On Keynesian Economicses and the Economicses of Keynes
I think that there are two ways to understand the divergence of perspectives here. The first is to note that Jamie Galbraith sees Keynes's General Theory as part of something bigger: combine it with John Kenneth Galbraith's New Industrial State, with Hyman Minsky's approach to financial crises, and perhaps with Piero Sraffa's Production of Commodities by Means of Commodities and you have an alternative theoretical framework for economics that owes very, very little to the Marshallian or even the Smithian tradition--and that owes nothing at all to the Walrasian tradition. Call this "East Anglian Keynesianism."
My macroeconomics teachers--Kindleberger, Eichengreen, Dornbusch, Fischer, Abel, Blanchard, Sargent--by contrast, see Keynes's macroeonomics (not just the single book that is the General Theory, but also How to Pay for the War, The Economic Consequences of Mr. Churchill, the Tract on Monetary Reform, and so forth) as part of a different bigger thing: they see, Keynes, Wicksell, and even Milton Friedman (though he would rarely admit it) as all groping toward an understanding of the macroeconomy that ends in the belief that limited, strategic, focused, yet powerful government interventions can create a situation in which the market economy could then work more-or-less along Smithian lines--that these focused government policies can, as I like to say, make Say's Law true in practice even though it is false in theory. Call this "MIT Keynesianism."
MIT Keynesianism tends to downplay the most Galbraithian moments of Keynes--for example, his cracks about how bankers would prefer to fail in a conventional manner than to profit and grow rich in an unconventional manner--and to regard the General Theory as just one of Keynes's works written at a particular time (one of Great Depression) and thus focusing on the issues of greatest importance at that particular historical moment.
East Anglian Keynesianism throws Keynes's earlier work out the window, and argues that the General Theory marks a genuine epistemological and theoretical break. But it has problems with passages in the General Theory like this one, which Keynes puts at the very end of the book, where he argues that his theory is:
moderately conservative.... The State will have to exercise a guiding influence on the propensity to consume partly through its scheme of taxation, partly by fixing the rate of interest.... I conceive... that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of... devices by which public authority will co-operate with private initiative.... Our criticism of the accepted classical theory of economics has consisted... in pointing out that its tacit assumptions are seldom or never satisfied, with the result that it cannot solve the economic problems of the actual world. But if our central controls succeed in establishing an aggregate volume of output corresponding to full employment... the classical theory comes into its own... then there is no objection to be raised against the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed between them... no objection...against the modern classical theory as to the degree of consilience between private and public advantage in conditions of perfect and imperfect competition respectively.... [T]he result of filling in the gaps in the classical theory is not to dispose of the ‘Manchester System’, but to indicate the nature of the environment which the free play of economic forces requires.... [T]here will still remain a wide field for the exercise of private initiative and responsibility. Within this field the traditional advantages of individualism will still hold good.
Let us stop for a moment to remind ourselves ... the advantages of efficiency — the advantages of decentralisation and of the play of self-interest.... and of individual responsibility.... [A]bove all, individualism, if it can be purged of its defects and its abuses, is the best safeguard of personal liberty... it greatly widens the field for the exercise of personal choice... the best safeguard of the variety of life... the loss of which is the greatest of all the losses of the homogeneous or totalitarian state. For this variety preserves the traditions which embody the most secure and successful choices of former generations; it colours the present with the diversification of its fancy; and, being the handmaid of experiment as well as of tradition and of fancy, it is the most powerful instrument to better the future...
And this one from the start of chapter 2 of the General Theory:
[O]rdinary experience tells us, beyond doubt, that a situation where labour stipulates (within limits) for a money-wage rather than a real wage, so far from being a mere possibility, is the normal case. Whilst workers will usually resist a reduction of money-wages, it is not their practice to withdraw their labour whenever there is a rise in the price of wage-goods. It is sometimes said that it would be illogical for labour to resist a reduction of money-wages but not to resist a reduction of real wages. For reasons given below (section III), this might not be so illogical as it appears at first; and, as we shall see later, fortunately so. But, whether logical or illogical, experience shows that this is how labour in fact behaves...
Thus not just Keynes's earlier work, but chunks of the General Theory have to be purged and thrown overboard.
MIT Keynesianism does not claim that East Anglian Keynesianism is not "Keynesianism." (It claims that it is a sterile research program, that pursuing its line of research is harmful to graduate students' intellectual development, and that its model-building practices lead to fuzzy thinking, but it doesn't excommunicate East Anglian Keynesianism.)
By contrast, East Anglian Keynesianism does excommunicate MIT Keynesianism. We've seen this here, with Thomas Palley's claim that "[t]oday’s orthodoxy is laissez-faire neo-classical economics" and that "the last time a paper on macroeconomics with a Keynesian structure was published in the American Economic Review was in the early 1980s. Send in such a paper and it will be immediately rejected as “old” economics." Whatever you think of the MIT Keynesians, they were never laissez-faire--orthodoxy yes, neoclassical yes, but never laissez-faire.
My view is that, as a matter of the history of economic thought, the MIT Keynesians have the better of it. But my view is that both research programs are useful and both should be pursued (although I think the MIT Keynesian one has been more successful), and that both are very far indeed from any form of laissez-faire.
The second way to understand the difference of perspectives is to interpret Jamie Galbraith as noting that there are two right-wing reactions to Keynes's: "The Economic Consequences of Mr. Churchill." The first is Milton Friedman's reaction: if the problem is that Churchill as Chancellor of the Exchequer pursues a stupid monetary policy, the answer is to get Churchill's hands off the steering wheel and make monetary policy automatic. The second is Friedrich Hayek's reaction: if the problem is that nominal wages cannot be easily forced down to their equilibrium level because the labor unions have too much bargaining power, the answer is to destroy the unions so that workers have no bargaining power to keep nominal wages sticky at all.
Now Keynes rejected both of these reactions. He wrote chapter 12 "The State of Long-Term Expectation" in the General Theory in order to say contra Friedman that "automatic" monetary policy cannot do the job. He wrote chapter 19 "Changes in Money Wages" to argue contra Hayek that sticky nominal wages are more likely to be a stabilizing than a destabilizing factor.
According to this second way of understanding this conversation, Galbraith is saying that modern orthodox establishment MIT Keynesianism gives much too little weight to ideas springing from chapter 12 and chapter 19. This is essentially the criticism of establishment MIT Keynesianism made by Axel Leijonhufvud in his book on Keynesian Economics and the Economics of Keynes. If this is what Galbraith is saying, I agree with him--and I think others agree with him too: Mark Gertler, Ben Bernanke, Larry Summers, James Tobin, Stanley Fischer, Rudi Dornbusch, and Robert Shiller are the first names that spring to my mind.
I have a bunch of comments on this, Brad's latest meditation, but let me just point out the following for now, as time is scarce:
"MIT Keynesianism does not claim that East Anglian Keynesianism is not "Keynesianism." (It claims that it is a sterile research program, that pursuing its line of research is harmful to graduate students' intellectual development, and that its model-building practices lead to fuzzy thinking, but it doesn't excommunicate East Anglian Keynesianism.)"
If you really believe that East-Anglian Keynesianism (a much better term for it is anti-neoclassical Keynesianism, btw) is a "sterile research program, that pursuing its line of research is harmful to graduate student' intellectual development, and that its model-building practics lead to fuzzy thinking", then the next set of steps that you need to _protect_ fledgling economists is obvious--you deny tenure to anti-neoclassical Keynesians, you refuse to publish their research in your journals, and you refuse to include their writings in your course reading lists and their ideas in your macro textbooks.
And you let anti-neoclassical Keynesical economists such as Jamie Galbraith know that they are engaged in a sterile research program that encourages fuzzy thinking and will lead their followers to become the intellectual equivalent of astrologers.
So tell me, how is this _not_ the same thing as excommunicating anti-neoclassical Keynesians?? Or are you just engaged in a large exercise in self delusion?
andres
June 2, 2007 3:29 PM | Reply | Permalink
I too can quote Keynes, and it's not that difficult. Take the international dimension of macroeconomics...
***
National Self-Sufficiency, Yale Review 1933:
"The protection of a country's existing foreign interests, the capture of new markets, the progress of economic imperialism--these are a scarcely avoidable part of a scheme of things which aims at the maximum of international specialization and at the maximum geographical diffusion of capital wherever its seat of ownership. Advisable domestic policies might often be easier to compass, if the phenomenon known as "the flight of capital" could be ruled out. The divorce between ownership and the real responsibility of management is serious within a country, when, as a result of joint stock enterprise, ownership is broken up among innumerable individuals who buy their interest to-day and sell it to-morrow and lack altogether both knowledge and responsibility towards what they momentarily own. But when the same principle is applied internationally, it is, in times of stress, intolerable--I am irresponsible towards what I own and those who operate what I own are irresponsible towards me. There may be some financial calculation which shows it to be advantageous that my savings should be invested in whatever quarter of the habitable globe shows the greatest marginal efficiency of capital or the highest rate of interest. But experience is accumulating that remoteness between ownership and operation is an evil in the relations among men, likely or certain in the long run to set up strains and enmities which will bring to nought the financial calculation.
I sympathize, therefore, with those who would minimize, rather than with those who would maximize, economic entanglement among nations. Ideas, knowledge, science, hospitality, travel--these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national. Yet, at the same time, those who seek to disembarrass a country of its entanglements should be very slow and wary. It should not be a matter of tearing up roots but of slowly training a plant to grow in a different direction."
***
Now if the economists Brad cited at the end of his post--Mark Gertler, Ben Bernanke, Larry Summers, James Tobin, Stanley Fischer, Rudi Dornbusch, and Robert Shiller--read this passage, they would initially dismiss this passage as the ravings of an anti-globalization nut case, and if reminded it was Keynes, they would assert that Keynes must have suffered a concussion on the day that he spoke these words. In short, Keynes isn't towing the party line here.
But such retaliation quickly ends up becoming pointless and reminiscent of the twiddle-dum/twiddle dee squabbling between Bolsheviks and Mensheviks as to what Marx "really" meant.
I think that it's time for us to grow up. Let's accept that Keynes had his neoclassical intellectual moments (he was, after all, Marshall's student) but that at very important moments such as the Great Depression he also rejected both neoclassical policy prescriptions and more importantly, key aspects of neoclassical economic theory.
Keynes' body of work is thus a suitable starting point for "Keynesian" theories that are both pro-neoclassical and anti-neoclassical. Let history and actual government policy-making decide which approach is more useful.
But above all, let's please not have condescencion and hostility towards the two approaches. I fully realize that anti-neoclassical Keynesians have excessive hostility towards pro-neoclassical Keynesians, but the latter imo initially earned this hostility by appropriating the label "Keynesian" for themselves without mentioning the key differences between their approach and that of the General Theory ("intellectual claim jumping"). I have some more points to nitpick with Brad, but that's all for now.
andres
June 2, 2007 3:46 PM | Reply | Permalink
I'm not an economist, which is one reasoning I'm following this whole week with such pleasure and interest. I'm learning something, and my thanks to all for participating (even if they address each other and ignore comments, wisely or not). But this post isn't convincing me at all about Keynes's commitment to classical economics.
The first quote sounds like what one ought to expect in a conclusion: radical as this critique may be, don't worry and certainly don't write me off as a lunatic, because I do not advocate Communism. (Well, yes.) Government may have to intervene to set all the terms, but you can still have private enterprise, and thanks to strong government intervention, it'll approach market efficiency that much more. Otherwise, such efficiency would be a fiction, it seems to be saying.
I can't think of many quotes as scathing as this one from the passage: "Our criticism of the accepted classical theory of economics has consisted... in pointing out that its tacit assumptions are seldom or never satisfied, with the result that it cannot solve the economic problems of the actual world." Gee. It sounds as close I can imagine to what I remember from the elder Galbraith's Economics and the Public Purpose.
While I'm not totally clear on the debate over sticky wages, I read Professor Galbraith's post as explaining that the issue went beyond labor's refusal to give up wage gains to a failure of the market model, because labor behaves like irrational actors, valuing stable nominal wages more highly than rising real wages. (He also raised a second objection.) And the second quote sounds to me like it's confirming him. Keynes seems to be saying, patiently, that while the behavior may seem irrational to classicists, it must be taken seriously.
I'm just (I hope) a careful reader, and I myself don't see why the historical fact of what Keynes believed should matter in determining our disagreements now. But I'm certainly wondering about a discipline that dismisses readings like, I imagine, mine as "harmful."
John
http://www.haberarts.com/
June 2, 2007 4:50 PM | Reply | Permalink
There is much in Brad's latest post to agree with, and the comments just above cover, very ably, my main points of disagreement. So I'll leave it at that, for now.
I'll be back tomorrow with one final intervention, in this excellent debate.
James Galbraith
June 2, 2007 7:21 PM | Reply | Permalink
I agree with your reading, John, and there's more where that came from e.g. "I accuse the classical economic theory of being itself one of these pretty, polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the future" in JMK's 1937 _Quarterly Journal of Economics_ followup to the _GT_. As I said over at Brad's place, "classical" is not used with much precision by Keynes; it's more of a foil, a way to point, in a given context, at whatever he thinks of as conventional opinion as opposed to his own thought.
Brad is trying to claim MIT Keynesianism as the truer legator of JMK. I think this is spurious, no matter how much weight you put on Marshall, but it may just be a fight over who gets to speak through the mouth of the dead god (to borrow James Ferguson's phrase from another context.)
I recommend G.L.S. Shackle's _The Years of High Theory_ (Cambridge 1967) to anyone interested in the relevant intellectual history.
June 2, 2007 7:24 PM | Reply | Permalink
Doctors used blood letting for several centuries despite the fact that there was no evidence that it worked.
Economists have been citing their theories starting with Keynes (and followers and opponents) for at least 75 years now and they also have no evidence that they work. One financial crises has followed another, leading at a minimum to economic misery as in Argentina to outright warfare (too many to list).
So, if the academics want to try and set the historical record straight about who should get credit for which idea then that is fine but the rest of us would like to see policies developed which actually address the big issues in the world.
Just as a reminder: wars, poverty, overpopulation, and impending resource shortages.
--- Policies not Politics
Daily Landscape
June 3, 2007 5:46 AM | Reply | Permalink
Brad Delong: "Yes economic insiders exclude everyone that is not like us, but that is not because we are insiders it is simply because those we exclude those who are no good."
As DeLong loves random Marx references (in order to show that he's hip), I'll say we have here another tragedy-farce situation.
The tragedy was Augustine of Hippo and his holy war against barbarians and heresy which he carried out in the name of saving people's souls.
Now we have DeLong of Berkeley carrying out his holy war against the heterodox as he tries to build his Economics of God. All the time, the motive is to save the souls of those poor graduate students who might, horrors or horrors, be attracted to the heresy of heterodox economics. That is a pathway straight to damnation.
Once these poor vulnerable souls are tempted by the heresy of the heterodox, bad things will happen to them and economics and the world. The bad things include...well the really bad thing is... well he is not exactly clear what horrible consequences will follow an increase in the number of heterodox economists. But he knows it's very very bad.
It could be, though, that the BAD THING is that the insiders would have to actually justify what they do (in a compelling way) and that, my friends, is the biggest horror of all: insiders like Delong are unable to actually justify what they do and this might give them difficulty in dominating the economics profession (for their own rent-seeking agenda).
Therefore, it's okay to drive out all heretics. Says DeLong: "Look, the barbarians are at the gates of Berkeley (believe me they are!) and, in fact, they have pillaged the holy University a number of times. They must be driven out and kept out at all cost. My social status...I mean, TRUTH, depends on my victory!"
June 3, 2007 6:23 AM | Reply | Permalink
What evidence would do the job? All the crude empiricism type evidence shows that Keynesian policies work with respect to employment and economic activity ... but that his theory of inflation presumes to much price flexibility so that his theory of prices would appear to be incomplete.
Orthodox economics normally rejects evidence unless it is evidence regarding an explanation founded on a theory of human behavior that is radically incomplete. So what you are going to get from orthodox economics is which of its theories is the best fit to what is happening ... akin to Aristotelian astronomers arguing over the size and placement of epicycles to best explain the orbit of Mars around the Earth.
June 3, 2007 7:11 AM | Reply | Permalink
This, then, would seem to be the problem ... seeing economic theorists of the past, as in a poorly taught course in the history of economic thought ... in terms of an "understanding" of the macroeconomy that ends with a "belief" about the role of government ... rather than in term of attempting to provide cause and effect explanations of how the economy works.
Having read Smith's Wealth of Nations, Marshall's Principles, Vebelen's Theory of Business Enterprise, Schumpeter's Theory of Economic Development, Keynes' General Theory, Galbraith's New Industrial State ... that's what they were trying to do. And, yes, they all will have had a general pre-theoretic vision of how things fit together ... but as in Keynes moving from the Treatise to the General Theory, that pre-theoretic vision should be subject to change if you come to understand that there is a flaw that interferes with understanding how the economy works.
June 3, 2007 7:24 AM | Reply | Permalink
Keynes, in his theoretical analysis in the General Theory retained as much of Marshallian economic theory as possible, only departing from it where he needed to to so to derive his conclusion that periods of high unemployment were caused by deficient aggregate demand, and that we could not count on the market, left to it own devices, to restore the economy to full employment. He even accepted the orthodox proposition that employment could only increase if real wages decreased. His analysis of what the economy was like during periods of high unemployment therefore was the precurser of MIT Keynesianism with a sticky-wage model of short-run aggregate supply. What his model produced was an equilibrium in which only one market, the labor market, failed to clear, while all other markets where in equilibrium. It was therefore perfectly consistent with an equilibrium approach to macroeconomics, only the possibility of non-market-clearing equilibria in some markets had to be allowed for. This is, of course, an anathama to the New Classicals, but is perfectly consistent with the MIT Keynesian version of neoclassical economics.
June 3, 2007 8:45 AM | Reply | Permalink
Some have indicated that they believe certain policy prescriptions work better than others and are based upon well-known economic theories.
Let's assume this is true. Then what are we to infer when policies are put into place which contradict these theories?
1. The goals desired are different?
2. The politicians and their advisers are unacquainted with the theories?
3. The politicians understand the theories and are lying to us about their intentions?
Let's assume the most venial motives. Then what are the options to get things back on track?
Speaking out as a professional in a private capacity (let's say Krugman in the NY Times) has no impact.
Publishing papers which reinforce the theories has no impact.
Engaging in debates with those who promote the venial policies has no effect.
I realize this lack of ability to get policies in place is not unique to economics, but in other areas the experts are more unified in their viewpoints. There are no "debates" over what size beam is needed to create a highway overpass. Use one that is too small and the bridge will fail.
There are no debates about the efficacy of polio vaccine. On the other hand science has been debased in recent years with politicians denying results in public health over AIDS and STD's, for example. But in this case the only people supporting the ridiculous policies are those with no real credentials.
So, the question is: can the squabbles over models in economics be resolved in such a fashion that everyone agrees that policy A produces result B?
If so, then not adopting A will be seen for what it is, the desire not to produce result B. For example, is the goal to make the rich richer, or to make the poor less poor?
--- Policies not Politics
Daily Landscape
June 3, 2007 12:38 PM | Reply | Permalink
Just as Newtonian physics made claims as to the behavior of all matter, so it would be nice that our economics could make similar precise predictions about human economic behavior.
Second, and this is what is important: Just as physics does not tell you what you should do given the laws of nature, so a descriptive economics will not tell you what to do about (how to shape?) human economic behavior.
And this is what it all amounts to. Smith et al want to merely describe and predict human economic behavior and for some inexplicable reason want to maintain that there should be as little interference as possible in markets.
That's like saying that now that we know that F=ma and that Fg=Gm1m2/d^2, we should do nothing with that knowledge at all. That is: don't utilize that knowledge to meet legitimate human needs and desires. But that's absurd. Perhaps the most valuable aspect of physics is that it allows us to craft nature to our wills.
Why then economists who pine for the descriptive rigor of physics seem phobic about market intervention--claiming that some mysterious "invisible hand" will optimize human utility--is beyond me. It would be as if Newton said "here are the laws of nature, just let them operate unimpeded and some "invisible hand" will make sure that all the useful gadgets that can be contrived will just coalesce on their own"
I really want to know why for example neoclassical and new classical economists think that way.
June 3, 2007 3:56 PM | Reply | Permalink
Okay, let's leave aside the point for a while, that neither Smith nor most of his successors promoted an anarchic laissez-faire style of plolitics.
Is it true then, that by pointing out the blessings of a "free market", they refuse to "utilize their knowledge to meet legitimate desires"? Well, absolutely not, quite the contrary: The knowledge Smith gained from his analysis was that the best way to meet legitimate desires like reducing poverty, promoting wealth and personal freedom was to absent from discretionary interference into the market where it is not absolutely necessary (because of external effects or the like).
Of course it is legitimate to "utilize" economic knowledge - and the point is: In many (although far from all) situations the best way to promote well being is to let people decide for themselves what they want, and not to dictate them what they ought to want.
"Neoclassical" Economists think this way, because that is what derives from their theory and (perhaps even more important) their empirical results.
August 8, 2007 9:04 AM | Reply | Permalink