Institutionalist Economics did not come up short
I am confused about something Paul Krugman wrote today in his post Dare to be Silly. What he wrote seems… silly.
“Before I turn to Syll’s critique, let me summarize my understanding of one of the great turning points in the practice of economics – the turn away from institutional economics in the 1940s and 1950s… Why did this happen?… No, what happened was the Great Depression… American Keynesians said, “We have inadequate demand. Increase government spending!”… And the Keynesians were right, confirming the sense that they had something useful to offer, while the institutional tradition came up short.”
The Institutional tradition came up short??? That statement does not make sense. The Institutional tradition gave us the New Deal. Keynes’s great book came in 1936.
Let’s go back in time a bit… a century ago in the United States, Institutional economics was centered in the Wisconsin School.
“The Wisconsin school in economics was based at the University of Wisconsin–Madison, and played a prominent role in American economics in the first half of the 20th century. The Wisconsin school was central to institutionalism in the United States, and also played a prominent role in labor economics and in the development of the policy ideas associated with the New Deal. The central figures in the Wisconsin school were Richard T. Ely and his student John R. Commons. Notable students of Commons included Edwin E. Witte, largely responsible for the drafting of the Social Security Act.”
We then remember that Keynes himself wrote a letter to John Commons in 1927, showing his appreciation of Mr. Commons…
“There seems to me to be no other economist with whose general way of thinking I feel myself in such genuine accord.”
This quote appears at the start of a paper of the talk Hyman Minsky gave as he accepted the Veblen-Commons award. (source) He went on to say…
“Keynes’s letter to John R. Commons illustrates the affinity between the economics of Keynes and the American institutionalists.“
“In today’s terminology, Keynes’s “beliefs” are mental models that lead to propositions about the behavior of the “real world” economy. This approach makes “real world” outcomes dependent upon institutions. It sanctions state interventions to create institutions that lead to an economy with desirable properties. The last act of Keynes’s life was his deep involvement in the creation of the World Bank and the International Monetary Fund. Much earlier he proposed institutions that would create what today we might call “capitalism with a human face”, which obviously was the aim of the great institutionalists.”
So as Mr. Krugman writes about the usefulness of the IS-LM model, he downplays the Institutional approach to theory, which formed the basis of the New Deal. Beatriz Webb, who spear-headed the Institutionalist movement in England, did develop theoretical models. Bruce Kaufman writes…
Maybe Mr. Krugman is referring to a claim that the Institutionalists did not have models and theories. Maybe that is why he says they came up short. But it is not fair to say that. As I see it, Keynes and the Institutionalists were working toward the same goals. To separate out the Institutionalists from that effort, like Mr. Krugman seems to be implying, would simply not be right.
Krugman has gotten too big for his britches , literally and figuratively. His only claim to fame is his ability to make clueless hacks sound clueless – not much to brag about , I’d say. Fifty years from now , hell , maybe ten , people will say : ” Paul Krug-who?? ” , and he knows it , yet he has the temerity to dismiss both Keynes and Minsky in a single post.
His defense of IS-LM lacks substance. The fact that it convinced him that we would not have inflation is meaningless. If he had used a crystal ball instead , would that make crystal balls valid economic models ?
So-called Keynesians like Krugman , DeLong , Summers and the rest of the bubble-blowers have tarnished the name of Keynes irreversibly. I say let them keep the name , and we start calling Keynes’ teachings “Maynardism”. Then I’ll be able to agree with the Zero Hedge crowd about Keynesians :
http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/03/photo.JPG
Marko,
I am a Keynesian with more of that original Institutional theoretical approach from Beatriz Webb.
The problem could be that models get taken out of an institutional context. For example, the IS-LM model will behave differently in an economy where labor share is increasing to one where labor share is falling. Also, inflation will respond differently when labor share is increasing to when it is falling. The institutions of tax policy, monetary policy, wage policy, regulations and even the prosecutions or lack thereof of corporate malfeasance change the way models express in the economy.
I see that monetary policy to promote inflation would be a lot more effective if labor share was increasing. I could say that a falling labor share was the cause of low inflation, but I am also Keynesian enough to say that the IS-LM model would say that too.
However, I say that inflation will not bounce back like central bankers think. If labor share stays low, inflation will not bounce back as the economy hits its natural level. Krugman I think has enough of a doubt on that too, but he is willing to push past the natural output level to do whatever it takes to stimulate some inflation.
I do not think that is a good idea, considering the current policies feeding wealth inequality.
Monetary policy hasn’t been the problem. Fiscal policy and economic policies out of Washington were both positive and negative on economic growth. For example, the tax cuts were too small and too slow to spur and sustain economic growth. Also, rather than deregulating to unleash growth, more regulations were added.
Fiscal policy and economic policies out of Washington caused the economy to spin its wheels very fast, and burn cash, to make little progress. Certainly, the progress was not enough to jolt the economy into a self-sustaining cycle of consumption-employment. There are still over 20 million Americans unemployed or underemployed, which, of course, lowers (labor) income.
It’s sad, because Americans were willing to work longer and harder to pay for the overconsumption, and strengthen household balance sheets, which would add to future economic growth, including over the past few years. Instead, they were forced into early retirements, collected government benefits, including disability, attended school, lived with their parents, etc..
I stated in Feb ’09:
1. Obama should change his stimulus plan to a $5,000 tax cut per worker [or $750 billion for the 150 million workers at the time], along with increasing unemployment benefits by a similar amount. This will help households strengthen their balance sheets [i.e. catch-up on bills, pay-down debt, increase saving, spur consumption of assets and goods, etc.]. This plan will have an immediate and powerful effect to stimulate the economy and strengthen the banking system. When excess assets and goods clear the market, production will increase.
2. Shift “toxic” assets into a “bad bank.” The government should pay premiums for toxic assets to recapitalize the banking industry and eliminate the systemic problem caused by global imbalances. The Fed has the power to create money out of thin air, to generate nominal growth, boost “animal spirits,” and inflate toxic assets.
3. Government expenditures should play a small role in the economic recovery. For example, instead of loans for the auto industry, the government should buy autos and give them away to government employees (e.g. a fringe benefit). So, automakers can continue to produce, instead of shutting down their plants for a month. Auto producers should take advantage of lower costs for raw materials and energy, and generate a multiplier effect in related industries.
SAM could just buy mortgages and give them to homeowners. A homeowner living at home PAYS much more state and local TAXES than a homeowner living under an overpass. PLUS said homeowner buys services. (electricity, home heating fuels, trash services, etc.) Throw a new GM(government motors) car in the deal to support the industry and local gasoline sales will increase also.
T’would be no worse than feeding T-Bills to AIG for the QE program.
Basically, Krugman was correct that a housing boom, or bubble, was needed to replace the tech boom.
A bubble is needed in a depression, although the country wasn’t in a depression in the early 2000s. The U.S. had a mild recovery, because the 2001 recession was mild, which followed the huge economic boom of the ’90s.
The housing “bubble” was needed. However, lending standards should’ve began to tightened when the Fed began the tightening cycle in 2004.
Mike, it would’ve been very expensive for the government to buy mortgages and give them away.
Also, it would be unfair. For example, a homeowner who almost had his mortgage paid-off, because he didn’t extract equity compared to a homeowner who spent over a hundred thousand dollars of equity.
A large tax cut would be most effective and flexible. Each individual would use the tax cut to improve his or her financial position, e.g. pay-off highest interest rate debt first, e.g. credit card debt, to increase monthly discretionary income.
And, a large tax cut was needed, because increasingly larger U.S. trade deficits meant U.S. consumers were buying foreign goods and foreigners were buying U.S. Treasury bonds.
Peak Trader: Its The USA, fairness is not an option. Better The Fed buys those T-Bills than Foreign Nations&businesses . TRADE deficit IS part of OUR problem. Printing cash is NO problem here. Let that foreigner take cash—NO INTEREST!!!
Besides, how is it fair can it be for BANKER WELFARE to exist while food stamps to the most poor and needy get cut?
Those mortgages could be called A TAX REBATE.
Should U&I get a rebate no one EVER questions the difference.