Saturday, November 27, 2010

The Unbearable Lightness of Keynesian Macroeconomics

is my poetic description of this post by Paul Krugman, which he more prosaically calls the 'Instability of Moderation'.

Krugman's argument is that the intellectual holes in Keynesian economics - the inconsistency of assumptions between micro and macro - has undermined the stability of the resulting policy paradigms. It's a great piece but my feeling is that most of the people engaged in trashing Keynesian economics have no idea what he's talking about. They are either simple-minded fanatics who've taken liberalism too literally, or people who've got lucky in the market and want to make sure they don't have to share their good fortune with anyone else.

In other words, it's politics, not theories of human behaviour. How do the rich manage to persuade the middle to overthrow the political economy that did so well for the non-rich majority? That's the question we have to answer, and in the end it's not really about whether we believe in inter-temporal optimization or not. 'Moderate' policy, as Krugman calls it, is about collective action - it requires labour unions, left parties, mass commitment to pooled risk and sharing. All of that is achievable but unstable, as three generations of post-Olsonian research reminds us.