New Monetarist Economics

New Monetarist Economics 1

This reminds me of the annual Fox News tales about the War on Christmas. The Keynesian Cross is really as shrouded in myth as Christmas, and about as more likely to go away, unfortunately. According to Krugman, here’s the problem: Basically, when confronted with what I would have said is an enormous shortfall of aggregate demand obviously, we’re viewing on all-out attack on the idea that the demand side matters.

As I’ve stated before, on more than one occasion, “shortfall in aggregate demand” has no meaning, either in fully-articulated New Keynesian models, or any other modern models of macroeconomic activity. If the statement has no meaning in conditions of the theory, we can’t observe the shortfall empirically either. Obviously, Krugman is thinking about a Keynesian Cross model, which is not what modern macroeconomists (of any stripe) work with. In the event that you agree with the Keynesian Cross, what recession wouldn’t normally be considered a shortfall in aggregate demand? Then, we get: This isn’t completely new, of course. Real business routine theory is a powerful power within educational economics for three years.

But my sense would be that the RBC guys had very little effect on public or policy debate, due to the fact what they said seemed (and was) so disconnected from actual experience. You could say more than this actually. Real business cycle theory is dependant on work on economic growth by Solow, Cass and Koopmans, which stretches the “powerful force” back more than five decades.

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Real business routine theory, in its original form was “disconnected from actual experience,” indeed area of the influence and strength of the strategy originated from its quantitative nature and the attempt to confront models with the info. Now, you won’t find many professionals today who actually use the RBC framework in its original form.

Krugman appears to think that people are out to attack the Keynesian Cross, but that’s not anyone I understand certainly. Many of them don’t think much about any of it. Apparently the episodes are from the commenters on Krugman’s blog posts. Well, good for them! Krugman’s defense is that the Keynesian Cross has been in the Econ 101 books for 62 years. I have heard that a majority of Americans think that angels exist also.

Krugman continues on by resurrecting his babysitting co-op tale. To me, the lesson out of this entire tale is that the designers of the co-op did not execute a good job. About 25 years ago, my wife and I participated in a babysitting co-op in Minneapolis that appeared to work fine, without whatever appeared as if Keynesian intervention.