Team Old Keynesian versus Team Chicago
Scott Sumner has a good article about the debate between Old Keynesian economists (Paul Krugman et al.) and the Chicago Economists (Robert Lucas et al.) that led to my housewives/star wars blog posts:
In this post, Sumner asserts that the problem in the recent debate between team Old Keynesian and team Chicago is that team Keynesian is assuming that the Keynesian model is correct when criticizing team Chicago. I’m very glad Scott Sumner posted this because it gives me a good opportunity to try and express what’s confusing me about this whole debate.
Essentially, in an economic debate like this one there are two different senses of being wrong:
First, you can argue someone is wrong because their argument exhibits a logical flaw that would be erroneous in any of the major categories of economic model.
Second, you can argue that someone is wrong because although their beliefs are logically consistent within the model they’re using, their model is not apt for the situation under consideration.
So here is what is really confusing me about the recent blog war between team Old Keynesian and team Chicago. Usually when an argument like this erupts between Nobel Prize winners and other eminent economists, the second statement is what’s really at issue. In other words, what the economists are arguing about is which logically coherent model to apply to the situation. Ultimately there isn’t enough systematic empirical evidence out there yet (maybe someday there will be) to make an absolute case for one macroeconomic model being true in the sense that the Einstein’s theory or relativity is true. Hence Nobel Prize winners disagree and their disagreements revolve around finding ever more pieces of evidence that they believe provide empirical support for their position.
But in this most recent debate, that is not my perception of what the Old Keynesian economists are arguing. Recall that this all started when Paul Krugman argued that Lucas and Cochrane do not understand Ricardian Equivalence:
Now Ricardian equivalence is not an element of the old Keynesian model that informs Krugman’s opinions. And at other points he and Brad DeLong and others have argued that Lucas and Cochrane don’t have a coherent model in mind when making their arguments. So it seems to me that team Old Keynesian is asserting that Lucas and Cochrane are wrong not just in the Keynesian model, but in every reasonable economic model. So that leads to my first question, am I right about the Krugman argument? Or is it just the case that what team old Keynesian is arguing is that team Chicago is employing the wrong model? If it’s the latter than I can stop being confused.
Now if it is the case that Krugman et al. are arguing that Lucas et al. are wrong at the logical flaw level, my question is this, is it true that the statements made by Lucas and Cochrane are wrong in pretty much all models? Have they really made a mistake in applying Barro’s Ricardian Equivalence theorem?
I’m just a semester into advanced macro right now, so I don’t feel like I have the technical ability yet to wade into the literature and figure it out. But for a number of reasons I’m skeptical of the charge that there is no logic behind Lucas and Cochrane’s arguments. Hence it seems to me that Scott Sumner is ultimately correct that this is a battle of models.
(1) From, what I know of real-business cycle models, Lucas/Cochrane’s argument seems pretty consistent with that sort of logic.
(2) Robert Lucas seems to be just about the most important person in modern macroeconomics, since just about everything we learn in macro is tied to him.
(3) One of the the major arguments here is that Lucas and Cochrane have misapplied Robert Barro’s Ricardian Equivalence Theorem. However, Barro has also argued forcefully that the multiplier is zero. Is the argument also that Barro doesn’t understand his own theorem?
So I end this post in a plea for one of the more nuanced economics bloggers, in the off chance they read this, to pick up these questions.
Help us Scott Sumner/Tyler Cowen, you’re our only hope! (A last little bit of Star Wars humor).