On Keynesian Economicses and the Economicses of Keynes

With respect to http://bookclub.tpmcafe.com/blog/bookclub/2007/jun/01/rebutted_but_not_refuted, 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 not a fruitful research program, that given the world as it is pursuing its line of research is harmful to graduate students' careers, 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 I find that I have a much easier time working within it), 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.

Comments

[andres]

I have a bunch of comments on this, Brad's latest meditation, but let me just point out the following:

"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]

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.

[John Emerson]

It's nice of you guys not to do drive the worthless and harmful East Anglian Keynesians out of the profession without excommunicating them.

[Colin Danby]

"Classical" is not a term used with great rigor in the GT. The larger point that Keynes was flexible if not opportunist in his theorizing is widely recognized and the point about multiple research programs is fine. I join Andres in detecting a certain caricature in the description East Anglian school. A more institutionalist reading of Keynes can make much use of his earlier work, for example on open economies. Let's add _Indian Currency and Finance_ to the list while we're at it.

[John Emerson]

SHould be: "It's nice of you guys to drive the worthless and harmful East Anglian Keynesians out of the profession without excommunicating them."

[Bloix]

Way OT but perhaps of interest to regular readers-
"How I Spent the War," by Gunter Grass, in this week's New Yorker.

http://www.newyorker.com/reporting/2007/06/04/070604fa_fact_grass

[Tomas]

Sorry brad, but I not sure I buy that.

As I understand it, you are arguing that the "MIT-Keynesian" just has a broader view on Keynes, taking all his previous works into account. While the "East-anglian keynesianst" cherry-pick to get the keynes they like by conducting a purge of GT and the earlier works.

On the contrary I think its the other way around. When Keynes in the preface to GT writes:

"The composition of this book has been for the author a long struggle of escape, and so must the reading be for most readers if the author´s assault upon them are to be successful, - a struggle to from the habitual modes of thought and expression. The ideas which are here expressed so laboriously are extremely simple and should be obvious. The difficulty lies, not in the new ideas, but in escaping from old ones, which ramify, for those brought up as most of us have been, into every corner of our minds"

Now you could argue that this ending is about policy (which seems to be the shibolleth for being "keynesian" in your opinion). But the beginning of the preface spells out that the main subject is theory and only secondly about practice.

While "MIT-keynesians" take two things from keynes labours: sticky prices and the idea that regulated capitalism can work well, they dont like where the story ends.

They throw out the theoretically radical part of keynes. The chapter 12 Keynes for instance. The idea that he is a political moderate (capitalism works if helped) and a theoretically radical doesnt fit. There is nothing that can be done to reconsile Keynes insistance that what he was doing something that required a break with the theoritical past with an argument that he is basically just saying that prices are sticky and dont adjust fast enough.

"east anglicans" read Keynes work as an intellectual development story culminating in GT. That doesnt mean everything else gets purged, but just that the place one should pick up on keynes work is at the end of the development, not in the beginning. They dont have to choose choice bits of Keynes because they dont need to write anything out. The reason they call themselves "post-keynesian" is just to say that the follow after keynes in historical time and follow up on his work (and because, you know, the neoclassical syntesis already had taken the name keynesian).

Personally I am not much a fan of Post-keynesianism as it has been carried oit as a research program (oddly enough). Its been too focused on this "real keynes" debate and on trying to make the mainstream see the light rather than develop the research program or reach up (untill the last 10 years) to other heterodox traditions like the institutionalist.

Oh, and by the way, I dont get the point on the second quote. I dont see why "east anglicans" have to throw out all reference to sticky prices. I would think that they would be quite happy to accept that prices, especially on the labour market, are sticky. They would just say that this is not the main point of the book and that it is not the only thing keynes is trying to argue. Can we now not even have sticky prices without having to eat the whole neoclassical cake?

[Chip Poirot]

I appreciate Brad's comments here and I support the idea that there can be multiple kinds of Keynesian economics, and even, fruitful discussion and dialogue between the Keynesianism of Tobin and Stiglitz and the Keynesianism of Minsky, Robinson and Sraffa.

I think it is interesting that Brad does not address Davidson's particular brand of what he calls "Keynes' Post-Keynesianism", becuase Davidson is firmly a Marshallian and is anti Sraffian. Davidson thinks that Marshallian microfoundations are consistent with non-ergodicity (fundamental uncertainy), non-neutrality of money and non-substitutability of money. Since I differ with Paul Davidson on so many points, I won't defend him further. But despite my disagreements I think he deserves attention.

Two things still bother me though. One is that this discussion is identified automatically as referring to political attitudes. I think this is a poor way to classify theories in economics.

The second thing that continues to bother me is that it is the neo-classical mainstream that has the practical power and exercises that power to excommunicate people from the profession. When you get excommunicated from a band of heretics your social status goes up. When you get excommunicated by the pope your social status goes down and you get burned at the stake.

I will admit, that as a heterodox economist (I've published in both the Journal of Economic Issues and the Journal of Post Keynesian Economics) I find the insularity of heterodox economists at times to be frustrating.

That frustration however is nothing compared to the incredible arrogance of the mainstream who have the practical power and exercise it to excommunicate perfectly valid scientific contributions to the discipline.

[Julian Elson]

I don't really see how all this exegesis of _General Theory_ is really all that relevant to the neoclassical/orthodox vs. heterodox debate. Surely if Keynes was somewhat neoclassical, that doesn't invalidate James Galbraith, nor does a heterodox Keynes invalidate Brad DeLong. Now, if we're just doing literary criticism of GT and trying to figure out Keynes' original intentions, then that could be an interesting exercise, although I'm not sure whether this is an indepedent tangent or it's still supposed to relate back to Chris Hayes' Nation article.

[David Lloyd-Jones]

I read all of Keynes once upon a time, and being pretty good at math I even did a little bit of modern economics for a while.

The thing that struck me about Keynes, at least as seen through Skidelsky's eyes, was that he didn't have the faintest clue what he was doing. He gave good meeting, did the paper beforehand, had the resolutions ready to go. He lost his own money -- and his investors' -- on at least one occasion, an early data point for the RWH.

His excellence, it seems to me, consists of his superb political sense. He figgered out the WWI Versailles mess just by looking at what the assholes were doing -- and the exact character of the morons doing it. (His description of Clemenceau's gloves is a total hoot!)

One sometimes feels that gay males have an uncanny ability to look into character. I think this is what Keynes brought to the scene: he understood the people involved and what they were up to.

A small thing follows from this: Why was Keynes's trip to New York, with the side trip to talk to Roosevelt, such a failure (a failure, incidentally, which may have set things up for Truman's abrupt cancellation of British credit on his accession)?

I think -- perhaps a little wryly -- that Keynes, the superb face-dancer, the towering master of understanding people and motives, may have met his equal in Roosevelt.

Economics has nothing to do with it -- unless one thinks of economics as that subdivision of biology which uses tokens.

**********

An aside for Brad:

Brad, you think that Teddy White was a great guy at Treasury, with which I agree, but you doubt that he was a Communist. I disagree.

The smoking gun on Teddy White is that he went to Cabinet to get a separate set of plates for the German occupation currency given to the Russians. At that point the US and Britain (and, uh, the French) lost control of the money supply: the Russian occupation was financed completely by inflation, at the expense of the Germans, obviously, and in a jerky kinda way, by sucking off the Marshall Plan.

[David Lloyd-Jones]

In my post above I have calumniated the excellent Teddy White, the historian, by confusing him with Harry Dexter White, the Communist infiltrator of the FDR Cabinet.

My bad.

[David Lloyd-Jones]

In my post above I have calumniated the excellent Teddy White, the historian, by confusing him with Harry Dexter White, the Communist infiltrator of the FDR Cabinet.

My bad.

[Econ_HH]

Stimulating and insightful debate. I think Brad DeLong make his points in a well-written way -- this and the answers make it clear that this topic goes very deep into the profession's self-image. I agree with Julian Elson to relate it back to the original debate which has a lot more facettes (hterodox is broader than a collection ``fancy'' (from the mainstream's perspective) strands of Keynesianism -- but here are the direct comments.

MIT Keynesianism and "non-neoclassical" Keynesianism: I think another important point is: What is the intellectual climate you can find for thories to be adopted, developed and to be sponsored in acedmics. We already talked about power. In that sense, what we do in economics is not independent from what other branches of science (sociology, philosophy and political science) do and what the society as a whole regards as "useful" theories. Ask yourself why do we have Post-Keynesians in continental Europe (and where!) and to some extent due to other reasons in UK. Take as an example the way you deal with laissez-faire. This is not independent from the understanding the overall academic scene has from the role of the state in general (i.e. in France versus UK). So there is a kind of path dependence.

@ Do Non-Post-Keynesians take up Leijonhuvhud's Criticism from 1966 (1968?)?
I wondered at which point Leijonhuvhud would come into the debate. In general, Leijonhuvhud's point is that the Keynes' of the effective demand principle was forgotten and there is nothing automatic about Say's Law. In general, a certain left-wing fractions of Keynesians took up this (btw, was Ben Bernanke suggested as a governor by George W.???) arguing for state intervention because of market failure. The main problem I have with this position is Hayek argument you mentioned above. Take an example; If I argue -- as Blanchard does -- that the European unemployment problem has to do with an interaction of institutions and shocks, the branch of Keynesians you mentioned whould try to minimize the (policy-induced) shocks, whereas Hayekians would claim that the institutions are the problem to make markets work. In this respect, this branch is much less radical than Keynes was (to use this word in an American discussion is a bit subtle I know).

[Peter H]

Chip,

As I understand Paul Davidson, he would not only exclude MIT Keynesianism from Keynesianism, but he would also exclude Hyman Minsky, Edward Nell, Jan Kregel, Alfred Eichner & pretty much anybody not named Paul Davidson from being called a post-Keynesian:
http://bus.utk.edu/econweb/davidson/whatis%20post%20keynesianism.pdf

[Colin Danby]

But I don't think, Peter, that Chip was touting Davidson as an arbiter of what is or is not PK or K. Chip's point was that since Brad relies on a Marshall/nonMarshall divide to Make MIT Keynesianism the Marshall-derived trunk and Eastangialism the anti-Marshall offshoot, Davidson as a seminal Marshallian PK theorist doesn't fit Brad's tidy scheme.

You can also see PK themes emerging in _Money Credit & Commerce_ -- I don't want to push the point too far, but Marshall had the kind of through-time understanding of business and finance that Keynes and Minsky did and that Davidson has done so much with.

[Barkley Rosser]

Brad,

Well, I just got back from a conference in Italy where the Sraffian, Luigi Pasinetti, was given an award. I do think there is an issue here of power and people being effectively excommunicated gently. Pasinetti called for a hyper-integration of Sraffa and Keynes, in effect using a vertically integrated input-output approach at the micro-supply side level to combine it with a Keynesian demand side analysis.

[Yes: Murray Milgate tried to convince me that Sraffian microfoundations beneath post-Keynesian macro was the way to go my... second year in graduate school. There was a semester when I was going to Milgate in the afternoon and then Sargent in the evening...]

The hard fact is that some of these alternative approaches have been ignored by the mainstream, even though they have been shown to be of merit. After all, pretty much anyone who has looked at it agrees that it was the East Anglians who won the debated over capital theory, but MIT controlled the top journals, and people just kept on cranking out aggregate neoclassical production functions and worrying about how to figure out where the enormouse unexplained residuals these models generated. This is very much the issue.

While I think some of the folks you listed at the end are open-minded on this stuff and take Chap. 12 of the GT seriously, some seem to do so less.

Also, it should be kept in mind that Marshall had a dynamic, non-equilibrium analysis of the life cycle of the firm in his Industry and Trade.