Saturday, June 30, 2012

Krugman on the Keynes-Friedman Link and Flip Flopping Theories

Paul Krugman is out with a post today that taken in aggregate is his usual mess. However, he does make a couple of individual points that are spot on:

First on what macroeconomics has become:
Simon Wren-Lewis says something quite similar to my own view about the trouble with macroeconomics: it’s mostly political.
Krugman is very right here, especially about Keynesians and especially about his column! You don't get more political than Krugman.

Krugman also does the very important service of again linking Milton Friedman to Keynesian economics:
What’s the evidence that Keynesians respond to evidence? Just think of how the view we call Keynesian has evolved since the 1950s. Time was when Keynesians were highly skeptical about the effectiveness of monetary policy under any circumstances; evidence, including but not only Friedman and Schwartz, persuaded the school otherwise.
But Krugman's full column is a mess, he pretty much admits that current day Keynesians have no theory and fly by the see of their pants, adopting whatever theory fits the empirical data of the moment:
The idea of the natural rate, that there was no long-run tradeoff between inflation and unemployment, was very much disliked by people like Jim Tobin, but accepted by nearly everyone after the experience of the 1970s.

More recently the revisions have tended to go in the other direction, with a revival of the concept of the liquidity trap in the light of Japan’s experience, and a renewed acceptance, again based on evidence, that wages are downwardly rigid – and hence that the natural rate hypothesis breaks down at low inflation. And there’s a widespread acceptance that we were paying too little attention to debt and the financial sector.
How can you hold theories in your head that contradict one another, at different points in time? Is Krugman saying that if the empirical evidence again shows that there is "no long-run tradeoff between inflation and unemployment," that he returns to the first "theory"?

Bottom line: This shows that Krugman has no theory and attempts to spin tales based on whatever the current empirical data show, and that he is quite willing to reverse his tales 180-degrees based on the new  circumstances. This is not economic theorizing. It is a perfect example of why it is incorrect, in the science of economics, to use empirical data to create theories. As Ludwig von Mises and Friedrich Hayek have pointed out, in the science of economics, we are dealing with super complex matter.  Because we are dealing with super complex matter, we can not, as Krugman attempts to do, pull out a few data points and claim some kind of correlation as theory.

What the economist must do, to obtain general economic theories, is to deduce from basic principles And here I direct you to Human Action by Mises, to see how this is done.Using deductive logic, Mises creates the entire theory of economics. Theory that holds over time and does not have to be changed with every new data set. Misesian theory can explain why there is  "no long-run tradeoff between inflation and employment" and also, without Krugman type contradiction, explain downward economic spirals.

8 comments:

  1. Vote Ron Paul 2012 !

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  2. Instead of bashing Krugman, say where he is wrong and back it up with your own EVIDENCE! All you are doing is saying he is political, while you are engaged in the same crap. This fantasy "boogyman is out to get you" is BS. The facts are that the corporations and the rich have done quite well and we ordinary folks have done poorly. Those are facts. And why is that? Because political policies, seem to help save the powerful and clever, over the honest and hard working! That is another FACT!

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    1. Krugman mostly talks shit. Wenzel and others, including the LVMI and Daily Capitalist, refute his factory output of bullshit on a daily basis. Bashing him is perfectly apt for he is a statist clown.

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    2. Republicans think democrats are political because they use facts and evidence instead of making stuff up like the republicans do.

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  3. @anonymous 9:39

    The facts you mention are some things that Bob might agree with you on, at least to a certain level. Lets distinguish.

    Rich people/ corporations who accumilate their wealth through the purely free and voluntary actions of the market, i.e. meeting consumer demand, are good for society. Would you not agree?

    However to your point; rich people/ corporations who accumilate wealth through the benefit of the coercive tentacles of the state, i.e. taxes, reguations, inflation, subsidies, and all the like that result from their lobbying efforts rather than their social benefit through the market, Bob would agree with your criticism here.

    The deeper question you must ask is, what fundamentals create such a political/ economic atmosphere? If you've read this blog enough, you would know that it is large power centers that cultivate such a social order (or lack there of). Only by eliminating the power centers will you save the honest and hard working from the facsist machine that is the United States government. Fact!

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  4. "again based on evidence, that wages are downwardly rigid"

    Would be interesting if he examined why...

    " – and hence that the natural rate hypothesis breaks down at low inflation. "

    Is he on crack?

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  5. I wonder what views most educated economists subscribe to? Hmm... Oh yeah, it's a liberal conspiracy. Sorry that was unfair. Oops, I'm looking to the right and seeing 'Global warming stopped ..."; I was right...worldwide conspiracy of scientists all over the globe to make people think that the biosphere is undergoing warming since the industrial revolution that is caused by human activities. Yep all the tens of thousands of scientists, worldwide, meet together. Oh wait...science is B.S. I forgot. Wild guess: scientists are biased, global warming is a conspiracy, evolution is false, education is B.s. because it's controlled by 'liberals', obama wants to take our guns, obama wants to destroy religion, chiropractics can cure heartburn and cancer, apple vienegar cures G.e.r.d., the earth is 6000 years old, theres too much wasted money going to eduction, inner-city, uneducated people are lazy and addicted to 'entitlements', we are a christian nation- keep god in schools, intellligent design is a theory, etc. How many did i guess right?? Please I want to know. Damn I forgot Obama faked is birth certificate, right?...never went to Harvard...yawn. Yep, that's the ticket.

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  6. Rofl. So apparently its important to create a theory and damned well ignore any evidence that says your theory might be wrong. One should never pay attention to the real world and attempt to learn from it. Those damned wishy washy liberals: first they think the earth is flat, then they think its round; first they think the sun circles the earth, then they think the earth circles the sun; first they develop a theory of gravity, and then they spin tales of relativity and quantum mechanics. Why can't they be good Republicans and continue to insist the earth is flat, the earth is the center of the universe, and Quantum mechanics is a gross approximation to perfectly accurate Newtonian mechanics?

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