Wednesday, December 3, 2014


Alan Blinder has what looked like an interesting-looking essay in the New York Review of Books, "What's the matter with economics?" Alan has usually been thoughtful, the WSJ house liberal columnist, so I approached it hoping for well-reasoned argument I might disagree with, but be interested by and learn something from. And it started well, pointing out the many things on which economists all agree and policy does not.

Alas, then we get to macro. Something about stimulus sends people off the deep end.  One little quote pretty much summarizes the tone and (lack of) usefulness of the whole thing:
The great Milton Friedman of the University of Chicago, a favorite target of Madrick, may have been right or wrong; but he was certainly far to the right. Much the same can be said of several other economists cited by Madrick as representing the mainstream. For example, he quotes John Cochrane, also of the University of Chicago, as saying in 2009 that Keynesian economics is “not part of what anybody has taught graduate students since the 1960s. [Keynesian ideas] are fairy tales that have been proved false.” The first statement is demonstrably false; the second is absurd. People can and do argue over the macroeconomic views associated with the so-called Chicago School, but it’s clear that the views of that school are far from the mainstream.
"Demonstrably false" and "absurd" are pretty strong.

Am I wrong that graduate programs do not teach any Keynesian economics? I went to look at the Princeton University Economics Department graduate course offerings. Following up on the ones titled "macro," I found

Esteban Rossi-Hansberg: Econ 522 Topics in Macroecomics
Benjamin Moll: Macroeconomic Theory I (1st year PhD): Lecture notes. Syllabus 
                          Advanced Macroeconomics I, Economics 521 (2nd Year PhD)  Syllabus
Chris Sims:   Macroeconomic Theory 504

First reaction: Wow, Princeton has a great macroeconomics program. I think I'll lie about my age and apply as a grad student.

Second reaction: There is zero Keynesian economics anywhere in Princeton's graduate program. 

Alan: if you think it's "absurd" to state that nobody teaches Keynesian economics in graduate programs, you are revealing that you have no idea what goes on in modern graduate programs, including your own. 

(I may have missed some, and not all syllabi are publicly available. If ISLM is taught anywhere in Princeton's economics PhD program, by anyone other than Blinder himself, post link to comments or send it to me and I'll be glad to acknowledge it.)

Forget about "absurd" and "mainstream." Alan, can you provide any evidence that any PhD program at a top US Economics department teaches any IS-LM Keynesian economics at all?

(Lay readers may be a bit confused about the presence of a few (surprisingly few) "new-Keynesian" mentions in these references. "Keynesian" and "New-Keynesian" are as different as Ptolemaic and Copernican astronomy. Yeah, both are about the motion of the stars, but that's it. While one might excuse New York Review of Books readers for not knowing the distinction, that's not the point. Blinder, if he has read any academic papers in the last 30 years, should know the distinction. Krugman is clear on the distinction, frequently savaging new-Keynesians. If that's his excuse for writing this, Blinder either reveals that he does not know the difference between Keynesian-- IS-LM--and new-Keynesian--Woodford, etc.--or that he does not know what's being taught in his own graduate program. Take your pick.)

As for "mainstream," Moll's syllabus starts 
- Stokey, Nancy, Robert E. Lucas Jr. and Edward C. Prescott (1989), “Recursive Methods in Economic Dynamics”
- Ljungqvist, Lars and Thomas J. Sargent (2004), “Recursive Macroeconomic Theory” 
How many Nobel Prizes have been awarded for demolishing Keynesian Economics?  Lucas, Sargent, Prescott, Sims, Phelps, ... I may have missed a few. How many for anything supporting it? 0 that I can find. (Update clarification: For Keynesian economics, not to "Keynesian" economists.) 

And readers of this blog understand the difference between "right" and "free market" or "libertarian." I presumed Blinder knew the difference as well. In case you forgot, Milton Friedman wanted drug legalization, open borders, the end of the draft, and a few other anathema to the "right."

Alan goes on the Chicago attack again with
But what about the strong form of the EMH? This “bad idea” proved pernicious, just as Madrick says. The EMH (plus some financial engineering) gave Wall Street managers the tools with which to build monstrosities like CDOs (collateralized debt obligations) and CDSs (credit default swaps) on top of the rickety foundation of subprime mortgages—and helped give Wall Street salesmen (and rating agencies) the chutzpah to pawn them off as “safe” to credulous investors.
Alan, please go read Fama 1970 and find out what the definition of strong form EMH is before you get it wrong in print again. Understand that it has nothing to do with derivatives. And that Fama 1970 showed the strong form failed in the data! You're just embarrassing yourself in both cases, at least to academic audiences who understand this stuff.

But, wait a minute, where have I heard this before? Hmm. There's someone else who can't stop quoting the few paragraphs of my 2009 blog post (a really authoritative source, eh?). Where have I heard an attack against "Chicago" that is 40 years out of date? (Hint: Becker and Friedman are dead. Chicago now is Getzkow, Goolsbee, Shapiro, Rajan, Zingales, Kashap, Hust, Diamond, Sufi, Seru; Shimer, Uhlig, Alvarez, and sorry for leaving everyone else out.)  

Oh yeah, Krugman. New York Times Magazine. September 2009. 
Keynesian economics has been “proved false,” Cochrane, of the University of Chicago, says.
And so Chicago’s Cochrane...declared: “It’s not part of what anybody has taught graduate students since the 1960s. They [Keynesian ideas] are fairy tales that have been proved false. It is very comforting in times of stress to go back to the fairy tales we heard as children, but it doesn’t make them less false.” (It’s a mark of how deep the division between saltwater and freshwater runs that Cochrane doesn’t believe that “anybody” teaches ideas that are, in fact, taught in places like Princeton, M.I.T. and Harvard.)
(In case you missed it -- it was a long time ago -- my response. A beer at the AEA meetings if a blog reader can find any serious teaching of ISLM in MIT and Harvard's Ph.D. program too. Two beers if you're a PhD student and you weren't chuckling the whole time.)

Alan, (and Jeff Madrick): are you such lazy readers that you have even to plaigiarize your insults? Come up with something new already!  I have a whole blog to mine, plus a website, and dozens of economic articles! I'm sure you can do better than this.

I guess Krugmanism is contagious. Too bad.


  1. Not to mention, John, that Alan doesn’t know his French. It’s “bon mots” not “bons mots."

    1. If only Voltaire and Flaubert had had you around to correct them, David!

    2. Hey guys: Alan is right about BonS mots if not in economics! It's not a "mot composé", ie, bon-mot, but an adjective before the name, i.e. bon mot,... and thus the adjective must take an "s" when the name is itself in the plural...
      Eh oui! Yet both seem to be acceptable. Tie game, but...
      Sorry I am French.
      André Fourçans -

    3. Thanks, Anonymous. I didn’t know that.

    4. The jury is still out on that one. If «bon mot» is treated as a "block" expression, whether it is spelled with or without a hyphen, there should be no s on bon. In English, where it's without question a "block", do not put an s. But in French, where it's just two very common words that happen to be used together, you can put an s. But if you mean it with imaginary quote marks around the two words, don't put an s. Thus:

      «Ce sont de bons mots»

      «C'est un auteur de bon mots»

      Ah ah ah! This is so much more interesting than the OP.

      On why you should put an s in French: Napoléon Landais, «Grammaire générale: résumé de toutes les grammaires».

    5. The power of economics: we even have discussions about French grammar! Ain't that great?
      André Fourçans

  2. Once again, data wins. The question evolves from "what is right?" to "why are there so many people so excited about some wrong idea?"

  3. IS-LM was covered in my graduate econ program, though it was more of a review of what we were expected to know from undergraduate macro.

  4. Replies
    1. Read "macroeconomics and reality." The heart of Keynesian econoimcs is "incredible" zero restrictions.

    2. On page 1 of "Macroeconomics and Reality," Sims says that Keynesian macro models "perform useful forecasting and policy analysis functions despite their incredible [restrictions]". So Sims wants to improve upon large scale Keynesian macro models, not demolish them.

      Sims' Nobel Prize lecture states that "Macroeconomics and Reality" demolished monetarism, not Keynesianism. He writes: "If monetary policy was in part systematic and predictable historically, it was no longer clear that shutting down its variation would reduce business cycle fluctuations." In other words, Sims says he demolished the monetarist claim that monetary fluctuations are the main driver of business cycles.

      Sims concludes his Nobel Lecture: "Keynesian and Quantity Theory views of the effects of standard monetary policy is at least for the time being largely resolved." He means they've been resolved in favor of Keynesianism.

  5. Also, didn't Tobin win the Nobel for Keynesian theories?

  6. ""Demonstrably false" and "absurd" are pretty strong."

    Yes they are. No need to play postmodern relativist games when it games to demand denial. Given that tens of millions are unemployed right now I'd use far stronger terms to describe folks who still stick to the treasury view.

  7. Franco Modigliani? James Tobin?

  8. @Noah:


    1. Well played. While Tobin was a Keynesian, the Nobel committee clearly stated that his prize was for contributions to portfolio theory.

  9. hmmm, no Nobel prizes to Keynesian macroeconomists? Modigliani, Samuelson, Tobin,Solow... etc .... all Nobel prizes and I was under the impression they were Keynesian

    1. I think his argument is that no one has won it for work that specifically proved or validated "old" Keynesian economics. I don't know if he's right or not, but I didn't read this post as saying no Keynesian economist ever won the Nobel Prize. Obviously that isn't true.

    2. For keynesian economics, not to "Keynesian" economists. Your list of names got the prize, and rightly, for contributions having nothing to do with Keynesian economics.

    3. How many Nobel prizes are awarded for classical mechanics? 0
      Classical mechanics is obviously useless and obsolete.

      Also Supply and Demand and arithmetic aren't taught to to grad students. They are probably useless, too.

      Your post is just one big argument from authority; Blinder is also guilty of this fallacy.

  10. You seem to have a Krugman obsession. can we move on from "Krugman said this or that" in this blog?

    1. I'm sure Prof. Cochrane noticed a little spike in traffic last time Krugman wrote a response to him and is trying to ride those coattails to some small bit of mainstream recognition again.

  11. I read Cochrane's reply to Krugman, and I saw major errors. Cochrane writes "the efficient markets hypothesis is precisely that nobody can tell where markets are going." As I'm sure he knows, the EMH actually says nobody can tell where *asset prices* are going, not "markets." This is a big difference that undermines much of Cochrane's argument. The EMH surely doesn't imply that the failure of "too big to fail" banks won't have devastating macro consequences.

    Further, the EMH says that *investors* can't forecast asset prices, not that "nobody" can. In particular, anyone with nonpublic information can potentially forecast asset prices better than "the market." Regulators have just this advantage -- for example, regulators have subpoena power -- so there is at least one very strong reason to expect regulators to be able spot problems that private investors can't. Perhaps there are other factors that offset regulators' tremendous advantage, but Cochrane never addresses this completely obvious point.

    1. What specifically is the difference between asset prices and markets, other than markets as an aggregate of a large number asset prices? Assuming of course you are talking about financial markets, which is what EMH is about and not goods markets.

      Your second point is laughable to anyone who has seen how good regulators are at extracting non-priced information, especially versus the hedge fund crowd. (Carmen Segarra is a case in point)

      Subpeoanas! Is that time consuming legalistic process really going to give you an edge in markets?

      Besides the only difference between investors and everyone else is whether you trade on your information. Typically even individuals that have legal obligations not to do so (insiders) find it irresistible to make a juicy profit.

    2. "What specifically is the difference between asset prices and markets?"

      In my example of Too Big to Fail banks, the banks provide financial services. Because these financial services have externalities or spillovers, their collapse can have a devastating effect on the economy. Investors don't take this into account, but regulators can. That fact that the stock prices of TBTF banks are "correct" or unforecastable may tell us that "markets are efficient," but obviously tells us nothing about market failures or whether regulation is needed.

      "Carmen Segarra is a case in point"

      First, Segarra, a financial regulator, was actually stationed in Goldman Sachs' offices, where she had substantial access to nonpublic information. Second, in the Segarra affair, regulators are accused of doing to little to force Goldman to disclose and limit their conflict of interest -- that is, too little compared to some ideal regulator. It is laughable to suggest that private investors do a better job. Private investors have neither the power nor the proper incentive to address Goldman's undisclosed conflicts. Certainly the EMH doesn't prove any such thing.

  12. The Nobel prize to Diamond, Mortensen, and Pissarides for search models stated explicitly that it was for their Keynesian work ("The analysis provides a rationale for “aggregate demand management”").

    Akerlof and Shiller, authors of "Animal Spirits," among many other Keynesian contributions, both won the Nobel Prize. Shiller's "excessive volatility in stock prices" (cited in his Nobel award) is just an empirical proof of Keynes' "animal spirits."

    Akerlof's and Stiglitz's work on unemployment, cited in their Nobel awards, seems pretty Keynesian to me.

    Mundell isn't generally considered a Keynesian, but he won the Nobel for his work on optimum currency areas, which is based on the crudest kind of Keynesianism (sticky prices).

    Of course, I assume others are right about Tobin, Solow, etc.

    1. >Shiller's "excessive volatility in stock prices" (cited in his Nobel award) is just an empirical proof of Keynes' "animal spirits."

      No, actually Keynes' animal spirits refer to the risk-taking proclivities of entrepreneurs, while Shiller's excess volatility refers to the irrationality of portfolio investors. One has nothing to do with the other.

  13. Seems unfair to associate Blinder with Krugman. Does that account for the strident tone?

  14. It would be funny that Hatzius (Goldman Sachs) et al are using Keynesian models to make big money if it weren't so sad that at the same time they support monetarist ideas to shape the public perception. Makes one wondering.


  15. Dear John,

    could you please describe why you consider Keynesian and New-Keynesian to be so different?

    I understand how IS-LM is very different at mathematical level to modern New-Keynesian models. But then AS-AD is very different at mathematical level to modern Real Business Cycle models and yet we would tend to describe both as neoclassical views, only that AS-AD is the 'incorrect' outdated version. What is the error in thinking of IS-LM as the 'incorrect' outdated version of modern New-Keynesian?

    1. Take a look at "determinacy and identification.." and "the new-keynesian liquidity trap" on my webpage. These document in great detail how new keynesian DSGE models are just nothing like older models. The marginal propsensity to consume in the basic NK model is zero. zero!

    2. Fair enough. I guess I just view 'Keynesian' as a more politico-philosophical term rather than specifically meaning IS-LM; judging from the comments of others I'm not alone in this. Keynes as Keynes, not as Hicks, if you will.

      (I have previously read your papers and did think your observation about the effectiveness of fiscal policy in new-keynesian as being largely about generating expected inflation was a particularly good point.)

    3. "The marginal propsensity [sic] to consume in the basic NK model is zero. zero!"

      Anyone who bothers to work through the algebra of the basic NK model (in Gali's textbook for example) will see that this is just wrong. Obviously you're no slouch at algebra, so I can only conclude that you are working with an idiosyncratic definition of the MPC.

  16. Prof. Cochrane,

    Please, may you stop talking about IS/LM and AS/AD ? These are undergraduate (static and mainly accounting) models to answer some general questions in macro, no more.

    Frankly, I do not believe one second you really think IS/LM or AS/AD is really what we call nowadays (new-)keynesian economics. DSGE models are taught in most graduate and PhD programs, used in central bank for forecasting, etc.

    How can you be such a good researcher and, still, be telling such "fairy tales" about, at least, 60% of modern macroeconomic models? And, please, do not compare yourself to Paul Krugman... We do not care about it.


  17. I think you are just arguing over semantics. When Shleifer talks about "Keynesian economics", he means Keynesian economic ideas, not a particular model. The modern form of these ideas is most commonly expressed in the New Keynesian model, which is definitely taught at Princeton and just about every other economic department.

    You're right that IS-LM and other pre-1980 style Keynesian models and methods are not (generally) taught in modern programs. But I think that many people took your 2009 quote to refer to Keynesian ideas more broadly.

    1. If they wanted to know if I meant ISLM or new-Keynesianism, before writing horrible personal things, they could have asked. My email is not a secret.

    2. You may want to revisit that "I'm not really grumpy" bio line. There's an overriding bitterness to your tone that comes off downright toxic.

    3. John, perhaps you should have been clear in your article what you meant.

      You were writing in publication read mainly by non economists. So most of your readers will see Keynesianism, within the context you were writing in, as meaning we need stimulus in this recession. What you wrote, therefore, suggested that it was ridiculous to argue for stimulus because arguments that we need stimulus now had been so discredited that they were no longer taught.

      That slight of hand - making an argument based on one unstated definition, when you must know that most readers will assume a different definition - is tantamount to ideological propaganda. Hence, people were annoyed.


  18. Perhaps it would be useful to specify the type of Nobel-winning reseearch that counts as a win for Keynsianism? Here's my list, in order of how quintessentially Keynesian they are, along with a few examples of Nobel winners.

    Research showing the effectiveness of fiscal policy. (Diamond, Mortensen, and Pissarides; Tobin)

    Research assuming sticky wages or prices. (Mundell, Tobin)

    "Animal Expectations," meaning that economic fluctuations are driven by exogenous expectations. (Shiller, Tobin)

    Research showing that macro slumps and involuntary unemployment can persist with no tendency towards self-correction. (Akerlof and Stiglitz on asymmetric information)

    Tobin's prize winning work embodies so much of this list that it's shocking anyone could deny that he won the Nobel for Keynesianism. It's more evidence that we're living in Krugman's "Dark Ages of Macroeconomics," where even top economists have forgotten the basics of the field. For an intro macro level explanation of how Tobin's q (his prize winning work) embodies Keynes, see conservative economis Arnold Kling:

  19. For what its worth (maybe nothing), basically all forecasting models used in the private sector are old-school Keynesian. Not only that, but the Fed's FRB/US model and the Bank of Canada's most recent model are big structural single equation models.

    1. by single equation, I mean estimated largely one equation at a time.

  20. A lot of mainstream graduate teaching is even more hostile to old Keynesian economics than your blog post indicates. My graduate macro professor said that anyone who mentioned IS-LM on a test would fail (regardless of what else their test said).

  21. As a layperson, my takeaway from this is that there is no agreement between economists whatsoever as to what "Keynesian" means. Obviously the syllabus from Moll's 521 course at Princeton is loaded with what Krugman and many other liberal economists would tell you are "Keynesian" (or perhaps "new Keynesian") ideas--there are multiple references to "liquidity trap", "government spending multipliers", and "zero lower bound", as well as "new Keynesian model[s]". Clearly Cochrane does not believe any of this to be "Keynesian economics".

    So, I guess the bottom line is that conservatives believe that "Keynesian" is bad, but "new Keynesian" is OK, while liberals believe that "Keynesian" and "new Keynesian" are mostly synonumous. In any case "new Keynesian" econompasses ideas about government making use of high "spending multipliers" when at the "zero lower bound" by juicing spending.

  22. I'm pretty sure you're choosing a narrow definition of Keynesian (ISLM) and they're using a broad one - demand side matters, fiscal stimulus is useful when conventional monetary policy runs out of room.

    Both sides would do well to be clear about this.

  23. If the value of a submission is market determined according to the number of citations your 2009 blogpost wins hands down. You should be flattered.

  24. Dear Professor Cochrane,

    If I were not aware of your research (and I am), reading this post of yours would have forced me to think that you did not know very well what the so called "New--Keynesian Model" is all about. But that's not the case. You know very well the NKM. So if you say that "Keynesian" and "New-Keynesian" are as different as Ptolemaic and Copernican astronomy" (and I know that you have a degree in physics, so I am sure that you know enough about astronomy), I can reach only one conclusion: you know very little about the "old Keynesian model".
    The fact is that the dressing of both models is indeed very different. But the essence turns out to be very similar in many circumstances. Well, the NKM has an aggregate demand function (as the old Keynesian model had one as well), it has a "rule" for monetary policy (nothing very different from an horizontal LM function in the old Keynesian model), and it has an Aggregate Supply function (the old model had one also). So what turns out to be really different between these two models is the assumption about expectations (adaptive versus rational). But even here, I think it's pretty established in the profession that the AS function in the NKM works better if some form of trendist behavior is incorporated into that function.
    Moreover, it is not very difficult to teach at an undergraduate level the basics of the NKM. Just check Chad Jones textbook on intermediate macroeconomics. In many cases, you get exactly the same kind of prescriptions to deal with business cycles as you did in the old style macro-textbooks filled in with the old type of Keynesian macro. I have used it and it works splendidly.

  25. I took ECO 311 at Princeton from Greg Kaplan last spring (awesome course, by the way - he's a great professor), and even in that upper-level undergraduate course, we didn't bother with IS/LM. We started with basic general equilibrium, did Solow/Neoclassical growth models, RBC and finished with search (very briefly at the end, the preceptors touched on some NK models a la Eggertsson). I even got through Blinder's ECO 101 without seeing IS/LM (also a great course); it was basically at AD/AS stuff when we talked about Keynesian economics.


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