The Failure of the "New Keynesian"

Nobel Prize Economist and New Keynesian Paul Krugman has a very bad discussion on Hazlitt.

Jeremy Hammond completely destroyed him in this great article. He even shows an old 1987 article in which Krugman blatantly refutes himself. Hammond perfectly points out that “[N]either does Krugman by any coherent and clear-cut argument refute the logic by which Hazlitt concluded that eliminating minimum wage laws would have benefited workers by allowing them to gain employment during the Great Depression. He simply declares Hazlitt “wrong about everything”, cites an irrelevant quote from Keynes, and then goes on to cite Irving Fisher to bolster his assertion that following Hazlitt’s advice would have made things “worse” and the “overall effect” would have been “to deepen the depression.””

I will show evidence that Krugman either never read Hazlitt or, if he did it, he deliberately misled his readers. In other words: either he is an ignorant talking about an author he never read or he is a dishonest person.

Krugman writes:

“Anyway, Bartlett focuses largely on the malign influence of Henry Hazlitt, who was among other things writing many editorials for the New York Times, always insisting that the answer to the Great Depression was to encourage big cuts in wages.”

However in his devastating and complete refutation of Keynes' book, Hazlitt wrote:

“Now in a free (non-statist, non-socialist, non-totalitarian) economy, wages do not and cannot adjust themselves en bloc, as a unit, by some neat, fixed, round, uniform percentage. Nor do prices adjust themselves en bloc, by a uniform percentage or as a unit. Nor does production adjust itself en bloc or as a unit. In a free economy there are millions of daily adjustments of one wage-rate to another, of one price to another, of this wage-rate to that price, of that price to this wage-rate. There is constantly going on in a free economy, in brief, an almost infinite number of mutual adjustments. This is how the economy works...

But all this conflicts with the simplistic theories of Keynes. He thinks in aggregates, in averages, in abstractions which are mental constructs that have lost touch with reality. He thinks, in short, in lumps. He deals only in his own lump-concepts like average-"level"-of-wages, average-“level''-of-prices, aggregate demand, aggregate supply... Keynes cannot understand a free economy precisely because it does not consist of such lumps. Having reduced everything to averages, he cannot understand any adjustment, he is even against any adjustment, that is not a uniform adjustment of each of these averages, blocks, lumps, to the other." (my bold)

If this is not enough for you, here come the best:

It is important, finally, to point out that no real adjustments of wages or prices are ever made, upward or downward, in the flat uniform simultaneous way in which Keynes implies they are made or ought to be made.

A Keynesian statistician, relying on averages and aggregates, would declare "wages" to be in equilibrium. Yet the wage-rate of none of the four industries would be in equilibrium. The solution, for a restoration of equilibrium and full employment, would be a mutual and multiple adjustment of particular wage-rates.

Always what is relevant to economic equilibrium and full employment is the relationship of particular wages-rates to other wage-rates, of particular prices to other prices, and of particular wages to particular prices; never of averages to averages, or of the wage 'level" to the price "level." Such mathematical averages or average levels do not exist in the real world. They are mental constructs;8 they are fictions; they conceal the real maladjustments in any given economic situation, or make them appear to cancel out.

It is clear as water that Hazlitt was saying that employment will be restored if PARTICULAR wage rates go down, He is not suggesting that ALL wages must to go down. Actually the reduction must not be a big and uniform one. He even used an example to demostrate that it would be a great mistake to push down all wages to combat unemployment. Hazlitt had never said in his whole book that all it was needed to combat unemployment was that THE wages go down as Krugman makes his readers to believe.

It took me around 20 minutes to find all this just using Acrobat’s word searcher. It was that easy, Krugman also could have done it.
 
Krugman says that: “Bad ideas, it appears, are extremely robust in the face of contrary evidence.” Here he is right, bad ideas like replacing Nasdaq bubble with a housing bubble (again in 2006). But hey! He was just "joking"

This is exactly the same kind of dishonesty that made his “master” to review a german written book when he couldn’t speak german very well... see here, here and here