According to Thomas Palley, Paul Krugman and my defence of mainstream economics is “pure flimflam”. The definition of flimflam is ‘nonsensical or insincere talk’ or ‘a confidence trick’. Nonsensical I guess is possible, but insincere or a confidence trick it most definitely is not. But I guess this no worse than ‘pure drivel’, which is how Lars Syll once described one of my posts.
Despite all this, I would like to have a debate about macroeconomics with heterodox economists, and have tried to initiate one in the past. A debate that gets beyond generalities (and name calling), and talks about actual macroeconomic mechanisms and what policy makers should do. This is because I’m genuinely puzzled about what I am doing that heterodox economists find so wrong.
According to Thomas Palley, New Keynesian economics “retained the nonsense of marginal productivity distribution theory while discarding the foundations of Keynesian economics”. We “use price and nominal wage rigidity to explain cyclical unemployment”. Now I admit to not being terribly concerned about what Keynes really meant, but I’m at a loss to see marginal productivity distribution theory at the centre of New Keynesian theory. What New Keynesian theory does need is that falls in real interest rates stimulate aggregate demand (i.e. some form of IS curve), and in the basic model this comes from changing the intertemporal pattern of consumption. Is that wrong? What explains cyclical unemployment is real interest rates being at the wrong level. Movements in wages and prices get us out of a recession because they lead the central bank to reduce real interest rates. At the zero bound they cannot do that, and in those circumstances wage and price flexibility could make things worse. Is that wrong?
Now it is true that the standard New Keynesian model assumes a labour market that clears, but a model that replaces this with labour market imperfect competition would not behave very differently. That is what I actually teach. Equally the basic New Keynesian model assumes rational expectations, but if we want to change this to a case where agents make predictable errors that is easy enough to do. I also teach this to undergraduates. (For a pretty good guide to what I teach, see this paper by Carlin and Soskice. I use their textbook.)
Which brings us back to teaching. As I said in my original post, I would like to make students aware of heterodox critiques, but I want to point out where in my mainstream account that critique would enter. (I think what I teach is pretty close to how many central bankers think, if not the rest of 'my tribe'!) I believe I can do that for what I call anti-Keynesians (freshwater or whatever), although I remain at a loss as to how flexible prices can get us out of a liquidity trap when central banks target inflation (see here and here). So where (in terms of macroeconomic mechanisms) do I locate the heterodox (post-Keynesian or whatever) critique of New Keynesian analysis? This is not an insincere or trick (flimflam) question.