Is the Neoclassical Synthesis Starting to Collapse?

Pretty interesting confession from Paul Krugman here.  Here writes:

“I’ve always considered myself a free-market Keynesian — basically, a believer in Samuelson’s synthesis. But I’m far less sure of that position than I used to be.”

Dr. Krugman is referring to his waning belief in the ideas that are the basis for much of the neoclassical synthesis.  The neoclassical synthesis, without getting too wonky, is the synthesis of Keynesian ideas with some of the neoclassical micro. From this we got wonderful things like loanable funds based IS/LM models (which don’t apply entirely to an endogenous monetary system), general equilibrium theory, the ergodic axiom (the idea that the future is already predetermined), etc.  In essence, you got a whole bunch of stuff that might sound fancy and look cool in an economic model, but doesn’t exactly translate over into an actual view of the economy.

Love him or hate him, I think you have to respect the way Paul Krugman has remained open-minded to alternative ideas.  Especially in recent years.  For instance, Dr. Krugman had expressed some confusion about the divergence in Italian bond yields and Japanese bond yields back in 2011 and I wrote a piece describing that the confusion was really rather simple.  Japan was a contingent currency issuer who could never “run out of money”.  Therefore, the solvency issue was not a matter of lacking money as it was in Italy thereby creating a real solvency constraint.  Dr. Krugman later realized the error and totally changed his position.  That’s a pretty substantial change in thinking from a Nobel Prize winner, and in my opinion, a pretty fantastic display of open-mindedness.

You could say I’ve had my own sort of “synthesis lost” in recent years.  After all, I used to adhere to Modern Monetary Theory (MMT) before recognizing what I believe are some flaws in it.  It’s why Monetary Realism exists.  Is it problematic when one realizes that a past position is potentially erroneous or flawed and searches out for the truth?  I would surely hope not.  After all, evolution and learning is largely about finding what’s wrong.  None of us has all the answers and the most dangerous people around us are the ones who pretend they do.  Learning is really a sequence of mistakes and errors that get resolved and improved.  I hope Dr. Krugman embraces the synthesis lost and finds a more accurate understanding of the world.  After all, that’s what evolution of thought is all about.


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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • Frederick

    This is a potentially important moment in economics. If Krugman were to shift out of the neoclassical camp it would really start to shift opinions.

    But he’s got to lose the liquidity trap idea and the IS/LM first. We’re not even close it seems to that happening.

  • Johnny Evers

    The only thing Krugman is sure of is that his political opponents are wrong, and evil.

  • El Viejo

    It’s funny what centralized control, a dumbed down population, insider trading, too much money in the markets, a campaign finance feedback loop in congress, the loss of individual rights, a tax structure that rewards investing with hedge funds instead of creating jobs, sloughing off a big part of the country’s manufacturing sector, over taxing the working poor, excessive entitlement and retirement programs and a huge slug of boomers retiring can do to an economy.

  • roger ingalls

    Krugman’s political opponents are wrong. I wouldn’t characterize them as evil, and I see no evidence that he does either.

  • roger ingalls


  • Widgetmaker

    That’s quite a simplification. He rails against the fallacious extremist ideas of the Right. And he is quite correct in doing so. The Right has gone absolutely wacko.

  • Tom Brown

    Cullen, Sumner praises Krugman with almost the same sentence you used:

    “Love him or hate him, I think you have to respect the way Paul Krugman has remained open-minded to alternative ideas.” – CR

    “I applaud Krugman for keeping an open mind and rethinking his assumptions.” -SS

    The rest is quite different though:

  • Tom Brown

    Plus, after reading Krugman’s piece again, it seems it’s more about political practicalities that best economic policies.

  • Schrat

    Unfortunately, most people will never be able to change their mindset.

    The neoclassical school of thought is far from dead.

  • Happy Dog