by Why monetarism — and ‘New Keynesianism’ — failed Paul Krugman has a post up today on why monetarism has more or less disappeared from economics nowadays. Milton Friedman’s project was, according to Krugman, doomed to failure. The key point for this argument is the following: On the intellectual side, the “neoclassical synthesis” — of which Friedman-style monetarism was essentially part, despite his occasional efforts to make it seem completely different — was inherently an awkward construct. Economists were urged to build everything from “micro foundations” — which was taken to mean perfect rationality and clearing markets, not realistic descriptions of individual behavior. But to get a macro picture that looked anything like the real world, and which justified monetary activism, you needed to assume that for some reason wages and prices were slow to adjust. Sounds familiar, doesn’t it? Yes, indeed, that is exactly what Krugman’s ‘New Keynesian’ buddies — Greg Mankiw, Olivier Blanchard, David Romer, Simon Wren-Lewis et consortes — are doing today! So being consistent to his own argument, Krugman has to conclude that their project is ‘doomed to failure.’ Mirabile dictu! Back in 1994 Laurence Ball and Greg Mankiw argued that although traditionalists are often called ‘New Keynesians,’ this label is a misnomer. They could just as easily be called ‘New Monetarists.
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Why monetarism — and ‘New Keynesianism’ — failed
Paul Krugman has a post up today on why monetarism has more or less disappeared from economics nowadays. Milton Friedman’s project was, according to Krugman, doomed to failure. The key point for this argument is the following:
On the intellectual side, the “neoclassical synthesis” — of which Friedman-style monetarism was essentially part, despite his occasional efforts to make it seem completely different — was inherently an awkward construct. Economists were urged to build everything from “micro foundations” — which was taken to mean perfect rationality and clearing markets, not realistic descriptions of individual behavior. But to get a macro picture that looked anything like the real world, and which justified monetary activism, you needed to assume that for some reason wages and prices were slow to adjust.
Sounds familiar, doesn’t it? Yes, indeed, that is exactly what Krugman’s ‘New Keynesian’ buddies — Greg Mankiw, Olivier Blanchard, David Romer, Simon Wren-Lewis et consortes — are doing today!
So being consistent to his own argument, Krugman has to conclude that their project is ‘doomed to failure.’
Mirabile dictu!
Back in 1994 Laurence Ball and Greg Mankiw argued that
although traditionalists are often called ‘New Keynesians,’ this label is a misnomer. They could just as easily be called ‘New Monetarists.’
That is still true today — the macroeconomics of people like Greg Mankiw and Paul Krugman has theoretically and methodologically a lot more to do with Milton Friedman than with John Maynard Keynes.