Paul Krugman the academic, Martin Wolf the economic journalist: Bottom line – read Wolf’s great new book

MartinWolf2011ByDaphneBorowski.pngPaul KrugmanI’m a big, though not uncritical admirer of Paul Krugman – of his straightforwardness and his aggression in what is almost always a worthy cause. And yet, reading Martin Wolf’s magnificent book rather inauspiciously titled The Shifts and the Shocks: What We’ve Learned-and Have Still to Learn-from the Financial Crisis, I’m struck by the way Krugman has constrained his own investigations and advocacy.

Before his decisive turn with the coming of George Bush’s presidency and what Krugman saw as the rampant dishonesty of the campaigning and discourse of the right, Krugman styled himself as an aggressive defender of centrism, puncturing the fallacies of the heroes of the right and left. As he put it, he liked to catch them with their hands in the intellectual cookie jar and expose them in his pieces. Thus in his attacks on the ‘policy entrepreneurs’ of the Clinton era and before, like Lester Thurow and Robert Reich, he’d frequently ‘catch’ each of them not paying sufficient respect to the subtleties of comparative advantage and allegedly committing themselves to various other alleged intellectual fallacies.

While I was quite sympathetic to the points he was making on policy – these guys were often somewhere between little and a lot too slick in the way they presented their stuff – I didn’t really think that Krugman had demonstrated that they had in fact committed themselves to those fallacies. If you tried to read them ‘with’ the grain as it were, to get what they were trying to say – knowing also that they’re trying to communicate with people who are not steeped in economics – it wasn’t clear they were mistaken logically whether or not you ultimately agreed with them.

By contrast on the right we had all sorts of hijinks – massive tax cuts that paid for themselves, full Ricardian equivalence, modelling the Great Depression as a spontaneous holiday and various other grand themes thrown together with the flimsiest of evidence. In any event since Krugman has self-identified as a fighting Liberal, he’s been fantastically good at skewering his opponents – almost always when they need skewering, and at the same time he’s kept producing interesting academic(ish) papers. And in economics where models should be used to test, train and illustrate economic intuition and shouldn’t take over the show, academic(ish) papers are usually better than academic papers. Yet there’s been something missing.

Krugman’s thinking is virtually all oriented around existing institutions – and contemporary policy questions – most particularly what’s the right stance for monetary and fiscal policy in the current circumstances (which have, since 2008 been in the presence or threatened presence of a liquidity trap.) Krugman has shown how right he’s been, how wrong his opponents have been, again and again. But one place he’s been remarkably silent has been in the institutional development he’d like to see to make the world safe for his vision of how macro-economic policy should be run. So despite his interest in active fiscal policy in the presence of a liquidity trap, he’s shown little interest in the debate about independent fiscal policy.

More strikingly he’s shown little interest in more fundamental questions. One doesn’t have to think for long about things like quantitative easing and its fiscal equivalent – helicopter money –  before a curious mind starts wondering whether fixations on budget balance, either in the short term or over the cycle might be clinging to a picture of the world in which the monetary system is essentially outside government, whether thinking of the budget balance in the traditional way might be, as Keynes described the gold standard, a barbarous relic.

At this point it’s of interest to understand a little of the way in which thinkers have tried to go beyond this kind of thinking. “Chartalism” before Keynes, “functional finance” afterward, and more recently modern monetary theory (MMT) all try to get beyond reifying money in an age in which money is supplied by government fiat. The basic ideas were set out in chartalism in the late nineteenth century. In a chartalist world money is issued by fiat by the government. Why do people use government money? Well ultimately the government requires them to pay taxes in that money. In this context it doesn’t make a lot of sense to talk of a budget surplus or deficit – certainly governments can ‘print’ or otherwise create any money they need to meet their bills. This doesn’t usher in Nirvana. It just means that the constraint on this power is macro-economic balance – and money is issued to the point that generates full employment but stops short of generating inflation.

Further, in normal times it seems that ‘traditional’ ways of thinking of budget deficits might operate quite neatly to encapsulate the constraints on governments trying to optimise economic management. So printing more money might get you out of a recession, but then once a recovery gets underway, you’ve got a lot of extra money sloshing around which you need to withdraw from the system – which you’d do by taxing more and/or reducing government spending. But that’s what you’d have to do if you’d debt financed your way out of a recession – loosening fiscal policy (borrowing to run a deficit) and then tightening fiscal policy (running a surplus and repaying some or all of the debt) after the event. So this way of thinking is not necessarily revolutionary. But if I were in Japan, or in a liquidity trap that I feared might run for a long time, I’d want to work out whether I should think of budget deficits in the traditional way.

Anyway, Krugman shows little interest in this – and indeed hostility to MMTers. Almost all Krugman’s interventions on MMTers seem to be dominated by an instinct that the place not be overrun by cranks (and money is certainly a place where cranks thrive). He’s forever showing how he really does know that commercial banks create money and implying that these MMTers think that commercial banks can expand the stock of money without limit. Krugman keeps intimating that somehow MMTers think that they can expand the amount of money they issue irrespective of the equity they raise. (I don’t know any MMTers who say this). Unfortunately one of the people who got to debate Krugman was our own Steve Keen but the combative styles of both took the debate rapidly into theological points of difference rather than building from points of agreement and Krugman left in a huff. In some ways Krugman’s conservatism about frameworks strikes me as typically academic. After all, if you go wandering off into another paradigm, or trying to figure out how they fit together, it will be difficult to publish it in the leading journal.

In any event, Martin Wolf’s approach couldn’t be more different. With a similarly perspicacious understanding of our current economic woes and what has caused them to Krugman’s, his mind turns to the deeper questions of economic theory and institutional design. And here ‘economic theory’ doesn’t mean what it normally means in economics – neoclassical economic theory. It means what ‘theory’ means in all other disciplines – a self-reflective search for the right mental architectures for understanding the world. Wolf is able to show how the theoretical concerns of chartalists or MMTers about endogenous money growth through the fractional reserve banking system 1are in many ways the same as the concerns of Austrians (I hadn’t thought of this before reading his book).

And he shows how the Chicago Plan for full reserve banking responds to many of these concerns and, it seems, might be able to prevent the endogenous money creation system that is our fractional reserve banking system exacerbating the economic cycle. He’s always pointing to symmetries in different perspectives in very enlightening ways. In any event, I recommend his book to anyone interested in our current economic woes. Easily the best book I’ve read on them – both trenchant and balanced, fair and forthright. And full of bold proposals to make the world better – that are pretty radical, but then they make sense to me and have a fine pedigree back to early twentieth century economics – strangely enough from both the right and left.

Anyway, the usual enthusiasm alert applies. I’m only about a third through the book – though I’ve bounced around a lot to the ‘solutions’ in Part Three – so perhaps I’ll revise my opinion down in the light of more reading or a night’s sleep. On a curious note, Amazon has offered me the Kindle version for US$13.00, US$16.00 and US$16.99 at different times. I bought it for US$13 and then downloaded it onto other Kindles by ‘buying’ it for the other prices only to be told that I’d bought the book already and it was being downloaded for nix.


  1. 1. Technically we’re not in a fractional reserve system, but we can assume we are for the purposes of this conversation.[]
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Paul Montgomery
9 years ago

You never really backed up the “modest” achievement diss, Nicholas. Your only gripe with him seems to be his opposition to MMT, but that doesn’t mean his achievements are modest. It is possible to achieve great things in economics without being an adherent of MMT.

When you mentioned “independent fiscal policy”, I thought you were going to start talking about the Tax Commission idea floated by John Hewson recently. Is that what you intended to imply, or am I on the wrong track there?

9 years ago

Not bad, Nick. I recommend Ed Harrison of Credit Writedowns for an Austrian/MMT person. Others may also recommend John Carney of CNBC.

You also brought to my attention a new thought on academic approaches to MMT. They work from a conservative academic position. To my mind though that defeats the purpose of being an academic. You shift through the data, separate correlation from causation, ensure you’re accurate comprehension and change your mind (shift paradigm) if you cannot find framework faults.
It also explains why I now think of some good Keynesian economists as Conservative.

Paul M, Nick has done work himself on independent fiscal policy. Presently I remain unconvinced but that just may be differences in current framework assumptions or it could be a lack of accurate comprehension on my part. I really need the work again. My understanding though is it would be a move to a smaller government and a lessening of intervention by government – as we would then have both independent monetary and fiscal body.

Paul Montgomery
9 years ago
Reply to  Senexx

So yes, Senexx, you think Nick is talking about a Tax Commission or similar. Support for that is a rather peculiar barrier that Nick puts up to an economist’s achievements going beyond “modest”. There are very valid arguments against that sort of thing, by those who prefer direct democratic accountability for tax policy.

Paul Montgomery
9 years ago
Reply to  Nicholas Gruen

Nicholas, the public is in the primary position to decide the fiscal stance because it’s their taxes that pay for it. Sever that link, and bad things follow.

What you are proposing is what Treasury does behind closed doors to Ministers, but done in public to directly shame the government into prudent policy. You want wonks like yourself to have a platform to engage in political debate when back room advisory roles don’t achieve your goals. This is understandable, but flawed.

The problem Delong had, and the problem you have, is that right wing Western governments in this millennium show little to no fiscal rectitude. The supposed bipartisan commitment to Keynesian discipline is breaking down on one side only.

The Libs attacked Treasury from opposition, and you want the wonks to be able to fight back in the media through a new “centrist” institution. However, it will be so very easy for the Libs to characterise this Commission as left-leaning, because the problems you will be railing against will be mostly due to right wing governments. The same would likely be true if the Commission tries to stop things like the NDIS or NBN by arguing from the right, because Labor would scream blue murder. That’s not to mention what happens when the Commission comes up against the mining lobby or the unions. How much effect could a toothless version of the Commission have in the current political environment? It would be a glorified fact checking unit, and we know how ineffectual those are.

There is a hole in the middle of the political spectrum at the moment, no doubt, because the bastards in the majors are drifting apart.. That hole, nevertheless, can not be filled by technocrats in an unaccountable centrist wonk commission. Minor parties can and are sprouting up to occupy the populist middle. You may not like Palmer and his mob, and they’re a far cry from Don Chipp, but they are at least accountable to public opinion.

Paul Montgomery
9 years ago
Reply to  Nicholas Gruen

Getting back to the OP, the above is a debate worth having, but it’s mystifying how you think Krugman’s achievements are modest unless he addresses this rather obscure and unpopular proposal of yours. Why is it vital that he spruik for a Tax Commission for him to achieve in your eyes? I’m reasonably sure Krugman would scoff at such a suggestion, because a Tax Commission in the US and Europe would inevitably be populated with Very Serious People who would propagate the march of liberalism and not be an agent of change for good. Your faith in Australian wonks to actually maintain the purity of centricity is no doubt based on sound evidence of decades of Treasury competence, but that may not always be the case. Skepticism as to the underlying structural integrity of such a body is a valid position to take.

Paul Montgomery
9 years ago
Reply to  Nicholas Gruen

We have such an independent expert body, Nicholas: it’s called Treasury. The RBA does it en passant, but it’s Treasury which fulfils that role on the fiscal side.

If you expand the role of Treasury to be able to criticise the government – and don’t pretend that this Commission won’t mostly be pushing Treasury’s view, as it would recruit from the ranks of wonks with a history with Treasury – then you are entering the world of politics and will have other political actors ascribing political motives to you, as I have just done. They will take your words and reinterpret them according to their world view. This is unavoidable, because as derrida derider said in that post you linked, fiscal policy is about “what sort of society we want” which makes it intrinsically political.

To answer your question directly: no, we don’t need a Tax Commission to argue on behalf of Treasury and/or Keynesianism at a macro level. I trust in the democratic processes of our modified Westminster system to produce outcomes which approximate what a Tax Commission would agitate for over the long term. It may take another Hawke to be the politician who can combine populism with reform, and the search for such a person may take a long time, and in the meantime Treasury is going to be sidelined. As they say, democracy is terrible but the alternatives are worse.

On what you were “getting at”: it seemed to me that it was to throw a few insults at Krugman and not back them up. You called his achievement “modest”, but didn’t directly specify why. You chipped him for having an “academic” mindset which is conservative about institutions, in contrast with Martin Wolf’s embrace of the radical Chicago Plan (and in contrast with your own more practical experience working inside government trying to be an agent of change?). If you’re going to make such statements about Krugman, you’d better have a full justification.

2020 summitier
2020 summitier
9 years ago


Are you really peddling MMT?

2020 summitier
2020 summitier
9 years ago
Reply to  Nicholas Gruen

You’re not supporting it, but giving crank MMT the light of day and scolding Krugman for thinking its crank theory. You realise that MMT is about on par with the stupid stuff Glen Beck preaches, which you linked to. As I said, incredible.

If you have no understanding of monetary economics, which you obviously don’t then stay away from these discussions and don’t, don’t knee jerk to something like MMT because its aligned with Keynesianism. It’s utter garbage and a person advising governments and world leaders and assorted plutocrats on Web 2 such as your good self should stay right away from it. On the crank scale it’s on par with the nonsense Glen Beck utters. Don’t be so tribal and be a little more thoughtful – at least thoughtful enough to know the difference between good and crap.

9 years ago
Reply to  2020 summitier

I “peddle” MMT as it is a a factually correct description of a modern financial system but at no point here did I think Nick was ‘peddling’ MMT.

2020 summitier – I know this is the Internet and it is easy to make mistakes but your tone sounds incredulous. I welcome discussion over at my blog so as not to sidetrack this one if you are willing to engage.

I once engaged Nick on the subject and his reply can be seen here, it was a response to one of these two posts. The 2nd I think but I don’t truly recall.

4 years ago

I’m in favour of direct democratic accountability for tax and spending, but not for the fiscal stance.

Um, spending minus tax is the fiscal stance.

That is I believe that the nature and level of taxes and the nature and level of spending should be determined by political processes,

Um, that’s the democratic ballot box and other processes of the branches of government.

but that the budget stance should be at least subject to the disciplines of independent expert and transparent review

Um, the budget stance is determined by the first two things mentioned and is a residual or an outcome of government and private sector spending choices.

How would one define expert given the disagreement (mostly over personality) across academia & even conflicting advice in the financial sector as you can see between IFM & Steward Wealth.

How would one define transparency? Do you define it before or after the fact? Do you show the sausage being made publicly or do you share the information afterwards? Do you just have an oversight body? Who guards the guards? Who selects them?

As best as I can tell you haven’t come to a conclusion or said anything conclusive.

My apologies that this is an aside to the main thrust of this post but of course MMT is going to share some similar characteristics with Austrians as it has some roots with Schumpeter.

Also it seems Paul Montgomery has already articulated some of these thoughts.

PS. If anyone visits my site, check out the videos on the main page and the top level FAQs (FAQs-2).