Phil captures some of the basic issues in contemporary economic debate in a short post. Well done.
It's the first time that Krugman enters the Post Keynesian debate and the Godley SFC approach as a guideline to guide empirical investigation wrt to actual context — and gets it wrong. Why he gets it wrong makes all the difference, and Phil calls him out on it. In doing so, he illumines the basic difference between the neoclassical, marginalist approach based on rationality and equilibrium and the Post Keynesian approach after Godley.
It was indeed the obsession with marginalism, rational agents and market equilibrium that drove out the far superior “hydraulic” approach to economics. Hydraulic approaches rely on stock-flow equilibrium outcomes rather than market equilibrium outcomes. As I have written before, the latter stinks of a determinism and a teleology that only exists in the minds of economists. As Krugman notes this whole belief system — for it is a belief system — is “at the core” of what economists are “supposed to know”. That Krugman says this with some degree of skepticism is refreshing indeed, because this is in my opinion the key problem with economics today that makes it less a framework for understanding the economy and more a doctrine based, ultimately, on an a priori, moral vision of man.Yes!
Fixing the Economists
Long Live Hydraulic Keynesianism: Krugman on Godley and Vernengo on Krugman
Philip Pilkington
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