Monday, June 05, 2006

Tobin and the New Keynesians

A student emails me a question about the term "New Keynesian economics:"

Dr. Mankiw--

In an interview, James Tobin was once quoted that basic tenets of New Keynesianism (adoption of rational expectations, choice-theoretic foundations, general market clearing [except under imperfect competition], menu costs) concern formulating "a rationale that allows nominal shocks to create real consequences." Tobin argues that Keynes' concern was real demand shocks rather than nominal shocks and that the New Keynesianism conflicts with this fundamental idea. He is further quoted to say, "If I had a copyright on who could use the term Keynesian I wouldn't allow them [New Keynesians] to use it" (Snowdon 2005, p. 156).

As a leading figure in New Keynesianism, in your opinion what justifies the use of the term "Keynesian" (in general and for New Keynesianism)? And more broadly, do you think labels matter in (macro)economic thought? If most economists steer away from labels (if I'm correct to assume that), why do they still exist? Solely for historical purposes? Interestingly enough, in the interview Tobin claimed that early in his career he did not want any such labels only later in his career to accept himself as a leader of Keynesian economics.

[name withheld]

PS: As an undergraduate econ major (UNC-CH), I am a big fan of your blog and an even bigger fan of your intermediate text. Thanks for not forgetting about the role of undergraduate economics!

[For blog readers not familiar with the "new Keynesian" literature in macroeconomics, you can read about it here and here.]

I knew James Tobin and have long been a fan of his work. My current dog is named Tobin (my previous one was Keynes). But Tobin (the economist) and I did not always see eye to eye on either macro theory or economic policy. His macroeconomics is probably closer to the original vision in Keynes's General Theory than mine is. So I understand why he objected when the work I and others did starting in the 1980s was called "New Keynesian." (Those others include Akerlof & Yellen, Ball & Romer, Blanchard & Kiyotaki, Rotemberg, etc.) But I think the label fits: Compared to the other leading business-cycle theory at the time, the real business cycle approach of Long & Plosser and Kydland & Prescott, this work is much closer to the tradition of Keynes.

You raise a good question: What is the purpose of such labels? Part of the answer is pedagogical. Macro theory can be confusing. It is hard for students to see how the different pieces fit together and how different points of view emerge. One way to approach the subject is by taking an historical perspective. Theories evolve from previous theories, and it can help to understand the evolution of thought. Labels like "New Keynesian" are intended to place a theory in historical context and to pay homage to intellectual antecedents. (For my most recent paper on the historical evolution of macroeconomic thought, click here.)

A few years after my intermediate macro textbook was first published, I was told that Tobin had come out of retirement to teach the course and assigned my book to his students at Yale. In all my years as a textbook author, I have never been more delighted by an adoption.