Depatment of "Huh!?"
Why Oh Why Can't We Have a Better Press Corps?: Jason De Parle/News Not Fit to Print Department

Daniel Kuehn: Maynard & Fred & Gus & Ralph on the History of Macroeconomics

Definitely not your father's Bob & Carol & Ted & Alice…

Daniel Kuehn:

Facts & other stubborn things: David Glasner on Keynes, Hayek, Cassel, and Hawtrey: [David Glasner's] is one of the best blog posts I've read in a while - one of those posts that really drives home the value-added of the blogosphere…. [T]wo points: that the Keynes v. Hayek mania is ridiculous, and that Cassel and Hawtrey deserve more credit than Keynes and Hayek.

Keynes v. Hayek:

I strongly agree with Glasner here. I consider this blog (and myself) pro-Keynes and pro-Hayek. I like them both a lot…. Keynes has always been a pariah in Austrian circles, and Hayek (before Friedman took his place) has always been a sort of short-hand for reactionary economics among left-wingers…. But I'm not sure that ever defined the men for people like it has in the last couple years…. [W]e really have two people to "thank" for this development: Russ Roberts and John Papola…. Roberts and Papola will often protest that there's nothing "wrong" with what they had Keynes say…. It's not that any of Keynes's words were "wrong" (although I would have written it differently), it's that he was advocating top-down solutions, he was getting special favors from government, he was acting like he could (and he wanted to) plan people's lives, he was a jerk to Hayek, he was on the side of the cronies and crooks, he was irresponsible, he was indifferent about war, etc…. There wasn't a whole lot of economics in the videos (particularly the second one). It was that Roberts and Papola are pounding the story that Keynesianism is the anti-bottom up, illiberal, cronyist, cheating side. Papola continues to protest to me in correspodence that he's presenting an entirely legitimate view of Keynes, but Russ Roberts has come out and said it's all about ideology for him…. [I]t's doing far more harm than good.

Indeed. Keynes was not a top-down special-favors irresponsible jerk indifferent about war. Far from it. For example:

John Maynard Keynes: The General Theory of Employment, Interest, and Money: If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary…. Our criticism of the accepted classical theory of economics has consisted not so much in finding logical flaws in its analysis as 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 as nearly as is practicable, the classical theory comes into its own again from this point onwards…. Thus I agree with Gesell that the 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 if it is to realise the full potentialities of production…. Within this field the traditional advantages of individualism will still hold good. Let us stop for a moment to remind ourselves what these advantages are. They are partly advantages of efficiency--the advantages of decentralisation and of the play of self-interest. The advantage to efficiency of the decentralisation of decisions and of individual responsibility is even greater, perhaps, than the nineteenth century supposed; and the reaction against the appeal to self-interest may have gone too far. But, above all, individualism, if it can be purged of its defects and its abuses, is the best safeguard of personal liberty… 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…. Whilst, therefore, the enlargement of the functions of government, involved in the task of adjusting to one another the propensitv to consume and the inducement to invest, would seem to a nineteenth-century publicist or to a contemporary American financier to be a terrific encroachment on individualism, I defend it, on the contrary, both as the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the condition of the successful functioning of individual initiative…


John Maynard Keynes: If we take the view that for at least a generation to come Germany cannot be trusted with even a modicum of prosperity, that while all our recent Allies are angels of light, all our recent enemies, Germans, Austrians, Hungarians, and the rest, are children of the devil, that year by year Germany must be kept impoverished and her children starved and crippled, and that she must be ringed round by enemies; then we shall reject all the proposals of this chapter.... But if this view of nations and of their relation to one another is adopted... heaven help us all. If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp. Nothing can then delay for very long that final civil war between the forces of Reaction and the despairing convulsions of Revolution, before which the horrors of the late German war will fade into nothing, and which will destroy, whoever is victor, the civilization and the progress of our generation. Even though the result disappoint us, must we not base our actions on better expectations, and believe that the prosperity and happiness of one country promotes that of others, that the solidarity of man is not a fiction, and that nations can still afford to treat other nations as fellow-creatures?...

Daniel goes on:

Cassel and Hawtrey:

Glasner goes on to talk about who he thinks really ought to be recognized instead of Keynes and Hayek: Gustav Cassel and Ralph Hawtrey. I found this discussion interesting, in part because I know Keynes was so influenced by Cassel and I think considered himself on the same page…. I don't think it's quite right to draw this sharp line that Glasner does. Keynes's point on the gold standard was that money was a "limiting factor" rather than an "operative factor" (this comes out in his letter to Roosevelt, but also more clearly on pages 230-236 of the General Theory). Tight money could drive economies into depression for all the reasons that Keynes and many other economists at the time laid out, and that money would have to be loosened to enable a recovery. But Keynes's broader point was that the level of output and employment is a function of investment demand, which itself is function of entrepreneur's expectation of future yields…. There's discussion in it of the problems associated with golden fetters, but that alone doesn't give you a theory of output and employment, which is the book's object.

I've never personally seen any substantial disagreement between Keynesianism and market monetarism. I think there's something to be said for monetary policy becoming relatively less effective in a liquidity trap (something Glasner isn't entirely in disagreement with himself), but that hasn't lead any prominent Keynesians to disagree with market monetarists, just as Keynes was right there with Cassel and Hawtrey advocating and then praising the exits from the gold standard in the 1930s.

I would put it this way: Contrary to Say's Law, money opens the door to general gluts, and general gluts can cause depressions…. Keynes rejected Say on a more fundamental level, pointing out that even when purchases and sales were balanced, the balance might not be struck at a full employment level. Was he right? That's a tough call. The Depression didn't end in 1933, and there's pretty strong reason to believe increased (public) investment demand in the early 1940s determinantly put an end to it. That seems to be a mark in Keynes's favor (although, of course, not a mark against Cassel and Hawtrey…. Does comparing today to the 1930s offer a good test of whether the Cassel-Hawtrey strategy alone could have addressed the problem?

btw - anyone not following Glasner's blog should be.

With that I agree. You need not just Fisher-Cassel-Hawtrey-Friedman, but also Wicksell-Kahn-Hicks and Bagehot-Minsky-Kindleberger-Koo. And anybody not following Glasner's weblog should be.

On Hayek… in my view, there are four Hayeks, one good, and three of varying degrees of badness:

  1. The good Hayek of the price system as a discovery and information transmission mechanism, of the importance of entrepreneurship, and of private property and the rechstaat as guarantees of individual liberty.

  2. The bad Hayek who prefers Augusto Pinochet to Helmut Schmidt.

  3. The worse Hayek who had his head completely up his posterior on economic policy during the Great Depression.

  4. The worst-of-all Hayek. The one who when Keynes praises the Road to Serfdom and pronounces himself in "not just agreement, but deeply moved agreement with it" responds "no you are not!"