Economics geeks and our obsession with Keynes
Posted by Lance on 05 Jun 2007 at 2:31 pm | Tagged as: Libertarianism, Economics, Lance's Page
I have a problem with Keynes, mostly because his theories have been used to propose policies I don’t like, not exactly the best reason to have an issue with a great thinker. Given that, he is essential study for investors, he was one of the most insightful (and inciteful!) economists as well as the starting point for much useful economic study, including by such greats as Milton Friedman.
He was also mercurial and interested in political expediency over intellectual consistency. He wanted to solve the pressing problems of the day, and was willing to bend his economic arguments to that end, even if it left impressions which he might have to undo later. Much of his thought could have used his own clarifications later. Keynes once said, “In the long run, we’re all dead,” which he went on to prove in his particular case, leading to disciples turning his thought into a fractious, godlike orthodoxy. They are still fighting over what that orthodoxy should be. I would have loved for Keynes to have stepped away from his battles and try and synthesize all his ideas. Some will claim he did, I think he developed theories which would sell what he thought needed doing at the time. In retrospect, I have to admit that as reactions to particular issues his policies had some merit, if not unalloyed goods. Nevertheless, economics, by worshiping him, was a poorer policy guide for a very long time, and many of those issues could have been illuminated profitably by a less politically engaged Keynes, and one who understood that while in the long run we all may indeed die, the ideas of a great economist often do not. In Keynes’ case, the ideas lived on as various incomplete and contradictory zombies, animated by his brilliance, but lacking his ability to adjust and reject.
In the end though, economics has moved forward, and Keynes has been absorbed and adapted by theorists of diverse ideological persuasions.
James Galbraith and Brad Delong go at it here, here and here to our benefit, though Tyler Cowen puts things in a perspective that resonates more with me:
My broadly similar take sees the post Keynesians as having promoted several important ideas:
1. Price and/or wage stability can be destabilizing; Keynes (sometimes) presented stickiness as a policy recommendation rather than a necessary fact.
2. Financial fragility, a’la Hyman Minsky.
3. Noise traders matter for macroeconomics.
4. Moving Keynesian economics away from the consumption function and IS-LM.
5. Behavioral and psychological imperfections are relevant for macroeconomics.
6. They resurrected interest in the idea of an endogenous money supply.
I’m not entirely on board but overall that is a strong list. These ideas have now been incorporated into the mainstream, but only recently, typically in the 1990s and sometimes by Brad himself.
The post Keynesians went wrong, however, in several ways:
1. Too many of them obsessed over incomes policies. On “public choice” more generally they were naive.
2. Too many viewed Thatcherism, the war against inflation, and other developments as instruments of class warfare, designed to redistribute income from poor to rich.
3. They held too many debates over “what Keynes really meant” and cared too much about distinguishing themselves from mainstream Keynesians, whom they often treated as their worst enemy.
4. They ascribed too much power to the liquidity premium on money, and thought it was easy for an economy to end up in a corner where no one wants to produce new investment assets.
5. They failed to model the complexities of system-wide wage and price stickiness, and the differences between real and nominal stickiness, a’la Romer (ReStud 1990) or Caplin and Spulber. For this reason at some point they stopped coming up with insights on stickiness and fell far behind the rest of the profession.
6. They failed to develop an empirically progressive research program that kept pace with mainstream macro.
7. They failed to realize that the future of Keynesian economics lies in the elements of Milton Friedman — nominal stickiness is real and the action is with monetary policy — that were most Keynesian.
Overall post Keynesianism has been a far more useful heterodox thread than Sraffa and neo-Ricardianism.
Scroll down as Tyler looks at various schools of thought in previous posts. I also like this post about economic heterodoxy:
Diversity brings broader benefits by allowing people to use niches as ladders to further steps, frequently into the mainstream, or in my case into another niche. Diversity is also a form of insurance, and of course it doesn’t always pay off. Finally many excellent mainstream or sometimes even right-wing economists started with an intense interest in social justice, often gleaned from heterodox writings. Vernon Smith was once a socialist, and George Stigler was early on a trust-basher.
Yes the profession is getting better but we also are losing too much diversity in terms of schools of thought. The diminution of the Austrian School, as an organized and intellectually alive phenomenon seems to me a shame, even though I don’t believe in a unique Austrian method. Heterodoxies encourage the mainstream to be more philosophical and more self-reflective.
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