Tony Yates has recently been battling with some members and supporters of the heterodox economics community, and is clearly very annoyed by their portrayal of mainstream macro. Now Tony is a fully paid up member of microfounded mainstream macro, while I tend to be more critical of this orthodoxy (although I still work within it, and argue that it is a progressive research programme). So you might expect me to be less annoyed by heterodox attacks on the mainstream. Not so!
Here is an example of what gets me really cross. I would not normally post about a comment to my blog, but this was anonymous, and it is also not atypical. It said, following my criticism of the recent article by Jeffrey Sachs:
“Unfortunately, this is what happens when you contaminate the GT [General Theory] with inter-temporal economics.”
“Sachs is very much the quintessential Great Moderation New Keynesian.”
The implication is that modern intertemporal New Keynesian theory is somehow behind the view that austerity will not harm a recovery.
This is absolute and dangerous nonsense. Having spent the last decade or two looking at fiscal policy in intertemporal New Keynesian models, I know that exactly the opposite is true. In these models temporary decreases in government spending have significant negative effects on output for given real interest rates. At the Zero Lower Bound (ZLB) the effects are greater still. I have written chapter and verse on this, and will not repeat any of that here. (For those who are curious, here is a relatively non-technical discussion and here is something more technical.) I was very critical when certain eminent economists associated with the right made the mistake of suggesting otherwise. Judging by the recent exchange, Paul Krugman is much more the “quintessential Great Moderation New Keynesian” than Jeffrey Sachs. Perhaps the problem with Jeffrey Sachs is that he just does not realise what a big difference the ZLB makes (although Paul Krugman has made this point so many times). Anyhow anyone who says that mainstream New Keynesian theory supports austerity does not know what they are talking about.
I get plenty of comments on my posts which display lack of knowledge of key macro models and ideas, and if I have time I like to think that I respond to these in a helpful and positive manner. However this comment (and others like it) makes me cross for the following simple reason. Many economists and non-economists of the right try and portray mainstream economics as naturally supportive of their political programme. Right wing think tanks name themselves after one of the pioneers of economics. It is normally nonsense: mainstream economics is all about market failure, diminishing marginal utility favours redistribution etc. Of course there are counter examples (Pareto optimality), so it would be wrong to say that economics leans to the left as well.
However when some of those on the left say yes, mainstream economics is all the things that those on the right say it is, they share a mutual conspiracy to distort the truth. When you are trying hard to convince policy makers and journalists that what those on the right are arguing for is not implied by mainstream thought, people from the left pop up to undermine what you say.
That last sentence probably exaggerates the importance of heterodox economics. In my view heterodox economics is far more dangerous in giving young students that lean to the left a distorted view of the mainstream which can have lasting damage. Been there, done that (briefly). I actually think that heterodox economists have some important criticisms to make, and I also think that mainstream macro orthodoxy can often discourage such fundamental criticism. However pretending mainstream economics is something that it is not just devalues these criticisms.