A couple of weeks ago, Paul Krugman wrote a mini take-down of Post Keynesian economics. The tone was acerbic. Krugman was reacting to an excellent Lars Syll piece which claimed that Krugman was not a true Keynesian because his use of the Hicksian IS-LM model implies that the future is certain, while Keynes argued the opposite.
Krugman’s response was troubling. He said that if he were to accept the idea of uncertainty, the notion that the future is inherently unknowable and unmodellable, then suddenly the dreaded confidence fairy of the austerian right becomes a possibility. In other words, if the future is murky, than demand-boosting austerity is within the bounds of theory. By sticking to the IS-LM model, instead, he can prove that fiscal stimulus always boosts demand.
The logic is somewhat surreal here. Krugman seems to be saying that it doesn’t really matter whether the IS-LM is an accurate representation of reality so long as it shows that fiscal stimulus reliably boosts demand during a liquidity trap. To put it another way, he is reverse engineering from his preferred policy option – fiscal stimulus – to create an economic model that suits his needs. As much as I personally agree with that policy option, this ends-justify-the-means strategy should give us all pause. If anything, it undermines the credibility of a left-wing champion at a time when fiscal stimulus is badly needed to reduce inequality and repair America’s crumbling infrastructure.