An Open Letter To Professor Paul Krugman
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August 13th 2013
I deeply appreciate your efforts to clarify the history of economic thought and I share many of your sentiments, particularly with regard to Austrian economics, the importance of Keynesian ideas and the need to be aware of the writings of our predecessors. But just as Milton Friedman and Friedrich Hayek were not always right, neither was Keynes.
Perhaps you have read some of my recent work: Perhaps not. I infer that you may be aware of it since your columns often select themes that closely mirror my writings, usually a day or two after they are circulated. Perhaps that is due to the coincidence fairy.
I enjoy reading your column in the New York Times, although I do feel that you might be a little more balanced from time to time. Politeness and respect for those who disagree with our positions are underrated virtues.
Until now I have been content to keep my intellectual disagreements with you private. We have much in common. However, your most recent attempt to distance yourself from your own heritage, the neoclassical synthesis, without reference to my recent NBER paper, here, is a step too far.
The entire body of work that you yourself associate with is based on an MIT tradition that interprets Keynesian economics through the lens of Samuelson’s neo-classical synthesis. Prices and wages are sticky; therefore unemployment is high. As I have argued now for more than six years, Keynesian economics is not about sticky wages and prices. It is about the inability of a market economy to coordinate on a Pareto efficient steady-state equilibrium.
In the General Theory, high involuntary unemployment is one of many steady state equilibria. It is not enough to fall back on the IS-LM model to understand that idea. The Hicks-Hansen IS-LM interpretation of the General Theory was never properly reconciled with microeconomic behavior. Recognizing that fact, and integrating Keynesian ideas with forward-looking expectations, leads to a whole new way of thinking; one that I have elaborated on in my books and articles published over the past six years. Perhaps you are familiar with them? If not, I would be happy to send you signed copies.
Roger E. A. Farmer
Distinguished Professor of Economics, UCLA and
Senior Houblon Norman Fellow, Bank of England