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Paul Krugman’s Interesting Move Closer to Post-Keynesian Economics

If you’d been paying close attention over the years you’d have noticed something interesting about many of Paul Krugman’s economic positions – they’re becoming increasingly compatible with Post-Keynesian Economic positions.  For instance:

  • First there was the realization that Italy and Japan were fundamentally different because Japan controls its own central bank and Treasury.  This was important because after the Euro crisis broke out we saw lots of mainstream economists mistaking the USA for the next Greece.  And they didn’t seem to quite understand why Greece’s interest rates were surging and Japan and the USA’s were not.  Of course, it’s because the USA and Japan don’t have to worry about a solvency crisis whereas Greece was literally running out of money.  And this is something MMTers and Post-Keynesians have been pointing out for years.
  • Then, a bit after my back and forth on IS/LM, Dr. Krugman started using the IS/MP model on his blog.  The IS/MP model is interesting (thanks to JKH for pointing this out to me in the first place) because it better reflects a world with endogenous money, which was my main criticism of the way he was using the IS/LM.   I love seeing Dr. Krugman use the IS/MP because it means he’s really starting to more heavily weight the relevance of a monetary system where banks and broad money play an important role.

Maybe I am reading too much into this, but I think these are important shifts in views.  And I think they’re admirable shifts.  Of course, I am biased towards the PKE view of the world so take that into consideration.  But still – it’s really nice to see a person of his stature who comes out and noticeably change positions to more accurately reflect an improved understanding of the world.  I always like to point out that even the smartest people will never fully understand the monetary system and the economic machine because it is dynamic and always evolving.  But the really smart people will always remain flexible enough to try to keep up with it.   Too many economists these days just find a position and make a career banging their drum on it.

And this hits in on one of the keys to understanding Monetary Realism – we look at the institutional and operational realities of the monetary system, as they presently exist, and try to analyze the system for what it is, while also knowing that it’s evolving and dynamic.  In my biased opinion, that helps us establish a better framework for being able to navigate the world of money, finance and economics.

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