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I Rise, Like a Moth to a Flame...

It's all Suresh Naidu's fault.

There I was, head down, revising "Capital and Its Complements: The International Macroeconomic History of the Late Twentieth Century" and "The American Equity Return Premium: Past, Present, and Future," and ignoring the TPM Cafe symposium on heterodoxy on economics. Then Suresh Naidu caught me in the Peixotto Room: "You must have something to say," he remarked, as we stared out at the fog swirling around the Golden Gate from our concrete, glass, and steel eyrie eighty feet above the Berkeley campus.

And now the intelligent and thoughtful Jamie Galbriath trolls the bait further. How can I resist?

Jamie Galbraith: Invasion of the Name Snatchers | TPMCafe: [I]t is breathtaking for [Brad DeLong] to accuse David Ruccio of intellectual claim-jumping... and then to lay down the law on what is "Keynesianism."

Have a look at [Jordi Gali's advanced macroeconomics monetary policy graduate MIT] reading list. The phrase that turns up repeatedly is "sticky prices." This is no accident. For a certain type of modern macro-economist, sticky prices are the essence of what they call Keynesian doctrine. It is the essential term in the lexicon of self-described New Keynesians. Because prices are sticky, New Keynesians argue, markets do not clear, and there is a role for government in fighting unemployment. So far, so good. I have many friends and allies among New Keynesians on practical policy questions.

But to make this into the economics of John Maynard Keynes is to do deep violence to the ideas of that economist. And the attempt to do so, which goes back to the very first American reviews of the General Theory, is the essence of the intellectual claim-jumping that infuriates heterodox economists. Joan Robinson, who may be taken as an authority on this, called it "bastard Keynesianism."

To summarize radically, [for] New Keynesians... [t]he problem... is that wages are sticky, that they won't fall as far as they should so as to guarantee full employment. And since this is the case, New Keynesians believe that something else should be done. But Keynes entirely rejected the labor market analysis of unemployment.... That is what the opening chapters of the General Theory are about. Thus for Keynes, cutting wages is not the ideal solution for unemployment, while lower interest rates or government spending are some sort of second best. Rather, increasing aggregate effective demand is the only viable solution.

Keynes' own analysis is one thing. The "sticky wage" argument is another. You will not find it in Keynes. For New Keynesians to call themselves Keynesians is therefore intellectual claim-jumping of very long standing. But the fact that it has been well-established for half a century cannot change this, any more than time can erase the theft of the Black Hills from the Sioux...

Two points in response:

First, in the post I was responding to Thomas Palley opposes "Keynesians" to "orthodox" thus:

Are Heterodox Economists Just Unhappy Whiners?: the orthodoxy dismissed (and still dismisses) Keynesian theory on the grounds that perfectly flexible prices and wages will automatically solve real world unemployment...

Bastard Keynesians--neoclassical-synthesis types--New Keynesians--American MIT Keynesians--whatever you want to call them are not believers in perfectly flexible prices and wages, and are believers that real world unemployment is a big problem. If you take Palley's division between Keynesians and orthodox, people like Jordi Gali and me are a live and powerful faction of Keynesians, not a dispirited remnant shut out of journals and graduate teaching reading lists.

Second, Jamie Galbraith is right in his assertion that there is much more in Keynes than in mainstream American MIT Keynesianism. Mainstream American MIT Keynesianism is for the most part descended from Franco Modigliani (1944), who argued that because wages are sticky the classical adjustment channel that relies on wage deflation to restore full employment after a contractionary shock is ineffective, brutal, and destructive. Keynes believed that that was not the only reason that expansionary fiscal and monetary policy was a good idea. Lots of us "orthodox" agree with Keynes on this point--that wage and price stickiness are, contra Modigliani, best seen as stabilizing rather than destabilizing factors. For example:

Tobin, Bernanke, Summers, and Gertler are not figures without status in "orthodox" American economics today.

But while wage-stickiness macroeconomics is not all of Keynesianism, it is one important branch of Keynesianism--if, that is, "Keynesianism" refers to arguments that John Maynard Keynes thought were important and frequently deployed in a variety of contexts over an extended period of time. And with that, let me turn the microphone over to John Maynard Keynes, talking about the inadequacies of Winston Churchill as Chancellor of the Exchequer:

Keynes: The Economic Consequences of Mr. Churchill: I think that Mr. Churchill's experts also misunderstood and underrated the technical difficulty of bringing about a general reduction of internal money values.... [T]he minds of his advisers still dwelt in the imaginary academic world, peopled by City Editors, members of Cunliffe and Currency Committees et hoc genus omne, where the necessary adjustments follow "automatically" from a "sound" policy by the Bank of England; the theory is that depression in the export industries, which are admittedly hit first, coupled if necessary with dear money and credit restriction, diffuse themselves evenly and fairly rapidly throughout the whole community. But the professors of this theory do not tell us in plain language how the diffusion takes place.

Mr. Churchill asked the Treasury Committee on the Currency to advise him.... Their... vague and jejune meditations... are there for anyone to read. What they ought to have said, but did not say, can be expressed as follows:

Money-wages... have not adjusted themselves.... They are about 10 per cent, too high. If, therefore, you fix the exchange at this gold parity, you must either gamble on a rise in gold prices abroad... or you are committing yourself to a policy of forcing down money wages....

[T]his latter policy is not easy. It is certain to involve unemployment and industrial disputes. If, as some people think, real wages were already too high a year ago, that is all the worse....

[T[he course of events will probably be as follows. To begin with, there will be great depression in the export industries. This, in itself, will be helpful, since it will produce an atmosphere favourable to the reduction of wages.... Nevertheless, the cost of living will not fall sufficiently and, consequently, the export industries will not be able to reduce their prices sufficiently, until wages have fallen in the sheltered industries.

Now, wages will not fall in the sheltered industries, merely because there is unemployment in the unsheltered industries. Therefore, you will have to see to it that there is unemployment in the sheltered industries also.... By means of the restriction of credit by the Bank of England, you can deliberately intensify unemployment to any required degree, until wages do fall. When the process is complete the cost of living will have fallen too; and we shall then be, with luck, just where we were before we started.

We ought to warn you, though perhaps this is going a little outside our proper sphere, that it will not be safe politically to admit that you are intensifying unemployment deliberately in order to reduce wages. Thus you will have to ascribe what is happening to every conceivable cause except the true one....

Source: John Maynard Keynes (1925), "The Economic Consequences of Mr. Churchill," pp. 10-13.

To deny that sticky-wage Keynesianism is a prominent branch of Keynesianism is like... well, I can think of one analogy. It is like Louis Althusser's claim that everything Karl Marx wrote was corrupted by Hegelianism--and not truly "Marxist"--except for "the Critique of the Gotha Program (1875) as well as *Marginal Notes on Wagner's 'Lehrbuch der politischen Okonomie' (1882)." According to Althusser, these works written when Marx was 57 and 65 are the only works "totally and definitely exempt from any trace of Hegelian influence," and hence the only texts that are truly Marxist.

June 01, 2007 at 10:12 in #economics, #monetaryeconomics | | Comments (4)

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