I’m often asked—by students and readers of this blog—why I include Keynesian economics, alongside neoclassical economics, within mainstream economic theory.
The major reason I do so is because the mainstream debate within the discipline of economics is mostly confined within limits defined by neoclassical economics and Keynesian economics—between (as I explained last year), the conservative invisible hand of free markets and the more liberal visible hand of government intervention.
It’s basically what most students of economics are exposed to their in their micro and macro courses:
At the microeconomic level, capitalism (or, as liberals generally refer to it, the market system) has the potential of achieving an efficient allocation of resources. As for the macroeconomy, capitalism is capable of providing stable growth and full employment. Capitalism, therefore, promises the best possible outcomes both for individuals and for the economy as a whole.
Now, while conservative mainstream economists believe that efficiency, growth, and full employment stem from allowing markets to operate freely, liberal mainstream economists argue that markets are often imperfect and therefore the only way to achieve (or at least approximate) those goals is to intervene in and regulate markets. Those are the terms of the mainstream debate in economics, from the origins of modern economic discourse in the late-eighteenth century right on down to the present.
Keynesian economics was, of course, born as a critique of neoclassical economics, in the midst of the First Great Depression, when the allocation of resources was anything but efficient and capitalism provided neither stable growth nor full employment. Far from it!
Keynes introduced new ideas into economic discourse, emphasizing the role of economic and social structures (such as collective bargaining and, from later Keynesians, imperfect competition), mass psychology (especially with respect to investors and stock-market speculators), and fundamental uncertainty (it was impossible to make rational decisions in the face of an unknown—and unknowable—future).
However, as recent essays by Michael Roberts and Chris Dillow remind us, Keynesian economics has severe shortcomings.
While I think Roberts begins by overstating his case (I, for one, am not convinced that “Keynes is the economic hero of those wanting to change the world”), he does convincingly argue that Keynes’s economic prescriptions are based on a fallacy:
The long depression continues not because there is too much capital keeping down the return (‘marginal efficiency’) of capital relative to the rate of interest on money. There is not too much investment (business investment rates are low) and interest rates are near zero or even negative. The long depression is the result of too low profitability and so not enough investment, thus keeping down productivity growth. Low real wages and low productivity are the cost of ‘full employment’, contrary to all the ideas of Keynesian economics. Too much investment has not caused low profitability, but low profitability has caused too little investment.
Dillow, for his part, explains that Keynes “was largely silent about three related issues: class, power and profits, or least he dismissed them lightly.” In a sense, then,
Keynesianism was profoundly conservative. In believing that technocratic governments could provide workers with decent wages and full employment, Keynesianism did away with the need for industrial democracy: one of the achievements of Keynes was to eclipse movements such as guild socialism. It wasn’t Keynes himself who said “the man in Whitehall knows best” but one of his disciples, Douglas Jay – and that encapsulated a key part of Keynesian ideology, its belief in top-down management.
Populism, of course, is a backlash against just this. That slogan “take back control” and the dismissal of experts represent a rejection of Keynesianism; the baby of decent macroeconomic policy is being thrown out with the bathwater of elitism. It’s far from clear that Keynesianism has the intellectual or political resources to fight back.
In my view, neither neoclassical nor Keynesian economics turns out to have the intellectual or political resources to effectively respond to the issues that motivate and resonate within contemporary populism. If anything, they have served to create the problems that have brought right-wing nationalist populism to the fore.
For good reason, both wings of mainstream economics have ceased to be persuasive.
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If anything, they have served to create the problems that have brought right-wing nationalist populism to the fore.
For good reason, both wings of mainstream economics have ceased to be persuasive.
Economist Peter Cooper points to one of the problems inherent to Keynes’ thought: Keynesian uncertainty and policy.
Personally, and for what it might be worth, I share much of what he says.
http://heteconomist.com/the-confidence-fairy-and-formation-of-demand-expectations-under-uncertainty/
Yes, Magpie, I understand that anti-deficit economists have attempted to hijack the issue of uncertainty (as I have written about here, here, here, and here)—and, at the same time, that Coddington and other modernist economists have expressed their fear of fundamental uncertainty (because of nihilism). I, for one, don’t think expansionary policies actually eliminate capitalist uncertainty—either for workers or, more generally, for reasons explained by Kalecki.
Although I give some more credit to anti-cyclical policies (and I believe so does Cooper), I am less than sanguine about them.
But that’s not the point. The point was that Keynes’ thought was contradictory: his explanation for recessions is the mainstream austerian argument against anti-cyclical policies.
OK, I think I understand the point. But I’m not convinced it’s contradictory. Both groups share the view that expectations (confidence, uncertainty, etc.) matter for capitalists’ decisions. For that matter, Marxists, too. But, of course, they have different theories about both the causes and consequences of those expectations. The neoclassical austerians believe, with little if any evidence, that capitalists are worried about deficits; Keynesians, on the other hand, have a different theory, based on the unknowability of the profitability of investment projects. Marxists, of course, emphasize the anarchy of commodity production—as well as the different uncertainty that faces workers within capitalism. I don’t see how that makes Keynes’s thought contradictory.
There is, however, the issue of uncertainty over the course of Keynes’s writings, during which he seems to have put forward both objectivist and subjectivist views.
But I’m not convinced it’s contradictory. … I don’t see how that makes Keynes’s thought contradictory.
I’m mistaken, then.
I mean, if hearing Keynesians arguing that fiscal stimulus will pull the economy out of recession, based on what Keynes wrote, while austerians argue that fiscal stimulus will push the economy deeper into recession, also based on what Keynes wrote is not contradictory, then I suppose you’ll agree is at the very least hilarious. 🙂
And on top hearing the fundamentalist Keynesians lambasting both New Keynesians and austerians for their revisionism is just the icing on the cake.
Ultimately, if I’m mistaken, I might be in very good company. I wouldn’t be surprised that Krugman, Skidelsky and several Austrians shared my opinion.
This, for instance, was Paul Krugman a couple of years ago:
Unreal Keynesians March 28, 2015.
Brad DeLong points me to Lars Syll declaring that I am not a “real Keynesian”, because I use equilibrium models and don’t emphasize the instability of expectations.
One way to answer this is to point out that Keynes said a lot of things, not all consistent with each other. (The same is true for all of us.) Right at the beginning of the General Theory, Keynes explains the “principle of effective demand” with a little model of temporary equilibrium that takes expectations as given. If that kind of modeling is anti-Keynesian, the man himself must be excommunicated.
(…)
And as I have often argued, these past 6 or 7 years have in fact been a triumph for IS-LM. Those of us using IS-LM made predictions about the quiescence of interest rates and inflation that were ridiculed by many on the right, but have been completely borne out in practice. We also predicted much bigger adverse effects from austerity than usual because of the zero lower bound, and that has also come true.
Now, what have those who declare themselves the true Keynesians had to offer? Has insisting that expectations are volatile and unpredictable been helpful in this context? Actually, if anything it lends support to believers in the confidence fairy. After all, if it’s all animal spirits, who are we to say they’re wrong?
Read the whole thing, it’s rather telling.
https://krugman.blogs.nytimes.com/2015/03/28/unreal-keynesians/
I’ve also written about that. I had good fun writing it, too.
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