Quote from Ricter:
"My broader point, however, involves Murphyâs main argument, which is âWell, some Keynesians got their unemployment predictions wrong, so there.â
"Whatâs wrong with this line of attack? Two things, actually.
"First, itâs really important to distinguish between fundamental predictions of a model and predictions that an economist happens to make that donât really come from the model. The prediction that huge increases in the monetary base will cause large increases in the price level, and that big government deficits will cause big increases in interest rates, are more or less inescapable if your model of the economy is one in which recessions are supply-side problems, not the result of inadequate demand. Conversely, the prediction that neither of these things will happen if the economy is in a liquidity trap is a fundamental prediction of Keynesian models. On the other hand, the unfortunate Romer-Bernstein prediction of a fairly rapid bounceback from recession reflected judgements about future private spending that had nothing much to do with Keynesian fundamentals, and therefore sheds no light on whether those fundamentals are correct.
"In short, some predictions matter more than others.
"Beyond that is the question of how you react if your prediction goes badly wrong.
"The fact is that while Keynesians predicting a fast recovery werenât really relying on their models, the failure of that fast recovery has nonetheless prompted quite a lot of soul-searching and rethinking. It is now standard, in a way that it wasnât before, to argue that recessions that follow financial crises have a very different time path of recovery from other recessions, and that debt overhang, in particular, poses special problems.
"So Keynesian thinking has evolved in important ways; weâve learned from our mistakes (where by âourâ, as it happens, I donât exactly mean âmyâ â I expected a slow recovery all along; but the actual event has nonetheless led me to substantial rethinking). The fundamental concepts of demand-side slumps and the importance of the zero lower bound remain, but thereâs a lot of further refinement that changes the way we think.
"Has there been anything comparable on the Austrian/Austerian side? Not that I can see. All I see are excuses â hey, we would have had inflation except for the Europeans, or something. And to return to Bradâs point, there doesnât even seem to be any consideration of the implications for policy if in fact things like a debt crisis on the other side of the Atlantic can suddenly triple the apparent demand for high-powered money.
"Being willing to learn matters. Unfortunately, that willingness seems absent from many people who consider themselves economic experts."
