schooled: Bob Murphy On Greg Mankiw’s Macro

It’s rather telling that Greg Mankiw has no answer to the main substance of Robert Murphy’s takedown of Mankiw’s overall macreconomic vision.   Instead, Mankiw fires his giant Harvard guns on an issue that was recognized long ago by economists without need of the unreal mathematical machinery of “new Keynesian analysis”.   But the heavy mathematical machinary doesn’t solve the scientific question at issue, which can be asked this way:   Is the groping process of the market better appreciated by microeconomic market process thinking (see, e.g. Kirzner, Boettke or Horwitz) — or by the unreal / artificial fake-microeconomic constructs of “new Keynesian” macroeconomics?  And in the re-coordination phase after an artificial boom can a centralized monetary policy possibly deal with the problems across time more successfully than heterogeneous participants in the market?  It would be useful if Mankiw could provide us with arguments and evidence — excluding arguments based on a cartoonish understanding of “science” — for thinking his fake-micro / econometric machinery really did give us a sounder and deeper insight into the coordination process and impediments to that process than does heterogenous market process microeconomics.  And ditto with his claim that a centralized monetary policy could reliably be counted on to deal more successfully with the knowledge problems across time than participants in the market.  Bonus question:  is it possible to construct a neutral econometrics to adjudicate between microeconomic market process thinking and the fake-micro new Keynesian math constructions as rival modes of understanding market coordination across time in real-world disequilibrium environment not subject to mathematically tractable formal modeling — i.e. involving heterogenous capital goods?

UPDATE:  Murphy challenges Mankiw on the empirical facts here and here.  Note also that Mankiw gets Murphy’s position wrong — falsely associating it with a “new classical” perfect markets position that Murphy does not hold.  Here’s a bit of Murphy on Mankiw:

in November, Mankiw called for the Fed to promise to pump in new money in the present, to combat any falling prices. And then just a month later, he started calling for the Fed to promise to pump in new money in the future, because…the imperfect market economy doesn’t allow for prices to fall in the short run.

And let me also recommend David Glasner’s remarks found below in the comment section.

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6 Responses to schooled: Bob Murphy On Greg Mankiw’s Macro

  1. david glasner says:

    Greg, I’m sorry, but Greg Mankiw is 100 percent right about what the problem is. I’m afraid that you are falling for Austrian rhetoric and hype about market processes and central planning to avoid addressing the implications of what happens in the secondary deflation stage of a severe crisis. This is straight out of Hayek, as I pointed out in my February 26 posting on your blog. His neutral money policy norm requires stabilizing total nominal money expenditure and if real income and output are falling then as a matter of arithmetic the appropriate policy for stabilizing nominal expenditure is, yes, inflation at exactly the rate that real income is contracting. The alternative, but essentially equivalent, way to look at this is in terms of the Fisherian real versus nominal interest rates. In the downturn phase short term real interest rates become negative, because expectations of profitability in a contracting economy are negative. But when the real interest rate is negative and the nominal interest rate can’t fall below zero, cash becomes the dominating asset and everyone tries to sell assets in order to get cash which feeds a vicious downward cycle. To stop the cycle, a neutral monetary policy needs to cause inflation so that cash is no longer absolutely the most desirable asset to hold. Mainstream economics (i.e., Wicksell and Fisher!) is totally right about this, and Hayek agreed with them. His pro-deflation policy advice in the Great Depression was aberrational as he acknowledged repeatedly in his later years. Larry White has published a fine paper on Hayek’s policy advice on deflation, and I don’t understand why so many Austrians refuse to acknowledge obvious facts that can easily be looked up. And to call a policy of temporary inflation to stop a vicious deflationary cycle currency destruction is just nonsense.

  2. Greg Ransom says:

    David — I’m challenging the scientific standing of “new Keynesian analysis”, I’m not challenging the existence of a secondary deflation stage of a severe crisis, as I make plain when I speak of “an issue that was recognized long ago by economists without need of the unreal mathematical machinery of “new Keynesian analysis”.”

    I’m also challenging the profession to put up or shut up in making the case — also made by Hayek — that the central banking authorities and the U.S. Congress can do a better job dealing with the secondary deflation stage than can the private economy. The historical contrast between the 1919-1921 episode and the 1929-1934 episode is equivocal, at best, and the tools and math constructs which have been used to adjudicate the matter simply beg the question between these models, as I’ve suggested above.

    I’m not falling for anything, David. I’m pushing the profession to stand up engage the contested issues at hand — rather than take the position of scientistic hacks falling back on Marvel comic 1940s philosophy of science and the discredited “credentials” of “rocket science” macro-math.

  3. david glasner says:

    Fair enough. I’m not happy with how the “profession” is responding to the crisis either. However, when you cite and link to Robert Murphy’s attack on Mankiw’s op-ed piece, which did a good job of explaining in plain terms the perverse dynamic that takes hold in a secondary deflation and why short-term inflation is required to short-circuit that dynamic, it seemed to me that you were endorsing or associating yourself with Murphy’s views, which strike me as, well, um, I think you already know how they strike me.

  4. Greg Ransom says:

    Fair enough, David.

    I don’t myself have clear answers on how to deal with secondary deflation problems from a combined and sound macro and microeconomic production perspective — or even how to well identify the on the ground character of any particular episode.

    I do know that the institutions we have to deal with the problem are worse than 2nd best — they are an idiotic and corrupt Congress and a small and flawed group of Wall Street connected Treasury and Fed guys without enough sleep. And a President who’s read more Fanon and Said and Marx and Rev. Wright and Duncan Kennedy than sound economics.

    And we know that macroeconomists like Mankiw are using “models” with one “representative” consumer, one capital good, etc. — i.e. essentially nothing that has anything to do with an actual time using production economy.

    So I’m not at all well assured that the political hacks like Krugman or the scientistic Marvel comic “scientists” like Mankiw have much to tell us about what expect when they apply their false tinker toy “models” to the hypothesized actions of the knowledge limited, politically compromised folks at the Fed, or in the Treasury, or in Congress.

    I’m aware that I have a way of calling for scientific humility and competence within the discipline of economics using a sledge hammer. I know that there are other and better ways to do it. I guess I lack the patience and ability to do it the better way.

    David writes:

    “when you cite and link to Robert Murphy’s attack on Mankiw’s op-ed piece, which did a good job of explaining in plain terms the perverse dynamic that takes hold in a secondary deflation and why short-term inflation is required to short-circuit that dynamic, it seemed to me that you were endorsing or associating yourself with Murphy’s views, which strike me as, well, um, I think you already know how they strike me.”

  5. Greg,

    RE: “I’m aware that I have a way of calling for scientific humility and competence within the discipline of economics using a sledge hammer.”

    Well, for what it’s worth, please don’t stop until you find something larger. At worst, it’s both correct and entertaining.

    Curt

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