What Are Non-Depression Economics?
This discussion has so far one major lack: it does not tell us what "depression economics" is supposed to replace--it does not tell us what non-depression economics is, or was.
So let me try my hand at a definition of non-depression economics.
Non-depression economics believes that:
* Short-run economic policy should be left to the central bank--the legislature and the executive should focus on the long run and keep their noses out of year-to-year fluctuations in employment and prices.
* The highest priority for central banks should be to maintain their credibility as guardians of price stability.
* Once that highest goal has been achieved, central banks can turn their attention to trying to keep the economy near full employment.
* They should try to keep the economy near full employment by influencing asset prices--pushing asset prices up when unemployment threatens to rise, and pushing them down when an inflationary spiral appears on the horizon.
* Central banks should influence asset prices through normal open-market operations--by buying and selling short-term government securities for cash, thus changing the safe interest rate and the price of longer-duration assets.
* Central banks should stand ready to intervene to prevent bank runs. Otherwise, central banks should let the financial sector run itself with a light regulatory hand--financiers can take care of themselves, and the central bank should view itself not as chaperone or duenna but rather as the designated driver in the case of financial speculative excess.
That is what Paul Krugman is arguing is no longer sufficient doctrine for our age.
I thought non-depression economics concerned itself with elegant mathematical models that had little real world relevance.
December 18, 2008 12:28 AM | Reply | Permalink
Excellent snark -- because more than a bit true.
When Keynesianism unable to explain the stagflation of the '70s failed, economists whether they liked it or not and especially, those of a certain age (DeLong) became Friedmanites and were forced to give central banking's powers preeminence in their models. That left the DSGE-ers free to run and off they ran.
The '80s academics have yet to abandon the heresy -- entirely.
December 18, 2008 4:22 AM | Reply | Permalink
I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we [Federal Reserve Board] did it. We're very sorry. But thanks to you, we won't do it again. Ben S. Bernanke November 8, 2002
December 18, 2008 4:44 AM | Reply | Permalink
This is not only insufficient doctrine for our age - it was never sufficient doctrine. You are just adopting the rightwing philosophy of using only monetary policy to adjust the economy.
Monetary policy is useful only in assuring a reasonably adequate money supply. But that doesn't directly address aggregate supply/demand, tax policy, wages or prices. To directly affect those factors requires macro and micro policies. If monetary policy is used to affect those factors, the result is either high inflation or recession.
If we want the best economy possible, the government must actively engage in aggregate supply/demand and taxation policy, and occasionally wage and price policy.
One non-depression example is the Volcker Fed - which raised interest rates to reduce inflation and thereby produced a deep recession. Micro policies would have done the job without causing a recession, but the political environment precluded their use.
December 18, 2008 12:51 AM | Reply | Permalink
These are great, informative posts. The more the basic terms are defined, the more we all learn about what you're prescribing.
December 18, 2008 2:02 AM | Reply | Permalink
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OK Brad . . .
~OGD~
December 18, 2008 5:29 AM | Reply | Permalink
A sage once said that a classic is a book that every one cites but no one reads. Keynes's General Theory is a classic for both Delong and Krugman for they clearly have either never read or never understood Keynes's theory of an entrepreneuial economy -- an economy that possess liquid financial markets (hence Keynes's liquidity preference theory) and therefore is potentially very unstable.
What passes for Keynesian Economics among the elite professionals such as Brad DeLong and Paul Krugman is Samuelson's and Hicks' 1930s interpretation of Keynes. But as I point out in my book JOHN MAYNARD KEYNES (Great Thinkers in Economics Series) Palgrave, 2007)-- on page 181 I note that Samuelson states that when he read The General Theory as a graduate sudent in the 1930s he found the book "unpalatable" and not comprehensible. Samuelson then states "The way I finally convinced myself was to just stop worrying about it [about Keynes's analytical framework]. I asked myself: why do I refuse a paradigm that enables me to understand the Roosevelt understanding from 1933 to 1937? I was content to assume that there was enough rigidity in relative prices and wages to make the Keynesian alternative to Walras operative".
But if Samuelson had ever read Chapter 19 in THE GENERAL THEORY etitled "Changes in Money Wages" he wold see that Keynes specified that the "supposedly self adjusting charcter of the economic system rests on an assumed fluidity of money wages; and when thereis a rigidity, to lay on thisrigidity the blame for maladjustment....My difference from this theory is primarily a difference of analysis".
Morover, in the 1937 EJ, in response to Tarshis and Dunlo, Keynes specifically notes that his analysis demonstrates that as a theoretical matter, even with perfectly flexible wages and prices an entrepreneurial economy will not automatically assure full employment.
Furthermore on pp.185-187 I demonstrate how I convinced Hicks to ultimately reject the ISLM system for it was not a correct interpretation of Keynes and I quote Hicks in his ultimate acceptance of my analysis of Keynes's General Theory as the appropriate measure.
So wha should replace the non depression economics of classical efficient market theory? Keynes's liquidity prefernence theory of financial markets. Why? See my KEYNES book.
Paul
December 18, 2008 10:23 AM | Reply | Permalink
An example of non-depression economics would be trying to balance the budget. That's not a priority right now as we engage in depression economics.
December 18, 2008 11:24 AM | Reply | Permalink
Paul
How embarrassing for you that professor Krugman has been telling his readers to do exactly what you have suggested. To read The General Theory not books on the General Theory.
Research before you write.
December 18, 2008 1:06 PM | Reply | Permalink
Brad,
You only describe the policy implications. But what's the theoretical basis for non-Depression economics? I'd say it's belief that Say's Law is a "good enough" description of the real world, so that abstract Walrasian models assuming full employment, no quantity constraints, and no role for money besides as the means of payment are adequate first approximations. It's presumed that the economy operates within what Axel Leijonhuvfud called the "corridor."
December 18, 2008 2:00 PM | Reply | Permalink
Organic George:
Sorry but it would have been nice if Paul Krugman read the General Theory and understood it -- especially the chapter on "the essential properties of interest and money". How can one read the General theory of MONEY, INTEREST and Employment and not mention what Keynes thought was the ESSENTIAL properties of two of the three things mentioned in the title? If it is ESSENTIAL then it should be the basis of one's analytical framework! Krugman does not even talk about these ESSENTIAL properties!!
Paul
December 20, 2008 10:20 PM | Reply | Permalink