New Old Keynesianism

by John Q on January 22, 2014

The term “New Old Keynesian” was coined by Tyler Cowen a couple of years ago, to describe the revival of the view that the Keynesian analysis of recessions caused by lack of aggregate demand is relevant, not only in the short run (in this context, the time taken for wage contracts to reset, say 2-3 years) but in the long run (5 years or more) as well. When Cowen was writing, in September 2011, the New Depression could still, just about, be seen as a short run phenomenon[1]. In particular, the anti-Keynesian advocates of austerity in the US, UK and Europe were predicting rapid recovery.

As 2014 begins, it’s clear enough that any theory in which mass unemployment or (in the US case) withdrawal from the labour force can only occur in the short run is inconsistent with the evidence. Given that unions are weaker than they have been for a century or so, and that severe cuts to social welfare benefits have been imposed in most countries, the traditional rightwing explanation that labour market inflexibility [arising from minimum wage laws or unions], is the cause of unemployment, appeals only to ideologues (who are, unfortunately, plentiful).

So, on the face of it, Cowen’s “New Old Keynesianism” looks pretty appealing. But what are the alternatives? Leaving aside anti-Keynesian views for the moment, the terminology suggests four logical possibilities: Old Old Keynesianism, Old New Keynesianism, New Old Keynesianism and New New Keynesianism.

But do these logical possibilities correspond to actual viewpoints, and, if so, whose?

In Cowen’s “New Old” terminology, we can take New to mean “post Global Financial Crisis” and “Old” to refer to a belief that the economy can be in a long-run high unemployment equilibrum.

Old Old

So, “Old Old Keynesians” refers most naturally to the Keynesians who dominated the economics profession in the 1950s and 1960s (Hicks, Samuelson and Solow being obvious examples). They regarded Keynes as having refuted the errors of Classical economics, and saw the management of aggregate demand through fiscal policy as the key to macroeconomic stability. The Old Old Keynesians were discredited (or so it seemed at the time) in policy terms by their failure to respond adequately to the stagflation of the 1960s (correctly predicted by Milton Friedman), and in theoretical terms by the absence of consistent foundations in microeconomics, as demanded by the New Classical school led by Robert Lucas.

Old New

After the 1970s, the “Old Old Keynesians” became, or were replaced by “Old New Keynesians”. The Old New Keynesians tried to develop microeconomic foundations for models that would yield Keynesian conclusions. In general, this could only be done for the short term. The corollary was that fiscal policy (which typically takes the better part of a year to adjust) was too clumsy a tool and that the primary responsibility for macroeconomic stabilization should lie with interest rate adjustments by central banks like the Fed. Over time, as it became clear that the “Real Business Cycle” approach of the New Classical School was unrealistic in its pure form, New Classical and (Old) New Keynesian macroeconomists converged on the Dynamic Stochastic General Equilibrium (DSGE) approach

After the Global Financial Crisis, it became clear that the concessions made by the New Keynesians were ill-advised in both theoretical and political terms. In theoretical terms, the DSGE models developed during the spurious “Great Moderation” were entirely inconsistent with the experience of the New Depression. The problem was not just a failure of prediction: the models simply did not allow for depressions that permanently shift the economy from its previous long term growth path. In political terms, it turned out that the seeming convergence with the New Classical school was an illusion. Faced with the need to respond to the New Depression, most of the New Classical school retreated to pre-Keynesian positions based on versions of Say’s Law (supply creates its own demand) that Say himself would have rejected, and advocated austerity policies in the face of overwhelming evidence that they were not working

New Old

The failure of DSGE macroeconomics in the crisis gave rise to New Old Keynesianism, represented most notably by Paul Krugman, and rather less notably by me. I won’t presume to state Krugman’s position for him, but will give my own.

* In theoretical terms, New Old Keynesianism recognises that the Old Old Keynesians oversold the capacity of aggregate demand management to ‘fine-tune’ the economy, and select from a menu of macroeconomic outcomes represented by the Phillips curve[2], and that the Old New Keynesians provided valuable understanding of the way in which relatively minor deviations from standard microeconomic models could have significant macroeconomic consequences. Nevertheless, in conditions like those of the New Depression it is the ideas and policy prescriptions of Old Keynesianism that are needed. To the extent that microeconomic foundations are needed at all, they are likely to end up being radically different from those of current micro textbooks, incorporating bounded rationality and large-scale co-ordination failures

* In political terms, projects of convergence have been shown to be futile. As on all scientific issues, those on the political right are ideologues whose views are immune to empirical evidence. There is no value in intellectual debate with Classical macroeconomists, any more than with climate denialists (the overlap between the groups being large and growing)

* Relative to DSGE, the key point is that there is no unique long-run equilibrium growth path, determined by technology and preferences, to which the economy is bound to return. In particular, the loss of productive capacity, skills and so on in the current depression is, for all practical purposes, permanent. But if there is no exogenously determined (though maybe still stochastic) growth path for the economy, economic agents (workers and firms) can’t make the kind of long-term plans required of them in standard life-cycle models. They have to rely on heuristics and rules of thumb. (Update in response to comments This is, in my view, the most important point made by post-Keynesians and ignored by Old Old Keynesians).

New New

The prominence of New Old Keynesians like Krugman in the public debate contrasts with the situation in academic macroeconomics, which has gone on almost unchanged since the crisis (and in a state of massive intellectual retrogression relative to Old Old Keynesianism). It’s still the norm to assume that recessions can at most be transitory, and quite common to see New Classical/Real Business Cycle models that assume full employment at all times. Within this framework, the New Keynesian program (at least as I see it), is to incorporate a volatile financial sector into DSGE-style models, and aim to reproduce the observed outcome that financial crises are commonly followed by long and deep recessions. From the outside, I don’t see much progress being made here. But the sense of crisis that briefly gripped the profession in 2008 and 2009 is long gone.

There hasn’t been much overt conflict between New New and New Old Keynesians. That’s because nearly all Keynesians are in agreement on the need for more fiscal stimulus in the major economies, and because New Old Keynesians have, in general, confined themselves to policy debate while New New Keynesians have mostly steered clear of those debates. But the need to refound Keynesian macroeconomics on firmer foundations is every bit as clear as in the 1970s.

I haven’t said much about the other side of the debate: the New Classical/Chicago/austerity camp. That’s because, on this as on most issues (climate science, energy, environmental hazards etc), the political right has immunised itself against evidence that conflicts with its desired views. The difference between economics and the natural sciences is that natural scientists have almost uniformly rejected the Republican/right position (around 6 per cent of scientists identify as Republicans). By contrast, in economics, there are plenty of Nobel prizewinners (yes, yes I know) on both sides.

fn1. Although the NBER dated the recession as having started in Dec 2007 and ended in 2009, the Lesser Depression began later, with the financial meltdowns of 2008, and has never ended.



Ed Herdman 01.22.14 at 9:19 pm

Excellent summary of the positions – I can’t fathom why somebody would assume that an economy would rebound to its previous growth path after a recession as if nothing happened – as Ben Franklin wrote, “never forget that time is money.”

The one group I would like to find out more about is the group labeled here New New – it seems implied that they actually have done less original work than the New Old and Old New positions. Is it properly considered a coalescent position, or just a default position one gets to by being careless and too credulous when reading the available materials? Originally I was going to ask if these fit into a framework of teacher / student vs. “original” students, which is somewhat implied in some of the previous moves, but doesn’t seem so here. The argument suggests the trend with the New New group is not one of theoretical advancement, but retreat.


bob mcmanus 01.22.14 at 9:25 pm

Post-Keynesians still can’t even get insulted.


Sandwichman 01.22.14 at 9:31 pm

“based on versions of Say’s Law (supply creates its own demand) that Say himself would have rejected…”

Not so fast! While I agree it is a stretch to identify those reductionist versions of ‘supply creates its own demand’ with Say’s Law, Say did in fact make a similar argument in Chapter 7 of the Treatise on Political Economy and in his fourth letter to Malthus of 1821. You might call that argument a corollary to Say’s Law or you might call Say’s Law a corollary to the classical wages-fund doctrine.

Getting beyond from the Abbott and Costello question of who’s Say’s on first, it seems to me that the deeper, cognitive problem is a confusion between logic, probability and uncertainty. The rules of logic don’t always apply to probability, although sometimes they do. But our minds (or temperaments) are not comfortable with such a degree of ambiguity. Anyway, I’ve been dealing with this over at EconoSpeak and Ecological Headstand in a series of posts,” Yasraeh’s Law,” “Say against Say: lower wages won’t clear labor markets (It’s the law!)” and “‘The long-debunked fallacy known as Say’s Law…’ — a perplexing guide to the perplexed.” I’m linking just to the first so avoid getting the comment in a spam trap but I add links to the others at the bottom of that one.


Kevin Donoghue 01.22.14 at 9:33 pm

There seems to be a missing footnote on the Old Keynesian belief in a “menu of macroeconomic outcomes represented by the Phillips curve” but I can’t believe there’s much to say, since I’m pretty sure it’s a myth. AFAICR, Robert Solow made an unguarded remark about it once upon a time but that’s about all there is to that.
There seems to be a bit of a conflict between this:

To the extent that microeconomic foundations are needed at all, they are likely to end up being radically different from those of current micro textbooks, incorporating bounded rationality and large-scale co-ordination failures.

and this:

But the need to refound Keynesian macroeconomics on firmer foundations is every bit as clear as in the 1970s.

The demand for microfoundations looks more and more peculiar to me as time goes by. I’m no expert, but I’ve heard of the Anything Goes Theorem for GE models and the Folk Theorem for games. Am I wrong in saying that microfoundations for almost any model, however daft, must necessarily exist? If that’s so, is finding them really worth the bother?


Z 01.22.14 at 9:39 pm

One school you left off was the monetarist, which in it’s modern guise (Market Monetarism) has extended the framework of New Keynesian (MP can stabilise with interest rates) further (MP can stabilise NGDP, regardless of the ZLB). They are certainly separate from the New Classical/Chicago camp you seemed to lump them in with.

Also I’m pretty sure DSGE models can handle changes in the permanent growth path via permanent technology shocks.


Chris Warren 01.22.14 at 9:44 pm

No matter how many adjectives you put in front of Keynesianism, it still is a theory of capitalism, based on maximisation returns on capital plus injecting IOU’s in an attempt to paper over inherent contradictions.

As Keynes rejected classical economics based on reality – so too now we must reject Keynesian ‘economics’ based on reality – 200 trillion of IOU’s and 25% unemployment plus collapsing factor shares for labour.



Straightwood 01.22.14 at 9:48 pm

I think economists had better adopt Post-Keynesianism, because “full employment” will never again be attained. The obvious reason is the destruction of conventional jobs by the pending acceleration of technological substitution displacement of human labor. Even the Economist gets it, as their latest cover story shows.

What must ensue is a greatly expanded welfare state that allows the unemployable majority to live dignified and fulfilling lives while a tiny elite and billions of intelligent machines do the work of the world. The focus of the Economics profession must shift from maximizing growth to maximizing ecological sustatinability and human harmony, and metrics and models must be adjusted accordingly.


Sandwichman 01.22.14 at 9:58 pm

Straightwood, no, the Economist doesn’t “get it” but it does get that it needs to be more accommodating toward it.


Metatone 01.22.14 at 10:03 pm

I’m feeling that this is getting more and more important:

Relative to DSGE, the key point is that there is no unique long-run equilibrium growth path, determined by technology and preferences, to which the economy is bound to return.

I’d go further – there’s a buried assumption in most “economic schools of thought” that the economy is a “self-stabilising system.” And this assumption is wrong – and it’s a critical issue.

There are of course others – and the critical problem is that so many economists will say “oh we know better, it’s just a simplifying assumption and we don’t use it all the time” about every single one – but whenever they are getting involved in policy advice, these buried assumptions come back into play.

Dani Rodrik has a good piece about how these buried assumptions play out on the level of public interactions:


Roger Farmer 01.22.14 at 10:04 pm

John. This is a very useful summary. I started using the term old Keynesian in a paper that came out in 2008 link here . I have not used the term in my more recent work because it was appropriated by economists, including Krugman, who argued that IS/LM is all we need to think about the economy. I have also offered here a definition for “neo-paleo Keynesian”, a term coined by Krugman.

I also am not convinced that a belief in the power of fiscal policy needs to be a defining feature of a new old Keynesian, however defined, but I am willing to be convinced. The evidence for or against large fiscal multipliers is simply very scarce and the consensus that has arisen amongst Keynesians of all varieties (that we need a large fiscal expansion) is, in my view, based more on theory than evidence.


Metatone 01.22.14 at 10:09 pm

@Roger Farmer – I’m sure you’re correct about the relative scarcity of evidence about fiscal multipliers.

However, at the same time the evidence is getting clearer all the time that the focus on mainstream monetary policy as a solution has certainly failed in the extraordinary conditions of recent years.

Which does rather suggest some other solutions need to be explored.


mpower69 01.22.14 at 10:15 pm

“…severe cuts to social welfare benefits have been imposed in most countries…”

this is hyperbole bordering on outright fiction.

social welfare benefits & spending have in fact increased in most countries… Greece, Britain & Ireland being possible exceptions.


roy belmont 01.22.14 at 11:30 pm

mpower69 at 10:15 pm-
I’m no economist, nor even a particularly informed layman, but is this possibly a definitional problem? Where exponential increase of population means even though fewer per capita have access to soc.welf. benefits, the actual nos. of recipients are increasing?
Spending thereby increasing as a function of population growth irrespective of eligibility requirements, which are becoming steadily more stringent and “austere”.
One gets the impression this would be the case in the US. More are eligible here for more restrictive and fewer overall benefits. More is being spent on less actual individual benefit. Like giving half a croissant a day to 2000 people, where before you were giving a whole croissant a day to 750.
Which, if it is the case, is like the rest of the capitalist gurge one finds on the bottoms of one’s shoes after a stroll through the dystopian.
Shorter capitalist splaining: We are adolescents. Like most adolescents we think our present growth, and the vitality that accompanies it, is a permanent condition of our being, which is, so far anyway, headed for immortality.


Straightwood 01.22.14 at 11:36 pm

The notion that for each job replaced by software or a robot, a new job is created is being decisively disproved all over the world. The exchange ratio is probably over 100 jobs lost for every new one created. Just the driverless trucks and electronic ordering at food establishments will wipe out about 5% of all service jobs. Those people are not going to be programming the software that replaced them.

It is time for the Economics profession to wake up and stop using a labor-intensive economy as a fundamental postulate. Keynes famously said “When the facts change, I change my mind. What do you do sir?” What will the economics community do?


John Quiggin 01.22.14 at 11:53 pm

@mpower69 Of course, expenditure has been increased in many countries since the number of unemployed/out of labour force has risen.

But I’m not aware of any where there have been significant real increases in benefits. In particular, the US has tightened benefits of all kinds over the past 25 years, including abolition of TANF in the 1990s, cuts to extended UB beginning early in the recession, more recently cuts to food stamps.

Can you point to substantial increases in unemployment benefits anywhere?


Sandwichman 01.22.14 at 11:55 pm

‘”The notion that for each job replaced by software or a robot, a new job is created is being decisively disproved all over the world.” — Straightwood

“It may be reading too much into recent experience, but one could also argue that under certain constraints the lump of labour fallacy is no fallacy at all.” — Ryan Avent, the Economist, Labour Markets (today)

“This idea cannot withstand a nanosecond of thought.”


mpowell 01.23.14 at 12:12 am

You would be mistaken if you though the right was not identifying supply side factors to help explain current conditions. There is the ACA which impacts small businesses (though with the more hackish types it impacts all employers) and there is the substantial UI extension. These are weak tea, but I’m not sure why you want to call cuts to extended benefits a cut on aggregate. I mean, there was an increase in benefits for several years.

What is unfortunate is that the hackishness of the right has made it difficult for substantial discussion to occur on the monetary vs fiscal management side of the debate. A lot of oxygen is taken up by people who appear to want to ignore the impact of AD (or NGDP if you prefer). And it has certainly reduced trust between participants in that conversation.


bob mcmanus 01.23.14 at 12:17 am

In particular, the loss of productive capacity, skills and so on in the current depression is, for all practical purposes, permanent.

Positive hysteresis. Larry Summers wrote an early paper on women workers in WWII. Christie Romer has mentioned it, barely.

Government spending and employment financed with high taxes and a acquiescent Central bank tolerating double digit inflation. Not even hard, except politically.

and stop using a labor-intensive economy as a fundamental postulate.

We actually need to start using a more labor-intensive economy and start de-capitalizing. What are the social benefits of 5 people digging a ditch over one person with a backhoe? Have we accounted for all the externalities associated with a technical division of labor?


Matt 01.23.14 at 1:17 am

Have you accounted for the externalities of replacing a backhoe with human muscle power? The big problem is that humans and other animals are thermodynamically inefficient. Muscles can convert about 25% of food energy to mechanical work. Food crops themselves, even if grown organically without fossil fuel inputs, convert at most 2% or so of incident sunlight to human-edible biomass. That’s (generously) 0.5% efficiency at converting sunlight to ditch-digging work. By way of contrast, a solar farm built without rare or toxic materials can achieve 10% sun-to-electricity conversion*, and after transmission and motor inefficiencies are accounted for about 8% of it can perform ditch-digging work. The solar farm also doesn’t need irrigation, tilling, or even land suited to agriculture. Better to provide an unconditional basic income for the extra 4 unneeded ditch diggers than to give them unneeded jobs that produce extra environmental damage from farm expansion.

“But wait — there will be no political support for UBI, so the unemployed will just suffer penury if we don’t get them all shovelling.”

Good point — someone has to bell the cat. But you have the same problem convincing people to deindustrialize in favor of the shovel corps. It’s not exactly going to be an easy slam-dunk policy among the Western general public or current legislators.

*Individual solar modules are much more efficient, but farm-scale installations leave spacing between modules to avoid self-shading, so the efficiency over total farm area is more like 10%.


Ed Herdman 01.23.14 at 1:20 am

Bob, would you like to have five people performing delicate surgery with their bare hands, instead of one with scalpels?

However, I do think you’re at least partly (if not mostly) right. If we treat this blindly as an either/or, it becomes “we can try to achieve a steady-state universe (squalor forever!), or we can try to reduce the surplus population.” Neither of those alternatives is very appealing. So I agree that there probably is something useful for people to be doing, though I would see it as more technologically sophisticated and artistically-centered than your example gives.

The hinge is ability to compete with highly capitalized structures for ability to live. There’s no way that the entirety of the world’s lesser-capitalized persons (i.e., everybody below the megarich, and maybe even the megarich after a bad day at court) are going to quietly accept obsolescence and death. I’m not prepared to totally reject techno-messianism here, but it is usually vastly oversold on its ability to help ordinary people – relative to where we would like to get, that is.

Also, this isn’t really important, but @ Straightwood: There most certainly are probabilistic logics, though perhaps they aren’t widely used.


Random Lurker 01.23.14 at 1:25 am

My two cents, offered with the authority of the internet guy with a keyboard:

The problem of the microfoundations is relevant, but comes from a logical error in the microfoundations themselves. Microfoundations basically mean: a model that can described by the assumption that all participants act “rationally”.
“Rational” here is a technical word, that means that the actor is maximising its utility in terms of consumption. In this logic, people only produce stuff in order to exchange it for other stuff, and consume the latter. According to this logic, it is a logical impossibility to have a shortfall in demand, but only a relative overproduction of some stuff, that then sells too low to buy the other stuff that was desired by the first producers who then become unemployed because their real wage would be too low to be appealing. This is, as far as I can understand, the essence of Say’s law, and it is embedded in the “microfoundations” that are the core of a large chunk of economic theory.

However, in the real world, we see very often behaviours that are not compatibile with “maximisation of consumption”, that is the heart of microfoundations.
For example, If people really tried to maximise consumption, nobody would accumulate more wealth than they can consume during their life; but in the real world very rich people still try to increase their wealth.

The point is that in our world the accumulation of wealth place the wealthy guy in a position of great respect and, often, power, so that the accumulation of wealth in itself can become a goal. This means that capitalist economies are permanently at risk of a shortfall in aggregate demand, since very important actors produce not in order to consume, but simply in order to accumulate capital.

This causes a lot of umpleasant side effect like increase of debt (that is capital that is recycled into demand through the creation of debt) and international mercantilism (since nations need to export in order to grow because they need to accumulate more “capital”).

However Keynesianism, for what I can understand, skips the question “where did the shortfall in demand came from” and just assumes that it exists.
While this is empirically sound, it is theorically incosistent. This means that Keynesian models have very big holes like: they cannot predict recessions or depressions, there is not a noncircular definition of acceptable levels of unemployment (the NAIRU is a joke, since in a depressed economy inflation has to accelerate to exit from the depression) and cannot see the pretty evident link between inequality (high accumulation of capital), recessions and a rising NAIRU (when the capitalist system needs a very large “army of the unemployed” to keep the wage share low, because a lot of financial/rentier capital was accumulated so the rate of profit fell).

On a different but related note, the “rise of the machines” imho is not a good reason for falling real wages, because the increased automatisation also makes stuff cheaper: in the end all costs of production can be reduced to wages and profits (with rents a subpart of profits), and those wages and profits have to be expressed in real terms. So it makes no sense to say: this machine produces as 100 workers but is cheaper, because if the worker who produced the machine was paid as 100 workers the machine wouldn’t be cheaper. The impression that machines are cheaper than workers only comes from the fact that the exploitation was shifted on another step of production.


Ed Herdman 01.23.14 at 1:29 am

@ Random Lurker: John Quiggin mentions the bounded rationality of the New Old Keynesianism in the “theoretical” section. I don’t know enough to say whether the critique is that these insights haven’t been applied broadly, but they are there in some form or other.


StevenAttewell 01.23.14 at 1:49 am

I’d agree with @2 – where on this map would we fit a Minsky or a Vickrey, or a Galbraith père or fils, or a Leon Keyserling, let alone L Randall Wray and the other folks at CFEPS?

Matt @19 – I think we could bump up that ratio with some cyborgization.

@Straightwood – here’s my problem with the whole “work is going to disappear” thing: first, we have in this country a $3.6 trillion gap in infrastructure and that’s just going to get us up to par. Second, we have an increasing need for caring services and will continue to for quite some time. Third, we have (as per Galbraith père) a significant underinvestment in public goods of many kind. So I don’t think it’s accurate to say that there’s not a need for labor, just that it’s not being expressed in the market right now.

Part of that has to do with a shift in the labor market towards labor shedding, casualization, outsourcing, speedup, and automation – but that’s largely because employers view workers as costs to be minimized, not because workers have become less productive. Given that U.S output per worker is ~$124,000 per year per worker, why choose to permanently forgo the value of their labor?


Matt 01.23.14 at 1:51 am

On a different but related note, the “rise of the machines” imho is not a good reason for falling real wages, because the increased automatisation also makes stuff cheaper: in the end all costs of production can be reduced to wages and profits (with rents a subpart of profits), and those wages and profits have to be expressed in real terms. So it makes no sense to say: this machine produces as 100 workers but is cheaper, because if the worker who produced the machine was paid as 100 workers the machine wouldn’t be cheaper. The impression that machines are cheaper than workers only comes from the fact that the exploitation was shifted on another step of production.

I have a parallel explanation: the rise of the machines is making some stuff cheaper, but the cost of living is not all manufactured goods.

The consumer price index is based on costs of:

-Food and beverages
-Medical care
-Other (such as tobacco products, haircuts, funerals)

Without looking up detailed histories I would venture that apparel, recreation, and communication have plunged in real cost for Americans over the last 40 years. But it has been more than compensated by huge cost increases in education and health care. I’m guessing that housing is at least modestly more expensive in real terms too, even now that the bubble has deflated. Since a college education or week in the hospital was more expensive than a television even 40 years ago, making televisions and other manufactured goods even arbitrarily inexpensive cannot fully offset the painfully rapid increase in medical and educational costs.


derrida derider 01.23.14 at 1:53 am

Kevin Donoghue @4 – to be fair to the New Classicals they never criticised Keynesian models as having NO microfoundations, but rather as having internally inconsistent ones, with the inconsistency hidden because those microfoundations are implicit rather than explicit. And that this internal inconsistency had led, and will continue to lead, to large-scale predictive failure.

Some New Classicals have revealed themselves to be political hacks, true, as have some of the various flavours of Keynesians. But I think it unwise, as well as unfair, of John to dismiss them all as crude ideologues who should not be heard. Its more that, like anyone, “to a first approximation no-one ever admits they were wrong about anything” (Krugman). That’s especially so if you have genuinely thought long and hard and built a distinguished careeer, all based on an approach that turns out to be a dead end. Even so some like Feldstein and Kocherlakota seem quite willing to update their priors properly.

The Lucas critique had – and has – a real point. In fact it is sufficently pointed that, when it quickly became evident that RBC was even less capable of giving a guide to the real world, New Keynesians responded by adding Calvo and Woodford epicycles to the Ptolemaic RBC model rather than revert to Old Keynesian approaches. It remains to be seen whether adding even more epicycles in the form of “financial frictions” can rescue the paradigm, or whether we really do need a Kuhnian revolution. But it’s unlikely pre-Ptolemaic approaches will be sufficient for that without at least as much modification.


Ed Herdman 01.23.14 at 1:55 am

We already have performed the first step of this cyborgization you speak of. It’s called the backhoe. Basically, all three of us are dancing around the point, which is that Bob’s comment appears anti-technology. Maybe he can clarify it to make it somewhat more palatable, but as it stands, technology isn’t actually the problem. Hasty generalizations about “good technology” (i.e., what evolved) and “bad technology” (“if people were meant to dig ditches, they’d have much bigger snouts”) seem, if anything, to obscure the power dynamics Bob really wants to talk about.


Ed Herdman 01.23.14 at 1:56 am

Sorry, that last was for #23.


Ed Herdman 01.23.14 at 2:05 am

Also, @ Matt: I am not so sure that the real price of communication has plunged in the last 40 years. You had super high-tech stuff (teletext messaging and similar services) that most people did not use at all; letters were approximately the same, telegrams requiring no major personal investment in infrastructure (if people had a need for them), and the same for phones. Phones were all, up until the late ’60s, provided by Ma Bell, and while the pricing wasn’t competitive, from what I’ve seen it wasn’t actually outrageously exploitative either – the main thing lost was convenience and variety since Bell telephones were designed for simplicity and reliability, instead of extra features and high profit.

Compare this with the average investment an individual has today in multiple modes of communication – throw in television as well if you like, to show how something that was still considered a luxury in the 60s-70s has now gotten tied in with all kinds of other things. TVs might have fallen in price but the average person uses them along with a basket of other services which cost money and which come with a basket of other electronic gizmos.

Overall I think this goes to your broader point – my point here being that I am not sure that the CPI’s model of marketplace synergies is complex enough to allow direct comparisons on even some of the most obvious areas. And while they might not reverse the broader trends, you can see even the literal bread-and-butter industries fighting against predictable growth patterns by diversifying and rebranding old staples in ways that allow them to sell you essentially the same thing for a multiple of the price of the thing itself.


Random Lurker 01.23.14 at 2:05 am

@Ed Herman
For what I can understand, bounded rationality is a different problem.

In short what I say is that some actors have different ends than those presumed in a classical model, whereas bounded rationality means that they have the usual ends, but are not that good at reaching that end.

If you see this from an efficient market hypothesis perspective:
The EFM states that markets are very good at allocating resources for social consumption (the banks are the central planners of a capitalist, economy, but price signals are efficient so banks are more efficient than the soviets);

The bounded rationality approach says that the banks are usually better than the soviets but sometimes misread the signals, thus causing stuff like the housing bubble;

I say that price signals are good and banks don’t misread them, they allocate resource correctly to social consumption, but unfortunately this comes at the price of having to accumulate wealth upward, and this, not a misallocation between branches of production, caused the housing bubble.

This is a big difference IMHO.


Matt 01.23.14 at 2:21 am

I was responding narrowly to a narrow point in 19. On the larger issue, I expect that mass employment is going to become less common over time. In the medium term however here are some goals that I believe could put almost everyone willing and able to work — all of more utility than replacing backhoes with ditch diggers:

-Repairing and improving bridges, dams, sewer treatment plants, electrical grids, rail systems, and other public infrastructure for safety, durability, and efficiency
-Auditing and upgrading heating, cooling, and lighting efficiency of homes and buildings
-Hiring enough OSHA, EPA, USDA inspectors so that all significant mines, factories, power plants, feedlots, etc. can be inspected at least twice a year (currently it may be years between inspections)
-Upgrading pollution controls on old fossil fuel plants (or demolishing and recycling them if efficiency can reduce demand sufficiently)
-Remediating water and soil pollution in lakes, rivers, old mine sites, old industrial parks
-Converting low-value brownfields, like empty Rust Belt factory complexes or closed landfills, to renewable energy production sites

There’s more but that should be a start before we really scrape the barrel looking for jobs. And yes I am fully aware that this sort of useful government employment is anathema to a significant part of the voting public and a larger segment of professional politicians — it’s what I think ought to be, not what I expect.


Peter K. 01.23.14 at 2:26 am

@18: “Government spending and employment financed with high taxes and a acquiescent Central bank tolerating double digit inflation. Not even hard, except politically.”

You don’t even need double digit inflation. How did they avoid lapsing back into secular stagnation after WWII?

About the monetarists, it seems to be working in Japan and QE might have partially offset the harsh austerity of the sequester. Government debt and deficits are no longer a problem if they ever were. Monetary policy wasn’t really tried just as Obama’s fiscal stimulus could have been much larger and composed of better a mix of spending and tax cuts, leaning more towards spending. And work-sharing? It worked in Germany.

The economics is doable unlike the politics. We just need sustainable demand, i.e. no more housing bubbles and overleveraged shadow banks. Any crankish talk about technology or trade or oil doesn’t have any substance backing it in my opinion. It’s the politics.

Janet Yellen who takes power in days: “I’d like to see real wages going up,” Yellen says, adding that the average American male worker’s inflation-adjusted wages have been flat or down for the past 20 years.”


John Quiggin 01.23.14 at 2:33 am

On post-Keynesianism, the version of New Old Keynesianism I’ve sketched out incorporates (what I see as) the key PK insight, namely fundamental uncertainty about the future, which can’t be captured in a DSGE model with a known state space, even if the usual assumption of known and commonly agreed probabilities is relaxed to allow for ambiguity etc.

I’ll edit to point this out.


Sandwichman 01.23.14 at 2:37 am

I’m fundamentally uncertain about the future, too.


bob mcmanus 01.23.14 at 2:42 am

to obscure the power dynamics Bob really wants to talk about.

I am wearing my Keynesian-Kaleckian hat here. And no I am not anti-technology or Luddite at all, and specifically used the word “decapitalizing” even if I made it up. I could throw in the idea that higher labor costs accelerate innovation and technology gains. I fully expect great surgeons. Let’s posit dis-accumulation.

30: As I read the Keynes story about burying the money in the ground, part of the main point was its inefficiency. All your ideas and plans are great, and they should be done, but they will all increase aggregate productivity and efficiency, and thereby in aggregate decrease labor needs and be deflationary in the long term. If, as I do, believe that the crises of capitalism are based in overproduction, overaccumulation and too much productivity rather than deficient aggregate demand, “productive” government spending is countercyclical. In part, the “Golden Age” worked until it failed because of massive military Keynesianism, mostly in young men getting paid to march.

We need to embrace inefficiency as a principle.


bob mcmanus 01.23.14 at 2:46 am

31: How did they avoid lapsing back into secular stagnation after WWII?

Double digit inflation, 1946-1948, 19.7% March 1947

Historical Inflation


Matt 01.23.14 at 3:08 am

On further reading the CPI construction seems just… bizarre. Or I don’t know what CPI is really supposed to represent (even after reading CPI definition again).

According to Appendix 4 of this document:

The relative weight of medical care was 6.3% by CPI-U or 5.2% by CPI-W. The relative weight of food was 13.9% by CPI-U or 15.5% by CPI-W. By this measure, a typical household spends 2-3 times as much on food as on medical care. This seems wrong intuitively and by cross checking with other sources: the World Bank says Americans spends 6% of household income on food, 9.7% of GDP on private health care. How can the CPI “representative” household deviate so far from the national averages?


roy belmont 01.23.14 at 3:12 am

We need to embrace inefficiency as a principle.
We need to stop adopting the terminologies of people who can’t see the larger efficiencies already at work in the systems they seek to exploit for their own very myopic ends.
There’s nothing inefficient about biological, as opposed to mechanical, labor in its totality, it’s the image of the stripped-down version, I hesitate to say the autistic version, holding only what is wanted by the exploiters, everything that’s already there that isn’t wanted is functionally invisible.
It’s time we start seeing that mind-set for the alien thing it is.
No waste in a healthy forest, or meadow, or ocean, and lots of life besides the climax organisms. Lots and lots.
But a timber harvester sees only board feet. Unless he’s been woke up to what he’s looking at.
So that the steady regenerative harvest is “inefficient”. An “inefficient” use of resources.
Whereas a clear-cut harvest using those giant robot earwigs that slice a tree down in one bite are the embodiment of “efficiency”.
If you’re a giant robot earwig.


John Quiggin 01.23.14 at 3:38 am

@Matt Expenditure share of GDP isn’t comparable to expenditure share of household income, since it includes government expenditure. Governments spend lots on health and very little on food. Some other points

* WB number you cite as food share of household income sounds way too low. Maybe this is something like agriculture share of GDP, which is totally different

* I don’t know how US CPI treats employer-provided health insurance, which isn’t significant elsewhere. On standard CPI methods, it would probably not be included in household expenditure.


Matt 01.23.14 at 4:07 am

@John: WB reports private health spending as percentage of GDP as well as total health spending — if you add in public spending, US is spending 17.9% (!) of GDP on health care according to WB. If medical care through employer-provided health plans isn’t included in CPI that would make the number more understandable although kind of odd — rising health care expenses increase cost of living whether they manifest as extra cash expenditures leaving the household or reduced cash wages entering the household.

This chart is an exercise in ostentatious visualization but it also is close to the WB number on food expenditure: 6.8% of household expenditures in the USA, underlying data source USDA:

The sticker price on food in the USA really is low compared to most of the developed world, though I don’t know what it would be if you could reveal all the hidden subsidies.


Straightwood 01.23.14 at 4:08 am

Until economists and politicians are able to kick the “growth” addiction, we are headed for ecological catastrophe. The planet has a limited sustainable population carrying capacity, and we are probably already about a billion people past it. As long as the major figure of merit is GDP growth, we are digging ourselves deeper into trouble.

New comprehensive measures of human welfare must be devised, and these are the values to be conserved. Unsustainable growth that overwhelmingly benefits the rich should be disavowed by all professional economists.


Lee A. Arnold 01.23.14 at 4:21 am

Straightwood #40: “New comprehensive measures of human welfare must be devised”

Stiglitz, Sen, and Fitoussi chaired the Commission on the Measurement Of Economic Performance and Social Progress which issued a comprehensive review of alternate indicators to GDP, here:

It is so comprehensive that they even mention the very farsighted Calvert Henderson Quality of Life Indicators on page 8.


John Quiggin 01.23.14 at 5:05 am

Matt, I checked USDA numbers, and I think those you cite must be only for food consumed at home, which is just over half the total. Counting food consumed away from home, share is listed here at 10 per cent


Chris Warren 01.23.14 at 6:49 am


Until economists and politicians are able to kick the “growth” addiction, we are headed for ecological catastrophe.

Surely you can have ecologically sustainable growth with a stable population. There are signs that the world is reducing aggregate greenhouse gases. See:

Population growth is critical and the Royal Society has produced some exemplary work demonstrating this. See:

But it is economists who are in the way. They typically declare that growth is needed for sustainability. They are the only ones, in effect, calling for growth to underpin capitalism.


chris y 01.23.14 at 8:35 am

but in the long run (5 years or more)

Oh, will we all be dead in 5 years? Very well, I shall party like its 1929.


UserGoogol 01.23.14 at 9:05 am

Straightwood: Economic growth, even in a narrow GDP-based definition, is totally compatible with finite resources. Economic growth is measured in terms of the market value of how much people pay for goods and services relative to some benchmark basket of goods. You don’t have to use more resources, you can instead reuse the resources in ways which people value more. Much of what the economy produces does involve a certain amount of resource input, but that isn’t something baked into capitalism.


Tim Worstall 01.23.14 at 9:41 am

“In particular, the US has tightened benefits of all kinds over the past 25 years, including abolition of TANF in the 1990s, cuts to extended UB beginning early in the recession, more recently cuts to food stamps.

Can you point to substantial increases in unemployment benefits anywhere?”

Well, the US expanded eligibility for unemployment benefits from the usual 26 weeks to 99 weeks a few years back. Only reversed that a couple of weeks ago. That’s a substantial increase isn’t it?

And yes, the US seriously curtailed TANF. But largely replaced it with the EITC (which has been expanded a number of times since the mid 70s introduction). Most recently under Bush II I think. And SNAP (food stamps) had a large expansion of eligibility in 2009 under the ARRA. The most recent cuts to SNAP are a reversal of that expansion but not a total one.

Total spending on welfare (EITC, SNAP, UI, and if you want to include it, Medicaid) has risen in recent years not just because there are more unemployed/poor but because the systems themselves have expanded eligibility.


Metatone 01.23.14 at 10:24 am

Some thoughts on stuff that has come up in the comment thread:

The Lucas Critique: Has a point, but Lucas (and so many others) missed it.

There is no such thing as policy invariant economics. There is no such thing as “deep parameters.” There are no stable preferences, technology, resource constraints etc. from which micro-foundations can be reliably drawn over anything more than the short term.

Now it’s true that if you take those 3 categories, it’s rare for them all to change at the same time, so Lucas critique models can, with big enough error bars, theoretically work into the medium term. But the way economists have taken the Critique has led to a fantasy land of fundamentally stupid modelling. (If nothing else, because policy rarely changes any faster than the so-called “deep parameters.”)

Lump of labour fallacy:

I’ve run out of time, but the linked piece by Ryan Avent upthread is well worth reading.

Key extra point, “lump of labour fallacy” assumes a self-stabilising economy. It assumes that people cannot fall out of the economy. We know this is not true… of course, exploring why and the consequences brings us back to politics…


John Quiggin 01.23.14 at 10:57 am

@Tim W

Extension of UB duration in recessions has been standard US policy for a long time. It’s unusual to cut back when unemployment is as high as it is now. And the 99-week extension expired long ago in many states

EITC is a wage subsidy, so the replacement of TANF by EITC was supposed to boost employment.

As far as I can tell, the increase in SNAP benefits was followed by a freeze in nominal terms, which eroded most of the value.


Collin Street 01.23.14 at 12:12 pm

Much of what the economy produces does involve a certain amount of resource input, but that isn’t something baked into capitalism

Except that it is baked into capitalism that for anything that’s not explicitly prohibited there’s someone out there who’ll give it a go.


Straightwood 01.23.14 at 3:01 pm

Economists should not bear all the blame for growth addiction. A major contributor is the deeply entrenched custom of paying executives based on the size of their businesses. Somehow, each hour of their labor magically becomes more valuable as their organization grows. On this basis, we should be paying Obama several billion dollars a year.

Modern Capitalism is plagued by bad incentives and blindness to critical externalities. The resulting “emergencies” of environmental disaster and civil unrest will bring reform – at a very high cost. Economists, who should be crafting timely and efficient adjustments to the Capitalist system, are acting as ineffectual bystanders, with divided political loyalties, inadequate models, and insufficient courage.


Barry 01.23.14 at 3:36 pm

Sandwichman: “The rules of logic don’t always apply to probability, although sometimes they do. ”

Wow. Please contact me, and we’ll share the Fields Medal.

Probability is a branch of math.


Wonks Anonymous 01.23.14 at 4:09 pm

“There is no value in intellectual debate with Classical macroeconomists, any more than with climate denialists (the overlap between the groups being large and growing)”
I hadn’t heard of any classical macroeconomists expressing an opinion on climate, although I’ll admit to not having researched it. So I just searched Cochrane’s blog, and he seemed to take standard climate predictions as a given in order to discuss how carbon should be priced. Casey Mulligan tends to be less explicitly political in his rhetoric (if not in the salience of his academic work), so I checked his blog next, and he also seems to take the scientific consensus as a given (or at least claims to be too ignorant of the subject to argue about it).

“I can’t fathom why somebody would assume that an economy would rebound to its previous growth path after a recession as if nothing happened ”
If you look at the U.S growth path before and after the Great Depression, that’s basically what happened. When I first came across the stylized fact that recessions seem to be temporary blips down from a mostly level growth path, motivating Friedman’s “plucking theory”, it occurred to me how strange it was that in arguments about Austrian Business Cycle Theory nobody had brought up that sort of massive empirical evidence against it. And if positive “technology shocks” are supposed to be just as likely as negative ones (much more likely I’d think, if we actually believed it’s “technology”), that asymmetry of busts vs booms (meaning the latter only follows the former back to the growth path, never the other way around) also counts as evidence against Real Business Cycle Theory.


jake the snake 01.23.14 at 4:27 pm

I enjoy these economic debates at the cost of feeling profoundly ignorant. But, that is a normal state for me.
I have thought recently that any advantage that Capitalism has over Socialism is that
it operates on some of the worst aspects of human nature (greed, acquisitiveness, power and status seeking, etc.). At least until it is overbalanced by those aspects and has one if its inevitable collapses. I don’t suppose that would be news to anyone other than a few right-wing ideologues. Is there any economic theory that accounts for the fact that people are mostly perverse assholes?


ottovbvs 01.23.14 at 5:10 pm

Overall excellent analysis which I broadly agree with. However, I’d have to disagree with the final comment. We’re not by any stretch of the imagination still in a lesser recession.


marcel 01.23.14 at 6:08 pm

BdL recently had an amusing quote, almost apropos so I share it here, that he attributed to M. Freidman recently:

Walrasians believe we are automatically and magically at some general equilibrium. Marshallians believe that supply cubes slope up and demand curves slope down. Trust Marshallians …

(I hope I got the links here better than I did in my last attempt(s)).


Robert Baesemann 01.23.14 at 6:26 pm

Please see:

An Equilibrium Model with Involuntary Unemployment at Flexible, Competitive Prices and Wages; John Roberts. The American Economic Review, Vol. 77, No. 5 (Dec., 1987), pp. 856-874.

This paper posits a different kind of economy wide equilibrium (game theory) where agents make prices but behave competitively. In that context, the paper shows that unemployment can be an equilibrium state. The approach seems to indicate that financial market malfunction and a liquidity trap can be permanent fixtures as well. I am not qualified to work through this, but I think this might be important. Might it be that what went wrong with the micro foundations for macroeconomics was that the modelers built on the wrong microeconomic model of equilibrium. Take a look and think about it.


Plume 01.23.14 at 6:29 pm

This was too hard to resist.

Forget for the moment proposed alternatives from posters, like moi. At least admit this much:

Any discussion of economics that leaves out Marxist and anarchist analyses is nothing more than a discussion from A to B, when we need A to Z. It is, at best, two political operatives arguing with each other, one from team D, and the other from team R. Both insiders, both fully invested in the status quo ante, and quite self-satisfied that they encompass the totality of the possible.

It is also the discussion of two cheerleaders who happen to have different opinions on making their beloved game a little bit better (without ruffling any feathers), rather than questioning its legitimacy in the first place. We need to include forces outside the cheerleader zone.

Be it saltwater or freshwater arguments, you basically have a Democratic consultant disagreeing with a Republican consultant, both cheering for their own side, which happens to be one half of the same ugly coin, with more than a little overlap.

What is needed is something entirely different, outside the accepted zone of docility and defeat, in addition to, without the constraints of, well established, Versailles approved, orthodoxy and limits on the possible.


Plume 01.23.14 at 6:38 pm

jake the snake 53,

I recently bumped into some studies on the “equality bias” among the very young. It’s fascinating that toddlers and very young children tend to religiously see “fairness” as the equal distribution of goods, and clearly become upset when this equality is not in place — at all times. Whether it is in direct distribution from and for the young in question, or through the use of dolls and other surrogates, it appears we humans have an innate sense of fairness as typified by distribution, almost from Day One.

Rather than the capitalist fairy tale taught us later, and beaten into our heads wherever we turn, we do not “naturally” come into this world wanting to grab up everything in sight, taking it from our neighbors in the process — which is the only way that works, contrary to another fairy tale. The one that says a “winner take all” system magically takes nothing from “voluntary” participants in supposedly mutually agreed upon transactions.

Now, it is true that some people seek domination and mass control. And, yes, this is “natural” to them in many cases. But they are the exceptions, the alphas, the sociopaths, not the rule. And they’ve managed to con the rest of humanity into accepting that what they do is the norm — for everyone — when it’s no such thing. It’s the norm for that tiny percentage and no more.


FP 01.23.14 at 6:41 pm

Aren’t Krugman and Summers both known for not being as focused as many other macroeconomic professors on producing promising and prominent students? They’ve chosen to focus on other things in their career, fair enough, but it has a long-run effect of not being able to re-shape their profession’s terms of debate. How about Delong — has his graduate teaching fostered a new generation of promising Keynesian academic researchers?


Robert Waldmann 01.23.14 at 7:20 pm

This is, as usual, brilliant. I can think of a few things to add.

1) the claim that medium and long run outcomes are determined by tastes and technology does not imply that there is a unique long run equilibrium growth path. This would follow if technology were exogenous, but, of course, it isn’t. It is standard in business cycle theory to assume that technological progress is exogenous, but really believing that it is exogenous is much crazier than believing in rational expectations and such. In growth theory it is conventional to attempt to model technological progress. This is enough for equilibrium to be indeterminate and for demand side policies to have permanent effects.

2) There was a rather large literature on coordination failures which cause fluctuations (you know Benhabib and Farmer and such like). There was nothing wrong with this literature as math of fun theory. It seems to have vanished. It just wasn’t true in 2007 that if you want to insist on rational expectations then the available choices are new classical vs sticky price models in which long run averages were as in new classical models.

3) Actual general equilibrium theory did not stagnate from 1950 on. Actual general equilibrium theorists studied models with incomplete markets in which equilibria can be indeterminate, sunspots can affect outcomes and equilibria are generically not constrained Pareto efficient.

4) Persistent fluctuations do to aggregate demand were renamed “hysteresis” by Blanchard and Summers in 1986. European data already massively rejected the not yet developed old new Keynesian models. This paper was considered to be relevant to a relatively minor field (the study of strange countries which aren’t the USA) and ignored in mainstream macroeconomics eg by Blanchard and Quah in 1987. The study of the strange unusual case of developed countries other than the USA didn’t even remain central to the modelling of European macroeconomies by European central banks.

All four points imply that the very widespread conviction among macroeconomists that long run outcomes are unique and determined by exogenous variables had no basis in theory. All over the place highly mathematical theory showed how that needn’t be true (typically theory based on extreme over use of the assumption of rational expectations do a degree which would make Lucas blush).

The assumption of a unique exogenous long run growth path absolutely does not follow from the D, S, G or E parts of DSGE. It is a separate assumption –a methodological a priori not an implication of other standard assumptions. I think you have explained why. If equilibrium is indeterminate, then economists can’t design optimal plans and economists are reluctant to admit this.

In contrast, it is possible (by extreme abuse of the assumption that the world is in Nash equilibrium) to write down models in which economic agents magically know which equilibrium they are in and in which there are Nash equilibrium with possible persistent depressions. The assumption of rational expectations makes no sense at all when there are multiple Nash equilibria. However, this does not reliably embarrass game theorists. The calculations required by agents in DSGE models with a unique equilibrium are obviously completely alien to actual people. I don’t see an intimate connection between multiple long run growth paths and people having to rely on rules of thumb. Real people rely on rules of thumb even in situations with a unique equilibrium (say a zero sum game with a 5 by 5 game matrix). Imaginary economic agents can know which of a continuum of Nash equilibrium they are in (solving the models feels about the same).


Sandwichman 01.23.14 at 7:45 pm

Barry: “Probability is a branch of math.”

Jeff Gill, “The insignificance of null hypothesis significance testing”:

The basis of the null hypothesis significance test rests on the logical argument of modus tollens (denying the consequent). The basic strategy is to make an assumption, observe some real-world event, and then check the consistency of the assumption given this observation. The syllogism works like this:

If A then B | If Ho is true then the data will follow an expected pattern
Not B observed |The data do not follow the expected pattern
Therefore not A | Therefore Ho is false.

The problem with the application of this logic to hypothesis testing is that the certainty statements above are replaced with probabilistic statements, causing the logic of modus tollens to fail. To see this, reword the logic above in the following way:

If A then B is highly likely | If Ho is true then the data are highly likely to follow
an expected pattern
Not B observed |The data do not follow the expected pattern
Therefore A is highly unlikely |Therefore Ho is highly unlikely

Initially, this logic seems plausible. However, it is a fallacy to assert that obtaining data that is atypical under a given assumption implies that the assumption is likely false: almost a contradiction of the null hypothesis does not imply that the null hypothesis is almost false (Falk and Greenbaum 1955). For example (Cohen 1994; Pollard and Richardson 1987):

If A then B is highly likely | If a person is an American then it is highly unlikely
she is a member of Congress
Not B observed | The person is a member of Congress

Therefore A is highly unlikely | Therefore it is highly unlikely she is an American.
From this simple little example and the resulting absurdity it is easy to see that if the P(Congress l American) is low (the p-value), it does not imply that P(American l Congress) is also low.


Bruce Wilder 01.23.14 at 8:36 pm

New New, New Old, Old New, Old Old — four corners of an attempt to square the circle.

Quiggin’s Old Old Keynesians were the authors of the first Neoclassical Synthesis, which attempted to reconcile the classical model of singular microeconomic general equilibrium with a macroeconomics of potential multiple equilibria. Quiggin makes some good points about the Old New Keynesians practically defining themselves by their theoretical and policy concessions to the ideological conservatives, adopting the RBC model structure in DSGE, and in accepting the primacy of monetary policy over clumsy fiscal policy. But, it is worth remembering that the Old Old Keynesians defined themselves by the same kinds of ill-advised concessions, in an earlier day. In doing so, they gave way to the conservatives on radical uncertainty, on money and finance, and on underlying long-run micro disequilibrium. Solow, one might say, was the Wrong-Way Corrigan of Macroeconomics, repeating Keynes’ feat (as Corrigan repeated Lindberg’s), but taking Macroeconomics in the wrong direction.

The story of Milton Friedman predicting stagflation, as the Old Old K’s followed Solow into an epic overinterpretation of the Philips Curve is unfair and inaccurate. At the time, the actual Old Old K’s in policy positions were struggling against fiscal overstimulation of the economy — first, because McNamara lied about the costs of the Vietnam War and then because Nixon wanted insurance for his re-election, and wasn’t above bullying his (pre-K) Fed Chair to get it. What happened as policy became unmoored by fiscal overstimulation was much more Kalecki than Friedman.

Another aspect of the evolution: the failure of computer-aided simulation of the economy with simultaneous equation models in the 1960s and 1970s had a profound effect not just on theoretical confidence, but on the personnel of academic economics, as the generation that came into economics to build those models, scattered, and the non-academic market for economists shifted from respected expertise to public relations b.s. artist. It was the inability to predict the economy’s movements in detail, on the basis of tracking and projecting Keynesian National Income Account statistical quantities, which set up academic economics for the Lucas Critique.


Olli Ranta 01.23.14 at 8:39 pm

Even the very basic economic theories can sometimes be improved. The article in is a great example. The author Egmont Kakarot-Handtke takes the trouble to write down all those little definitions and basic relations that Say and Keynes should have written but didn’t. The first surprise is that they are the same except that Keynes has the direction right in one dependency. No behavior is assumed but included as multipliers with unknown values. Then the author runs the arithmetic from equations in a closed two goods economy. That includes amount of work done and unemployment. The latter shows that an increase in wages will increase employment exactly as Phillips found empirically. Instead an increase in prices causes a decrease in employment as occurred after
the oil shock in 70’s. Unfortunately Samuelson and others had just assumed that inflation is same as wage rises. This caused the Keynesian theory to receive a massive blow in credibility. The strange mirror land features in macro economics pose dangers.


dsquared 01.23.14 at 11:13 pm

Robert Waldman’s comment is as usual excellent. I’d summarise it for the layman as saying that so called “microfoundations” are really not very founded in microeconomics.

The purpose of the microfoundations revolution was to get rid of nasty ad hoc assumptions, the idea being that you shouldn’t have assumptions in your model which weren’t grounded in rational maximising behaviour, because there would be no constraint on which assumptions you made, and so you’d just get the conclusions out of it that you put into it with your assumptions.

What we got though, was a bunch of models where about half the assumptions were rooted in rational maximising behaviour, and the rest were motivated by “the kind of shit you need to do in order to get the model to solve for a unique equilibrium”. Trust me when I say that in general it is not the assumptions about rationality, unattractive as they are, which are causing the problem. And it’s pure ideology whether you’re going to call a model “microfounded” or ad hoc. Calvo pricing, for example, is an absurd mathematical contrivance that makes no sense at all as the maximising behaviour of anyone setting their process, but a whole load of sense as a way of getting a certain class of models to display sticky price behaviour while remaining tractable. But it’s a “microfoundation” because of the history and intellectual tradition it’s associated with.

I think Roger Farmer is on the right track with the idea of having everything microfounded but subject to an “animal spirits” factor which is itself driven by a process that’s exogenous to the model. Everything’s rational conditional on the state of animal spirits, so you don’t get the GIGO problems of ad hoc assumptions, but the animal spirits factor isn’t itself reducible to some combination of tastes and technology.


UserGoogol 01.24.14 at 5:23 am

Sandwichman: There’s way more to probability than hypothesis testing (which is really more statistics anyway) and there’s way more to logic than modus tollens.


SoU 01.24.14 at 5:31 am

Bruce @62 –
a good comment but i want to esp. thank you for raising the issue of Vietnam. people love to throw around ‘stagflation’ and ‘Keynesianism coddled business and killed efficiency’ etc etc, which may all have a kernel of truth, but the non-discussion of the far-reaching economic implications of the Vietnam War among so many of the american academic & policy elite has always astounded me. i can’t tell if it is a neglect out of (ideological) convenience, or a more genuine distaste for that sordid part of america’s past, but it is remarkable nonetheless.

i sometimes wonder if we are similarly not paying enough attention to the implications of the Iraq war on the US economy during that period of time. this is a harder one tho b/c it so coincided with the housing bubble as well as having the whole crisis thing hit before it was all over and an honest assessment could be done.


LFC 01.24.14 at 5:46 am

How about DeLong — has his graduate teaching fostered a new generation of promising Keynesian academic researchers?

He’s too busy blogging ;)

Not meant as a dig, btw; I just couldn’t resist.


Greg vP 01.24.14 at 7:19 am


I think economists had better adopt Post-Keynesianism, because “full employment” will never again be attained. The obvious reason is the destruction of conventional jobs by the pending acceleration of technological substitution displacement of human labor.

This, regrettably, is cold-pressed extra-virgin “conventional wisdom”. Straightwood and many, many others have uncritically swallowed the discourse and are regurgitating it wholesale.

There’s at least a trillion USD missing from the world economy because the European political elite is Sadist. There’s another trillion or so USD missing from the world economy because East Asian countries got badly burned by the 1997 financial crisis, and imposed repressive policies on domestic wages and household incomes as a result. There’s a third trillion missing as a result of unhelpful policies in Anglophone countries since the GFC. There’s a fourth trillion missing due to self-interested responses to the foregoing by elites in non-Anglophone, non-East-Asian countries. From multipliers of the foregoing, there’s a fifth, and maybe a sixth, trillion missing. From Japan’s failure to deal resolutely with its bad loan problem and similar failures, there’s a seventh trillion missing. What effect would increasing gross world product by 10% have on employment?

In counterfactual-world, where most politicians actually want to help, and they understand the “circular flow of income” chart presented in the first lecture of macro 101 (non-advancing) –in that world, GDP is at least ten percent higher than here, and growing much faster. Unemployment is a non-issue. Inequality is declining. People who say “robots are going to take our jobs” are being trampled by the rush of customers to buy new personal services and a greater variety of goods, and drowned out by the cries of employers desperate to train new staff.

Full employment is a political choice: a choice by elites to act in the interests of ordinary people. Technological progress makes no difference whatsoever to that. Economic theories can only affect the result if elites have made that choice.

Even the Economist gets it, as their latest cover story shows.

The Economist is the Time of economics: very prone to getting the story wrong, and to sucking up to those in power in so doing.

Disclosure: I used to believe what Straightwood says. Then I thought, and looked at the evidence. There’s none that withstands even idle scrutiny.

Techdespair is seductive to those of a certain age and temperament, but by the time one reaches that age, one should have learned to resist believing what one is being led to believe, especially when one wants to believe it.


Bruce Wilder 01.24.14 at 9:11 am

I liked what Metatone @ 47 said about the Lucas Critique having a valid point, which point Lucas missed: there is no such thing as a micro-foundation immune to policy.

Archimedes, when he discovered the principle of the lever, is said to have exclaimed, “Give me a place to stand, and I can move the earth.” (Actually, he spoke Greek, so: δῶς μοι πᾶ στῶ καὶ τὰν γᾶν κινάσω, but you get the idea.) Economists are always looking furtively for a place to stand, or, failing that, a (safe) place to stand the economy, where they can analyze it with sufficient detachment. Well, not really “it”, per se, but a highly distilled idea of “it”, which might yield a reliable intuition or insight, and the feeling of superiority that comes from a mastery well-earned by dint of superior intellect, or, at least, hard math.

All the blather about long-run equilibrium, exogenous shocks, rational expectations and so on, is about how to find a dry place to stand and grasp a flowing stream of water, with both flippers as Brad DeLong might say. None can stand outside the stream or stay dry, policymakers least of all, but the economists like to pretend.

In the abstract imagined fishbowl, behind the glass of assumptions of maximizing behavior, the observing economist can know and calculate the one “right” answer. In the actual flowing stream, not so much.

The actual economy and its business cycle is daunting in its complexity and plasticity, throwing up novelties in the never-ending on-rush of events. Many of the actors, whose gambles and innovations and ambition and politics create the economy are . . . I know this will shock and dismay you . . . smarter and better informed than the economists, who study the epiphenomena of that activity. Oh, sure practical men . . . slaves of the defunct; madmen, academic scribbler and all that; but, let’s get real — Larry Summers may impress the heck out of Krugman with his secular stagnation thesis, but they’re both playing catch up, and neither one understands derivatives all that well, let alone how Wall Street nearly destroyed the world economy with them. Sure, policy would change the economy, but only because the economy will change in the act of responding strategically to policy. There’s no stepping into the same stream twice.

The New New, New Old, Old New, and Old Old are competing for intuition, and that competition encourages both a solipsistic skepticism (see Roger Farmer’s comment for an example) and a taste for stylized facts. It’s hard to imagine the reliance on time-series regression analysis could have any other motivation than a desire for antiseptic laboratories of the mind, where nearly all information is filtered out as contaminating dust.

Krugman noted Quiggin’s post in his blog, and in the same comment referenced a post by Simon Wren-Lewis. In part, Wren-Lewis writes:

I think you could argue that the events of the 1970s led to an intellectual revolution in the sense of promoting neoliberalism and questioning the value of collective action in the form of both state intervention and trade unionism. That did not require any revolution in economics, because it came from (a selective reading of) the existing economics playbook. However you could argue (in a rather functionalist way) that Keynesian economics was too great a counterexample to the neoliberal view of the world, and therefore had to be overturned. A counterrevolution was required. I’m not sure how important this is, because I still think the main reason New Classical ideas won out against traditional Keynesian theory was that they won the intellectual argument.

That’s pretty much classic Wren-Lewis — the Oxford don, who isn’t sure whether a political revolution that shifted wealth and income massively was all that important, because of how an intellectual argument was won fair and square.


Full Employment Hawk 01.24.14 at 9:12 am

“there are plenty of Nobel prizewinners (yes, yes I know) on both sides.”

THERE IS NO NOBEL PRIZE IN ECONOMICS! There is only a prize in economic science in memory of Alfred Nobel, set up and financed by the Swedish Central Bank. For short, this should be called the “Pseudo Nobel Prize.” Since the solid scientific criteria that are used in determining the winners of real Nobel prizes are not available in economics, what the awards committee seeks to do is to award them on “fair and balanced” criteria, so that awards are given to well established representatives on both sides of the political spectrum. The most recent award, where the originator of a theory and its fiercest and most effective critic were given the Pseudo prizes demonstates this dramatically.


Full Employment Hawk 01.24.14 at 9:22 am

“the situation in academic macroeconomics, which has gone on almost unchanged since the crisis”

The market monetarists have shown that you can do an end run around the professional journals by agressive use of blogging.


Full Employment Hawk 01.24.14 at 9:36 am

“The evidence for or against large fiscal multipliers is simply very scarce”

Krugman’s position is that you only get such large fiscal multipliers when the economy is in a liquidity trap. At other times the effects of fiscal policy on aggregate demand are largely offset by the actions of the central bank pursuing its own objectives. If his position is correct, empirical tests of the size of multipliers taken for data at times when there was no liquidity trap, which show them to be small are irrelevant for judging their size when there is a liquidity trap. And since periods where there have been liquidity traps have been relatively rare, one should not be surprised that the evidence for large multipliers should be scarce.


Bruce Wilder 01.24.14 at 9:41 am

SoU @ 66 liked that I mentioned Vietnam.

Economists could do us all a great favor if they could help to interpret the economy in specific terms. For a while there were some trying to promote a meso-economics, which would try to recast macro policy arguments into a less abstract language, which took account of particular circumstances and the always changing structure of the economy, to try to identify the collective choices we are making through the medium of political and economic institutions.

It would be nice to be able to place some of the one and two-dimensional stories, like technological unemployment, into a richer and more sophisticated, specific context: to narrow down our case, this time. And, it would be great to be able to remember the history of what is a path-dependent process for more than a few cable news cycles.

Note to Greg vP @ 68: resource constraints


dax 01.24.14 at 10:04 am

” You don’t have to use more resources, you can instead reuse the resources in ways which people value more.”

You can but you won’t or don’t. Growth has always been achieved by using more resources. What shows that there will be (not “can” be) growth using fewer resources?


dax 01.24.14 at 10:10 am

I’m also a little mystified by claims that classical economics can’t explain long periods of large unemployment. I thought classical economics claimed that workers would breed until there were too many of them, so not all could earn their subsistence, at would point some of them would have to die. If now governments step in, as modern governments do in the West, to provided a minimal subsistence, and to prevent people from dying off, then it follows that some people will either be unemployed or have only “make work” jobs. That at least is my (albeit poor) understanding of classical economics.


reason 01.24.14 at 10:35 am

Greg vP @68
I think the truth lies somewhere in between.

I agree – people need to understand the circular flow of income (and the corrolary that when money piles up in one place there is a problem).

But there is no doubt that technology makes a difference to the leverage that individuals have on the system. There was a substantial period of misery for many during the industrial revolution.

Technology could mean that redistribution goes from being optional to being necessary.


reason 01.24.14 at 10:41 am

Greg vP @68
If you want that argument put in economic terms, think about possible changes in the ratio of average to marginal productivity.


Robert 01.24.14 at 11:36 am

“I thought classical economics claimed that workers would breed until there were too many of them…”

Some economics use “classical” to mean “pre-keynesian neoclassical”, and they do not have a label for your “classical” economists. They do not care because they do not think there is any point reading them, anyways. Economics is, they pretend, a science, not a part of literary studies.


Vincent Cate 01.24.14 at 1:05 pm

The inflation of the 1970s reduced the popularity of Keynesianism for awhile. I expect hyperinflation in Japan should just about kill it off.


Digital Cosmology 01.24.14 at 1:13 pm

This is a new digital world. As someone already pointed out, robotics is changing everything and as a matter of fact it changes economics to its favor. Human economics are at a fault when labor capital.

DSGE models, {[new], [old]} {Keynesian} do no apply in this new digital world.


Straightwood 01.24.14 at 1:25 pm


The concluding paragraph neatly describes what I would call the meta trap, a theoretical game that becomes an end in itself, despite having been conceived as a means of addressing practical concerns. The social sciences are especially vulnerable to this trap because of poor empirical linkage between theory and practice. Physicists have particle accelerators in which to test their theories, but economists are largely immune to having their theories decisively disproved (E.g., the indestructible Say’s Law).

Our craving for “professional” authority in every knowledge domain has conferred unearned influence on economists. Unfortunately, this influence serves many political masters.


Barry 01.24.14 at 2:10 pm

SoU 01.24.14 at 5:31 am

” Bruce @62 –
a good comment but i want to esp. thank you for raising the issue of Vietnam. people love to throw around ‘stagflation’ and ‘Keynesianism coddled business and killed efficiency’ etc etc, which may all have a kernel of truth, but the non-discussion of the far-reaching economic implications of the Vietnam War among so many of the american academic & policy elite has always astounded me. i can’t tell if it is a neglect out of (ideological) convenience, or a more genuine distaste for that sordid part of america’s past, but it is remarkable nonetheless. ”

What I’ve noticed (given a minor amount of attention) is that economic discussions seem to lack much attention to oil prices. In 1973, the price of the basic commodity upon which the modern industrial world was based quintupled in price (then went down to triple the price, and exhibited huge oscillations). In an agricultural economy, if there was such a famine, experts would be well aware of it, and would never discuss events without referencing it.


Barry 01.24.14 at 2:12 pm

I’m seconding Greg vP’s point. The elites in the USA destroyed and looted at least a trillion US$ in the Iraq War; they caused at least that much destruction with the housing fraud bubble; they have deliberately suppressed growth and shrank economies in the years after 2007, in the US and Europe. The lost growth is probably a trillion or so; the destruction is vast.


Troy 01.24.14 at 4:33 pm

The problem seems to be that there are many kinds of economics that go on in the world which need different definitions. There are the purists who seem to be interested in theory and progress in the pure academic form (these would be stalwart microfoundationists); then the kinds of people who try to use economics to make real changes to the world and have real world applications (PK, most New Old Ks, Central Bankers), and finally those who want to use economics for personal gain. The lines are too blurred on these distinctions–


LFC 01.24.14 at 4:51 pm

What I’ve noticed (given a minor amount of attention) is that economic discussions seem to lack much attention to oil prices. In 1973, the price of the basic commodity upon which the modern industrial world was based quintupled in price (then went down to triple the price, and exhibited huge oscillations). In an agricultural economy, if there was such a famine, experts would be well aware of it, and would never discuss events without referencing it.

Don’t know specifically about economists, but mention of the oil price increase is I think quite standard among historians of the period. There has been a *lot* of recent work on the history of the 1970s and I wd be v. surprised if the OPEC thing weren’t discussed therein at some length and w attention to its political as well as economic effects.


mattski 01.24.14 at 6:21 pm

Barry @ 81

Basically agree with everything you say except “deliberately suppressed growth.” Why do you say that?


Plume 01.24.14 at 6:28 pm

I don’t know that they’ve deliberately suppressed growth directly. But they’ve been deliberately suppressing wages since 1973, which suppresses growth.

Of course, the entire system was always designed to suppress wages. That’s its nature and internal structure. It’s internal logic and mechanics. That’s how ownership makes its own coin. But since 1973, roughly, it’s been far worse than at any time since before the golden age of Keynes. It’s suppression on overdrive right now, which has led to the richest 85 people on earth holding as much wealth as the bottom 3.5 billion, according to the latest Oxfam report.

That kind of obscene inequality would make the 18th century denizens of Versailles blush. And it’s perhaps the biggest reason for slow or no growth now, and the recent great recession.


Plume 01.24.14 at 6:29 pm

its internal logic and mechanics.


Plume 01.24.14 at 7:02 pm

As in, there seems to be a tipping point for wage suppression. A combination of that and very low taxes on the rich seems to always presage a recession or depression. And if you have several decades of low or no rank and file wage growth, you don’t have the disposable income needed to buy/consume your way out of slow growth, even when we leave recession.

Tack on major household debt and it’s even worse.

Basically, the way we managed to put off the inevitable for as long as we did was the following, in no particular order:

1. The addition of a second income to the household
2. Credit cards
3. Second and third mortgages.

All of these things, for a time, could offset declining rank and file wages to some degree. But with the housing crash, and the tightening of credit, numbers 2 and 3 all but ended as fixes. And, since the Republicans are making sure to block the only other logical remedy — increased public sector spending — we’re doomed to a long period of slow or no growth. And if we are stuck there, then much of the world is too. Which, then, comes back to haunt us in turn.

It’s not a pretty picture.


Agog 01.24.14 at 7:31 pm

Come on. . . I’m sitting here with popcorn waiting for someone to answer Mattski’s question.

I’d try myself only I don’t have any of BIS’s reports from the past five years to hand.


Ellie Kesselman 01.24.14 at 7:34 pm

@Matt #19
You are predisposed to technological approaches thus the alternative energy suggestion. Agreed, it is alarming that the U.S. is now a net exporter of oil for the first time. Pursuit of 24/ 7 connectivity on multiple devices, as well as faster, broader broadband, is extraordinarily electricity-intensive. Power required to sustain such connectivity should be a major concern, see
The cloud’s real ecological timebomb is wireless, not datacenters (Communications of the ACM), however, advocacy of thin frame clients is a cornerstone of U.S. public policy, domestically and in foreign markets, especially Africa.

My second concern with exclusive reliance on alternative energy in its current form is impact on electricity quality. Great Britain is suffering from an overly hasty transition from coal and nuclear energy. “Anarcho-capitalists” (New Classical/ Chicago maybe?) are proponents of smart grids. In fact, smart grids may be used to justify gutting public utilities. Traditionally, power companies provided load balancing to accommodate surges in demand. Solar and wind energy alone cannot match the reliability of coal and nuclear to satisfy base demand, thus the erosion in electricity quality in the UK.

This approach may be more consistent with the Market Monetarists that Z mentioned in #5. Under the guise of choice and satisfying individualized energy as demanded by consumers, Market Monetarists (Supply-side Liberals?) want to shift responsibility for cogeneration from the utility to individual households: Decentralization, every household for itself. The current head of the U.S. Federal Energy Commission even said that utilities must “adapt or die”. The progressive Atlantic Monthly praises smart grids to high heaven, but columnists in Transmission Distribution World are uneasy, worry about breaking the covenant of rural electrification (my words). Such a transition would negatively impact quality of life, in the absence of additional technological advancement.

This segues into another public policy initiative, plausibly as a result of regulatory capture. We are emphasizing programming and software engineering education, and funding massive neuroscience projects without milestones e.g. President Obama’s $1 billion Big Brain. This is not genuine fiscal stimulus! Your list in #19 is true fiscal stimulus. Similarly, the private sector is almost single-mindedly focused on bioinformatics and genomics now. Basic research in materials science, chemical engineering and other applied physical sciences languishes, despite those fields being crucial to alternative energy development and feasibility, e.g. solar farms without rare or toxic materials that you mentioned.

@bob mcmanus #34 and @roy belmont in #36
I’m of similar mind as you regarding the impetus for greater efficiency in everything. I realize that technology and machine substitutes are not necessarily an improvement, but rather, motivated by cost minimization and desire for greater profit. The Rational Capitalist understands the importance of investment in physical and human capital, as well as research. Reliability, quality and accuracy are valuable, not always worth sacrificing, especially in the context of health care, education, engineering and the law. Ardent technophiles realize this; many sites whose customers are web developers prominently display, “Talk to a real person on the phone for user support, every time.”


Chris Warren 01.24.14 at 11:25 pm

Plume is right.

Capitalist crisis can be “put off” by:

1. The addition of a second income to the household
2. Credit cards
3. Second and third mortgages.

Other means of countering capitalism’s inherent crisis tendencies are – population growth – long-run declining factor shares to labour – generally increasing macroeconomic instability .

In America debt has steadily increased for the entire 20th century as different innovations were introduced to prop-up sales – hire purchase to credit cards. This was all graphically depicted in a panel in the NYTimes feature – The American Way of Debt. See:

Our capitalist economists are merrily throwing more stimulus into the system, pretending that this will get the ‘magneto’ going again, conveniently ignoring the fact that capitalism actually gets a reboot from savage wage cuts, 25% unemployment and elimination of social services and conditions of work.

The stimulus is now over 200 trillion –

Keynesians have no explanation for this, and no model for a stable economy.

We now need a new measurement stick to count capitalist debt.

As the US dollar is 0.15 metres long – 1 trillion would reach from the earth to the Sun based on the astronomical unit ‘AU’.

1 AU equals is 150 million kilometres (0.15 X 10^12 metres).

So we now have over 200 AU of debt.

This would reach from the Sun to Pluto around 7 times.

But all our capitalists can do, is make matters worse. It was 190 AU in 2010!


All due to capitalism.


Matt 01.25.14 at 12:21 am


I mentioned solar-electric ditch digging vs. corn-fed muscular ditch digging to show that even the most expensive and diffuse form of electrical generation is still way ahead of muscle power when it comes to performing mechanical work. This is both in terms of how much work can be accomplished and what negative environmental externalities are inflicted per unit of work accomplished. I don’t have strong objections to nuclear power, in fact I consider a modern nuclear power plant superior to any coal power plant, but introducing nuclear power into my comment seemed likely to lead to a 20-comment general tangent about nuclear power instead of a discussion of deliberate inefficiency as employment booster.

We already know how to build efficient solar modules without rare or toxic materials: crystalline silicon cells with copper cell contacts. Variations on this theme are how Panasonic and SunPower build solar modules with industry leading efficiency — just under and just over 20% module level efficiency, respectively. First Solar is going down this road too with their acquisition of TetraSun. Even more efficiency would be nice, but cost per peak watt is more important for most terrestrial applications, and low cost can only be achieved by scaling manufacturing. UNSW in Australia has long been a leader in solar research but it’s only by partnering with Chinese manufacturers that their advances have affected the world; a proof of concept can never match a full size production line on cost per watt even if it’s got a 10 year lead in technological research.

I understand that there is a risk of grid instability when a lot of intermittent renewables are in use. I don’t know how much smart meters can mitigate the situation without adding storage or fast-reacting backup generators. Nonetheless, I consider climate change from fossil burning a graver problem. As long as utility delivered power remains dominated by fossil fuels and CO2 emissions remain under-taxed or untaxed, the possible “utility death spiral” of rooftop solar is a rare positive externality. It’s much like a carbon tax on the utility, unless your utility is already using ~90% non-fossil generating sources.

The thesis of “The Cloud’s Real Timebomb” does not seem supported by the numbers given. Going back to the original Computerworld Australia article linked as the source, they say that data centers were drawing 31 gigawatts of power as of 2012 and that the ‘wireless cloud’ will reach 43 terawatt hours of annual energy use as of 2015, 90% of that (~39 terawatt hours) for wireless communications alone. 39 terawatt hours divided by the 8760 hours in a year gives average power of 4.45 gigawatts – equivalent only to 14% of current data center power.


Sandro 01.25.14 at 3:13 am

I am a Finance guy, so what do I know, but it has always been puzzling to me why macro theories based on coordination failures (e.g. Diamond 1982) don’t seem to get much traction, even though they appear to be logically tight (to me, at least). Is it because it is hard to provide solid empirical evidence?


Bruce Wilder 01.25.14 at 7:26 am

“It seems to be a shared view that there would be no macroeconomic problems if prices and wages were fully flexible and correctly perceived.” Diamond 1982

This attitude reminds me of the infamous exchange between Bette Davis and Joan Crawford, in the classic film, Whatever Happened to Baby Jane?:

Blanche (Joan Crawford): You wouldn’t be able to do these awful things to me…if I weren’t still in this (wheel) chair!

Jane (Bette Davis): But you are, Blanche! You are in that (wheel)chair!

I had a little paperback, which I cannot find now, in which some respectable economist imagined an economy of flexible prices and wages, and how great it would be for macroeconomic stability and puppy dogs and moonbeams. He was completely serious — there was nothing facetious about it. Only the dimmest awareness of how completely impractical such arrangements would be, seeped into his facile narrative.

A significant part of the profession consists of people, who have imbibed the idea of market-clearing price as an ideal coordinating mechanism, with all the obsessive carelessness for intelligence of 19th century absinthe drinkers. It’s kind of like the underlying mythological archetype of the discipline. Everything else, everything as it actually is, is counterpoint to that ideal, a world of sad and disappointing, rusty iron, falling short of the ideal of untarnished, shining gold.

I’m not sure, what is most weird in this way of thinking. That the world could, as a practical matter, be like that — perhaps with Walrasian auctioneers crying tatonnement on every street corner and factory gate, in every luncheonette and supermarket. That the world would be better than it is, if the world were somewhat more like that (prices and wages were more flexible than they are, in fact). Or, that expertise attaches to understanding this strange counterfactual, and not the actual, factual state of affairs. Or, that the actual world is enough like the imagined counterfactual of flexible wages and prices, despite the abundant evidence that it isn’t, and that it’s perfectly OK to think about the actual economy, as if it is sufficiently like the imagined world of flexible wages and prices.

It has been the key misunderstanding of Keynes, since the General Theory was published. Keynes asserted that more flexible wages — cutting wages — in a depression would make the depression worse. Cutting wages in a depression, like the Great Depression, might not solve the problem of involuntary unemployment, and could, conceivably contribute to making the slump worse. It was a very difficult insight to accept, going against the intuition that lowering wages should expand employment as well, of course, as the instinct of employers that profitability depends on holding the line against wage demands. It didn’t help that Keynes muddled the point with weirdly convoluted definitions of real and money wages, and fundamental errors about the usual course of wages over the business cycle, but that wasn’t the fundamental sticking point. It was the myth.

In the Neoclassical Synthesis, it was the fundamental concession: sticky prices were enshrined as the explanation for why changes in prices and wages didn’t restore full-employment. And, generations of conservative economists have stuck to the conviction that if only prices and wages — especially wages of the working classes — could be made more flexible, less sticky, the economy would be more efficient and there would be less need of mamby pampby socialist Keynesian demand management, gumming up the works. It is cliche in “explaining” the “superior” performance of an economy with low wages or inadequate social insurance, that its arrangements are more flexible and adaptable.

It’s a failure of markets, that prices and wages are sticky is the implication. Diamond’s search model could be subversive of this way of thinking, if it were not such a deep myth. If the stickiness of prices and wages were seen as a success, or as a common means to the success of economic organization in achieving efficiency and productivity, Diamond’s model would be interesting in entirely different ways, as it might point toward why such stickiness was microeconomically desirable.

Economics has been stuck on sticky prices for 70 years.


Bruce Wilder 01.25.14 at 5:07 pm

Here’s Tyler Cowen on the time Apple cut the price of the iPhone.


Jim Henley 01.25.14 at 8:21 pm

From outside the field, I can’t escape the inference that the Neoclassical prescription of downwardly flexible wages and prices cashes out as a claim that a bout of general deflation would be awesome, even though history suggests that is never, ever the case.


“Eliminate the minimum wage to maximize employment!” (Leave aside whether cutting the minimum wage would increase employment in the real world.)

“Wait. How would people on these even lower wages support themselves, especially once we cut the strings of ‘the hammock’ – EITC, food stamps etc.? Especially given the downward pressure on wages of those currently above the minimum?”

“Not to worry. Because of the lower wages everything will be cheaper!”


“Close enough, sure.”

This seems like easing onto the ramp of a deflationary spiral.


Bruce Wilder 01.26.14 at 2:21 am

Deflation is an absolute nightmare, but central bankers are judged by their commitment to “fight” inflation. Go figure.

Disinflation can be OK, but when that road runs out . . . as now . . . And if the road runs out on resources, too . . .


Stephen Frug 01.26.14 at 2:34 am

Typo in the “Old Old” section: for “stagflation of the 1960s”, read “stagflation of the 1970s”.


QS 01.26.14 at 3:12 am

Is DSGE the most influential oxymoron in intellectual history?


Fu Ko 01.26.14 at 3:15 am

That’s a very odd rant by Tyler Cowan. Shouldn’t he realize that Apple selling cheaper iPhones actually reduces the resale value of existing iPhones? And therefore, also, its value as a status symbol? It’s a real, measurable financial loss on their part. The economics reference ought to be something like Gresham’s Law rather than sticky wages. (Irrelevant to your point, I realize.)


Tim Worstall 01.26.14 at 10:41 am


” You don’t have to use more resources, you can instead reuse the resources in ways which people value more.”

You can but you won’t or don’t. Growth has always been achieved by using more resources. What shows that there will be (not “can” be) growth using fewer resources?”

Proving “will” about the future is difficult. But Solow (in a Krugman essay on Japan) is quoted as saying that 80% of the economic growth in the market economies in the 20th cent came from increases in total factor productivity. That’s the creating more value out of the same inputs stuff. Only 20% from increased use of resources. And Krugman compares this to claims that the Soviets managed zero increase in tfp over the same period: all growth coming from the consumption of more resources.

So it would appear that it is indeed possible to have growth without increased consumption of resources.


Zamfir 01.26.14 at 11:01 am

Might be me, but I have found those claims about total factor productivity baffling. How can someone compare the economy of the late USSR with with that of its start, and conclude that the only difference is ‘increased use of resources’?


Zamfir 01.26.14 at 11:12 am

In particular, such productivity calculations would require an uncontested measure of economic value that, as far as I know, doesn’t exist. Lamborghinis are very expensive. Does that make them a very productive use of resources?


Bruce Wilder 01.26.14 at 7:38 pm

Solow [calculated] that 80% of the economic growth in the market economies in the 20th cent came from increases in total factor productivity. That’s the creating more value out of the same inputs stuff. Only 20% from increased use of resources.

This is the analysis of the growth model that bears his name, but it doesn’t repeal Jevons.

Technical progress has long been the redeeming magic of the industrial revolution, rescuing the West from the charge of mere rapacious conquest of people’s and resources, and enabling at least a laggard concern for the environment and public health. Solow’s analysis still leaves technology out of economic focus: an ignored residual, not an examined explanator–he has identified neither parameters nor variables; even the relationship to factor growth is unexamined. If one has gone no further than Adam Smith, specialization limited by the extent of the market, one might have cause to wonder if technology’s progress requires population growth. Considering how virgin resources fueled the early industrial revolution, the prospect of technology trying to keep its balance on a resource foundation of congestion, depletion and self-poisoning in its late stages ought to give thoughtful people considerable pause.

Staring at the abyss looming ahead in the 21st century, people project their most lurid hopes and fears on the technology god. It is not the deus ex machina for our tragedy some seem to expect. Technology can be nothing more than an amplification of the same half-blind Will driving us toward the cliff.

We may realize in time the necessity of curbing our appetites, but Technology won’t do that service for us. It may aid us, but it will go right on tripping us up with unexpected consequences and tempting us with shiny but dangerous toys, as well.


Matt 01.26.14 at 11:32 pm

I think it was Sandwichman who first brought to my attention the symmetry between the Jevons Paradox and acceptance of the Lump of Labor Fallacy. Both positions say even that if you find ways to use less coal* or labor now, the demand will rebound to 100% or more of the baseline as people find ways to turn thrift into greater production instead of just keeping it as thrift or leisure.

To see if humans truly desire infinite consumption in a finite world, I think it’s useful to look at the behavior of the super-rich. In consumption habits a billionaire is not just a middle-class professional scaled to enormous excess. He does not eat 1000 omelettes for breakfast in a million square foot house, father 500 children, or travel cross-city in a vehicle that gets 0.05 miles to the gallon — even though he surely could pay for all of these excesses. He has more money than he can ever eat, drink, drive, smoke, snort, or otherwise personally consume; the surplus goes to ownership power, “investment,” rather than consumption.

There is a finite quantity of demand for goods and services of a certain quality, even in the presence of nigh-infinite buying power. The billionaire might be willing to buy more goods or services of unique quality — for example, a sure-fire cure for late stage pancreatic cancer. But his effectively infinite surplus buying power does not create a corresponding supply of exotic goods he might value like perfect cancer treatments, Iron Man suits, or magic carpets. Under capitalism the ability of humans to personally consume resources is more narrowly limited than the ability of humans to personally accumulate buying power beyond use.

Of course demonstrating that consumption unconstrained by costs remains finite is far from proving that it is sustainable. The challenge for humanity is to be content not only with finite consumption but sustainably finite consumption. Will we get there without first experiencing unprecedented catastrophe? The odds look poor now. I don’t really know. Predictions are hard, especially about the future.

*Perhaps generalized as any mineral commodity, or as any depletable resource.


Nine 01.27.14 at 12:57 am

Matt@106 – “He does not eat 1000 omelettes for breakfast in a million square foot house, father 500 children”

I’m never sure how this (and some forms of diminishing utility arguments, more generally) is asserted as obvious. It was not so long ago that billionaires were commissioning Taj Mahal’s ($1B in today’s money) & stocking 500 concubines in Deer Park’s etc. Why is it inconcievable that today’s ultra-rich would want underground moonbases or other absurd positional goods ? I’d totally want my own Justice League themed satellite & launch capability if I could afford it.


Matt 01.27.14 at 2:06 am

I’m not asserting these things as obvious from first principles but from empirical observation. Well, the 1000 omelette thing is obvious from first principles; your stomach doesn’t expand 1000 times as your buying power does. But seriously, there are about 1500 billionaires in the world so it’s not that hard to check certain possibilities by exhaustive search. My whole point is that there are a lot of consumptive excesses that today’s ultra-rich technically could afford, but none of them actually do it. Not one person out of 1500. This appears to me as very strong evidence for diminishing marginal utility of consumption.

As for wanting an underground moon base, that just reinforces my earlier point about wanting goods of a different quality rather than greater quantity of the same (a million square foot house). The reason nobody has the underground moon base is because even the combined Walton fortune is barely a down payment for something like that. The Apollo program cost around $170 billion in constant 2005 dollars, and it only put a handful of people on the moon for short visits.

According to this Forbes list the largest and most expensive billionaire house in the world is “only” 400,000 square feet:

The largest house in the USA is only 138,000 square feet, even though the USA has the world’s most billionaires. There’s only 5 homes that even top 100,000 square feet:

As for fathering children, again here’s a list:

No billionaires even close to 500.


Cranky Observer 01.27.14 at 2:33 am

= = = Matt @ 2:06 am – My whole point is that there are a lot of consumptive excesses that today’s ultra-rich technically could afford, but none of them actually do it. Not one person out of 1500.= = =

I actually don’t consider Larry Ellison’s antics excessive given his bank account, personally, but given his purchase of an entire Hawaiian Island, purchase of the airline that serves that island, obtaining a MiG-29 and hiring the 10s if not 100s of thousands of manhours of regulatory work necessary to get an import permit, single-handed transformation of a sport reserved for multimillionaires into one reserved for multibillionaires, etc, I have a hard time buying the theory that not one of the world’s 1500 billionaires consumes excessively.

There’s also the extended families of the patriarch. The Waltons who live in Bentonville may be careful to be perceived as modest, but their extended family (with “only” a billion or so apiece) who live in other states – including mine – are well known for being excessive if you read the local news.



Nine 01.27.14 at 6:11 am

Matt@108 –

First, being a neo-liberal fellow traveler, I don’t really buy Bruce Wilder’s nightmare future world of depleted resources and environmental catastrophe.
With that out of the way, if we accept a world of finite resources, then the question becomes one of human desires relative to those finite resources. Your first piece of evidence, Antilla in Mumbai, suggests a plutocrat so oblivious to finitude that he doesn’t think twice of plunking a billion dollar palace, of which he can probably afford several more, smack dab in the center (not quite, but close enough) of a slum, with cripples begging in the streets, and many other markers of limits that even he cannot always avoid seeing – it said somewhere that he commutes by helicopter. Likewise, the Walton’s aren’t springing for a private moonbase because they can’t, or maybe it is because they are satiated, but i can definitely see Ellison doing it if it were close to within his means or desires. Cranky’s AMericas Cup example suggests that the manufactures of the first Low Earth Orbit private habitat will have trouble keeping up with demand once the first one sells.
In other words, I’m not seeing that consumption is bounded by diminishing utility relative to constraints which is what you were arguing. There may be emperics that prove otherwise but it is not self-evident to me.


Bruce Wilder 01.27.14 at 8:32 am

Nine: Being a neoliberal fellow traveller would make you a seller. Supply-side as it were.

Matt: 1000 egg omelette? — not inconceivable, if you choose to entertain.

The deeper challenge to humanity from plutocracy concerns whether to socialize or externalize conservation, the reduction of consumption and the consequences of that we have wrought. Many of the rich may wish to externalize. The scandal is not the excess of, say, the Taj Mahal, but that so many people had to be reduced squalor to concentrate the wealth to build it.


Dawson 01.27.14 at 9:27 am

Indifferently targeted fiscal expansion, and even spending to improve household consumption, seems to have bad political externalities in that rich people with strong lobbying and liquidity preferences capture large portions of spending in the market. Lots of this money might be donated to the effect of opposition to new spending, and generally to reinforce the fortunes of “middle class” people who feel like they’re already making it fair and square, and whose common sense does not predispose them to favor governments spending more than than collect in taxes. These people do not clamor for further progressive policy, so the spending doesn’t reproduce itself.

Ecological crisis and commodity price fluctuations will probably compel a lot of people in unwealthy countries to migrate North. Migration and migrant remittances also seem like useful anti-poverty techniques. Greater supply of needy people will create its own demand for prudent fiscal expansion, Says I. With a view toward accommodating them in countries like the US and Canada, where space and water are plentiful, we should dramatically expand our supply of housing in wealthy locales.

1. Lots of public housing and deregulation of zoning, heights and new builds. 2. Household efficiency improvement, tutoring in maths/reading/mprtnt tongues/ESL, childcare, bus driving, ladies’ self-defense class leading, policing, jog/bike/hike leading, nutritional counseling, masterpiece copycat muraling, live covers of famous songs at dinner hour in restaurants en masse, please!


reason 01.27.14 at 10:55 am

Bruce Wilder @111
Very true unfortunately.

It worries me for instance that increase in energy taxes, will result in conspicuous consumption of energy by the very rich, INCREASING the burden on the poor.


Nine 01.27.14 at 5:29 pm

“Being a neoliberal fellow traveller would make you a seller.”

Heh. Nicely done sir.


Matt 01.27.14 at 11:26 pm

Billionaires’ spending is directed far more toward ownership than consumption, relative to the median citizen. Their consumption is huge in absolute terms but far less than would be expected were the same wealth spread across the middle strata of society. I’m a little surprised this is so controversial; it’s the same reason that sales taxes are de facto regressive. Or for a nation-scale example, it’s part of the reason the former Soviet Union saw the median standard of living and consumption collapse at the same time it was minting new looter-billionaires at record speed.

I bring this up at all because to the extent that Keynesianism is trying to recapture the good old days of the 20th century, I think it’s important to consider what is achievable. The Lump of Labor fallacy is not really fallacious; human desires to consume are vast but finite. It is entirely possible that automation will continue to increase faster than demand for consumable goods and transient services.

You can spur consumption by increasing the size of the market, either via population growth or access to new trade areas. You can spur consumption by providing people an increased quantity of something they value — more beans for the hungry, for example. You can spur consumption by providing people an improved or novel quality of something they value — salmon instead of beans, for example, or radios, televisions, refrigerators, all the mass-market inventions of the 20th century.

The peak of US population growth is in the past. World trade is already wide open. Consuming ever-greater quantities of the same stuff is likely to make middle-quintile Americans, and the planet, more ill. The 21st century is inventing major new stuff slower than the 20th century, and most of it either explicitly directed at replacing human labor or requiring operations of such a specialized nature that humans will never get the job in the first place (e.g. nucleic acid sequence alignment, connecting microscopic wires). So where do people expect to find the the increased consumption that would support increased employment?

I listed some suggestions for employment in post 30, most of which have low value to private capital owners (e.g. improving public infrastructure) and some of which actually have negative value (improving enforcement of health, safety, and environmental regulations). I think those things could increase employment, but I think it should be recognized that it would require permanent rather than temporary increases in employment democracy: private capital is minimizing the job-creating business, even while waving the “job creators” banner. This is not a phenomenon confined to the USA, either: between 1995 and 2008 Chinese manufacturing employment increased only 1% as manufacturing output increased ~400%.


Dawson 01.28.14 at 3:47 am

I’m sorry if my previous post I seemed to leaflet. I think it’s important to remember Keynes, given power’s attention, as a discerning enthusiast about government as a shopper for labor power. Some needs are greater than others, some needs are better satisfied by capital than others, some needs may not be satisfied by workers without certain skills, some skills are less common than others, some needs are very difficult to satisfy.

I like the idea of improving infrastructure, but I feel that construction labor is often pretty reactionary in the US. How they hollered in WA for new coal export terminal builds. I would be cautious about refreshing their lobbying power. Plus, infrastructure builds in the US are notoriously slow and overpriced, and many would-be supporters might not recognize how builds help us. This might frustrate what should be a continuous escalation of public investment.

Suboptimal portions of investment go to employment in capital intensive builds. Workers on such builds are often quite skilled. Workers on such build often have versatile skillsets. They’re not our most desperate workers

Employment in human services needn’t expand carbon footprints overmuch, builds in a larger worker constituency for our buck, is more easily recognized by recipients as worth protecting, may satisfy very important needs, doesn’t involve as many site specific technical challenges, needn’t require people with rare skills, and usually involves a lot more hiring of people who don’t hate nice things.


Dawson 01.28.14 at 4:03 am

Is there much literature on fiscal multipliers in anti-union vs. pro-union states? Towns like Austin and other blue dots seem especially well placed to chase full employment by purchasing a bunch of permanently useful services without fearing too much the power of public servants to win raises and preclude optimal diffusion of benefits by trading frequency of hiring and service for per-unit job quality.


Shirley0401 01.29.14 at 6:15 pm

As as layperson who slept through most of my sole college econ class, I just want to briefly thank all of you for this discussion. I don’t know that I’ll be able to wrap my head around all the acronyms, laws, &c, but the clarity of thought and genuine attempts to work through disagreements and differences is inspiring. The contrast between this comment thread and most of what passes for discourse is illuminating.

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