It enabled Scott Sumner back in January to throw mud in Krugman's eyes:
"Paul Krugman recently argued that Keynesian economics is alive and well, and linked to this paper by Greg Mankiw, which summarizes the principles of new Keynesian economics. Unfortunately it was typed back in the Stone Age, so I can’t cut and paste. And I’m too lazy to re-type, so I’ll summarize the gist of Mankiw’s explanation of new Keynesianism:
1. It probably shouldn’t even be called Keynesian; don’t waste time with the General Theory.
2. It uses lots of classical principles.
3. Paradox of thrift? Fugetaboutit.
4. Similar to the economics of Hume and Friedman.
5. Don’t do discretionary policies, follow a rule–preferably NGDP targeting.
6. Don’t bother with fiscal stabilization policy, use monetary policy.http://www.themoneyillusion.com/?p=12529
Indeed, Sumner was so taken with Makiw's version of Keynesianism that it literally brought tears to his eyes:
"Reading this brought tears to my eyes. A mere 20 years ago we were in a golden age of macroeconomics. Now a new dark age has set in, as the forces of old Keynesianism have made Mankiw’s vision seem like a distant dream."
I was just reading this very interesting PDF by Paul Davidson about Paul Samuelson-generally thought to be the father of American Keynesianism. A lot of what he writes is drawn from Colander and Landreth's "
The Coming of Keynesianism to America."
As it turns out Samuleson actually had planed to go to-you guessed it-the Chicago School. What led him to become Mr. Keynesian seemed to be the correct material incentives as it were:
"In his 1986 interview Samuelson indicated that in the period before World War II, “my friends
who were not economists regarded me as very conservative” [C-L, 1996, p. 154]. Samuelson
graduated the University of Chicago in June 1935 and, as he explained to Colander and Landreth,
were it not for the Social Science Research Council fellowship that he received upon graduation,
he would have done his graduate studies at the University of Chicago [C-L, 1996. P. 154-5].
Consequently, it was the visible hand of a fellowship offer that placed Samuelson at Harvard when
Keynes’s General Theory was published in 1936."http://www.newschool.edu/scepa/events/papers/051005_Davidson.pdf
It seems that Samuelson learnt the lion's share of his knowledge about Keynes from an essay from Robert Bryce at the London School of Economics-prior to 1936 when Keynes published GT. Bryce, in fact, never saw reading, much less understanding, GT as in any way important to understanding Keynes.
"In the fall of 1935 Bryce went to Harvard and stayed for two years. During that time, an
informal group met during the evenings to discuss Keynes’s book. Bryce, using the same pre-
General Theory essay that he had used as the basis for his talks at the LSE, presented to this group
what he believed was Keynes’s General Theory analysis -- although he still had not read the
General Theory. As Bryce put it “In most of the first academic year [1935-36] I was the only one
who was familiar enough with it [Keynes’ theory] to be willing to argue in defense of it.” [C-L,
1996, p. 45-6]. So in 1936 Bryce’s essay became the basis of what most economists at Harvard,
probably including Samuelson, thought was Keynes’s analysis – even though Bryce had not read
the book when he made his presentations. Even in 1987, Bryce stated that, “ anyone who studies
that book is going to get very confused. It was ... .a difficult, provocative book” (C-L, 1996p. 44-46)""The immediate question therefore is: “Did Bryce ever really comprehend the basis of
Keynes’s analytical framework?”. And if he did not, how did that affect how the young Samuelson
and others at Harvard in 1936 learn about Keynes’s analytical framework. Bryce’s presentations at
the LSE and Harvard were supposed to make Keynes’s ideas readily understandable -- something
that Bryce believed Keynes could not do in his General Theory book. Bryce indicated that in his
first year at Harvard “I felt like the only expert on Keynes’s work around” [C-L, 1996, p.45]"
"Samuelson has indicated that his first knowledge of Keynes’s General Theory was gained
from Bryce [C–L, 1996, p. 158]. Moreover, even after reading the General Theory in 1936, Samuelson, perhaps reflecting Bryce’s view of the difficulty of understanding Keynes’s book,
found the General Theory analysis “unpalatable” and not comprehensible [C-L, 1996, p. 159].
Samuelson finally indicated that “The way I finally convinced myself was to just stop worrying
about it [about understanding Keynes’s analysis] . I asked myself: why do I refuse a paradigm that
enables me to understand the Roosevelt upturn from 1933 till 1937? ... I was content to assume that
there was enough rigidity in relative prices and wages to make the Keynesian alternative to Walras
operative” [C-L, 1996, pp159-160]."Certainly, this is all very curious. There is no more denigrated book by mainstream Macro than GT and also, apparently, no book less read. Who on the U.S. scene actually has? Krugman?
He gets knocked a lot by the Post Keynesians-as well as teh anti Keynesians. Krugman, it's true is still on some level Neo-Classical and points to Hicks' IS-LM as the best model. Interestingly Hicks doesn't come up in Davidson's piece-I'm only pg. 18 out of 27, though a few of the last pages are no doubt just footnotes.
While Krugman can still be knocked for accepting Hicks and Samuelson, I wonder how much he has read GT? I don't know the answer to this, I'm wondering. As to the GT itself, Davidson argues that the GT directly contests the Classical Theory. This is why it's kryptonite for the Neoclassical American scene. In partiuclar, it denies three CT postulates:
"[1] the neutrality of money axiom, [2] the gross substitution axiom, and [3] the axiom of an
ergodic economic world." Pg. 15
An "ergodic economic world" is one that can be fully predicted by adding the whole of the present and the past.
The point I most appreciate here is this one:
"In 1935 Keynes explicitly noted that in his analytic framework money matters in both the
long and short run, i.e., money is never neutral. Money affects real decision making."
Keynes denied that money is neutral, even in the long run. by denying the "gross substitution axiom" this means that everything isn't a perfect subsittue for everything else. This gets us past the fallacy-the Austrains are partiucarly insistent-the commodity money fallacy.
"In other words, when the demand for money (liquidity) increases, private sector
entrepreneurs can not hire labor to produce more money to meet this increase in demand for a
nonreproducible (by the private sector) good." (pg. 27)P.S. At least Krugman cannot be accused of not reading General Theory. Here is Delong in 2006, about Krugman's forward to GT:
"Paul Krugman has written a very good introduction to Keynes's General Theory of Employment, Interest and Money:
In the spring of 2005 a panel of “conservative scholars and policy leaders” was asked to identify the most dangerous books of the 19th and 20th centuries.... Charles Darwin and Betty Friedan ranked high on the list. But The General Theory of Employment, Interest, and Money did very well, too. In fact, John Maynard Keynes beat out V.I. Lenin and Frantz Fanon. Keynes, who declared in the book’s oft-quoted conclusion that “soon or late, it is ideas, not vested interests, which are dangerous for good or evil,” [384] would probably have been pleased.
Over the past 70 years The General Theory has shaped the views even of those who haven’t heard of it, or who believe they disagree with it. A businessman who warns that falling confidence poses risks for the economy is a Keynesian, whether he knows it or not. A politician who promises that his tax cuts will create jobs by putting spending money in peoples’ pockets is a Keynesian, even if he claims to abhor the doctrine. Even self-proclaimed supply-side economists, who claim to have refuted Keynes, fall back on unmistakably Keynesian stories to explain why the economy turned down in a given year....
It’s probably safe to assume that the “conservative scholars and policy leaders” who pronounced The General Theory one of the most dangerous books of the past two centuries haven’t read it. But they’re sure it’s a leftist tract, a call for big government and high taxes.... [T]he arrival of Keynesian economics in American classrooms was delayed by a nasty case of academic McCarthyism. The first introductory textbook to present Keynesian thinking, written by the Canadian economist Lorie Tarshis, was targeted by a right-wing pressure campaign aimed at university trustees. As a result of this campaign, many universities that had planned to adopt the book for their courses cancelled their orders, and sales of the book, which was initially very successful, collapsed. Professors at Yale University, to their credit, continued to assign the book; their reward was to be attacked by the young William F. Buckley for propounding “evil ideas.”
But Keynes was no socialist - he came to save capitalism, not to bury it. And there’s a sense in which The General Theory was... a conservative book.... Keynes wrote during a time of mass unemployment, of waste and suffering on an incredible scale. A reasonable man might well have concluded that capitalism had failed, and that only... the nationalization of the means of production - could restore economic sanity.... Keynes argued that these failures had surprisingly narrow, technical causes... because Keynes saw the causes of mass unemployment as narrow and technical, he argued that the problem’s solution could also be narrow and technical: the system needed a new alternator, but there was no need to replace the whole car. In particular, “no obvious case is made out for a system of State Socialism which would embrace most of the economic life of the community.”... Keynes argued that much less intrusive government policies could ensure adequate effective demand, allowing the market economy to go on as before.
Still, there is a sense in which free-market fundamentalists are right to hate Keynes. If your doctrine says that free markets, left to their own devices, produce the best of all possible worlds, and that government intervention in the economy always makes things worse, Keynes is your enemy. And he is an especially dangerous enemy because his ideas have been vindicated so thoroughly by experience.
Delong actually quotes Krugman in full there, so if you're interested, go read it in full. Probably some of what he says Davidson would not agree with. Davidson makes the important point that even assuming totally flexible wages and prices, we still would not be assured Full Employment equilibirium. Still, as the mainstream goes, Krugman comes as close to the truth as you're going to find.
It's rather preverse that both him and Sumner have gone on vacation at the same moment.
P.S.S Wholly off the beaten track, does anyone know if Mike Sanowski over at Monetary Realism still plans to write any more on Sumner's NGDP futures? He claimed he was ready to publicly discredit it. Sumner replied peevishly that he ought to actually read it first. I haven't heard from Mike since. Did Sumner manage to make him think twice?
Good post!
ReplyDeleteIdeologues are interested in validating feelings, not in verifying truth. I've read GT about 2.5 times. Keynes treated economics scientifically. No wonder he is ranked along with Darwin on most-hated lists. (Let's not let facts, and certainly not logic, get in the way of our most cherished ideas!)
But then, as brilliant as they were, the classical originators were mostly 18th century Scottish philosophers, and in 1935 economics as a science was still in its infancy. Keynes had to correct false notions about that the interest rate does! There was so much work left to be done -- yet along came McCarthyism and Atlas Shrugged, and so much for science.
Interesting about Samuelson; I conclude the Keynesian synthesis we've been getting all along is too influenced by the classical model. But then, so was Keynes, whose training and thinking had been crafted in the classical paradigm. His raft drifted out into the raging current before it had been cut loose from the shore, so we have a strange hodgepodge of ideas.
So JMH you think that Keynes was too classical hiimself?
ReplyDeleteIn what way?