I am planning a sequence of posts on re-reading Keynes, where I will try to go through the General Theory. This first post explains my motivations for re-reading Keynes. As always, my primary motive is self-education; this will force me to go through the book again — I first read it in my first year graduate course on Macroeconomics at Stanford in 1975, when our teacher Duncan Foley was having doubts about modern macro theories, and decided to go back to the original sources. At the time, I could not understand it at all, and resorted to secondary sources, mainly Leijonhufvud, to make sense of it. Secondarily, i hope to be able to summarize Keynes’ insights to make them relevant and useful to a contemporary audience. Thirdly, there are many experts, especially Paul Davidson, on this blog, who will be able to prevent me from making serious mistakes in interpretation.
Reasons for Studying Keynes
“The heart has its reasons of which reason knows nothing.” Blaise Pascal
In line with the objectives of the WEA Pedagogy Blog, I am initiating a study group with the aim of [re-]reading Keynes’ classic The General Theory of Employment, Interest and Money. There are many reasons why I think this is a worthwhile enterprise. I hope to make weekly posts summarizing various aspects of the book, as we slog through the work, which can be difficult going in some parts. At the very least, this will force me to re-read Keynes, something I have been meaning to do for a long time. In this first post, I would like to explain my motivation in doing this exercise.
- It is my hope and ambition to write a radical and revolutionary textbook with the theme: “Macro-economics for the twenty first century” which will re-create the field from scratch. In fact, every revolution builds upon the accomplishments of earlier revolutionaries – we reach heights by standing on the shoulders of our predecessors. For several reasons, studying the thoughts of Keynes is a necessary first step towards a radical re-thinking of macroeconomics.
- In pursuit of this ambition, it is essential to study Keynes, because this is exactly what he wanted to do: to launch a revolution in economics. Furthermore, he was extra-ordinarily successful in achieving this goal. The economic theory and policy of the twentieth century has been deeply influence by Keynes. Some quotes from the preface to his book show that Keynes was well aware of the revolutionary nature of his theories. He writes that “The matters at issue are of an importance which cannot be exaggerated.” He himself underwent a revolution in his own thought: “I myself held with conviction for many years the theories which I now attack.” Revolution begins at home – that is, an internal thought revolution is required as a first step to creating an external revolution.
- The current economic situation is like the one faced by Keynes. Leading economists, including Keynes, had forecast ever-increasing prosperity, and had minimized the significance of the Great Depression when it occurred, forecasting a quick recovery from a temporary glitch. When this failed to happen, the reputation of economists and of economic theory was substantially damaged. Keynes writes that he wishes to resolve the “deep divergences of opinion between fellow economists which have for the time being almost destroyed the practical influence of economic theory”. He writes that the “struggle of escape from habitual modes of thought and expression” was the main obstacle in arriving at his new, revolutionary, theory. Our current situation after the Global Financial Crisis, which has deeply damaged the reputation of economists and economic theories, bears a strong resemblance to the problems which Keynes faced and resolved with outstanding success. One of our main problems today is failure to recognize and reject many foundational assumptions – habitual modes of thought and expression.
- In some ways, the Keynesian revolution was aborted before it was launched. That is, many central Keynesian insights never made it into the textbooks. For example, while Keynes stated very clearly that demand and supply in the labor market need not reach equilibrium because the real wage was not in control of either the laborers or the capitalists. Negotiations could only take place in nominal wages, and increasing or decreasing nominal wages would not necessarily have the desired effects on the real wage. However, most extant interpretations trivialize Keynes by saying that wage rigidities were responsible for unemployment. Similarly, Keynes states clearly that money is not neutral in the short run and in the long run. Also Keynes argued that the future was fundamentally unpredictable. These Keynesian insights make no appearance in textbooks and models purporting to be “Keynesian”. Again, this furnishes an important reason to study the original Keynes, bypassing fake imitations.
- We have all studied the Keynesian IS-LM model. However, this interpretation of Keynes was developed by Hicks and Samuelson. Hicks later agreed that this model missed most of what Keynes was trying to say, and was of limited use beyond a “classroom gadget.” Keynes was trying to integrate money into the real economy, while the IS-LM model separates the monetary sector from the real sector. The crucial role of uncertainty in Keynes is completely absent from the IS-LM framework. There are many reasons to suspect that the two curves cannot be separated; factors affect both, and the two curves also affect each other. There are other ways in which the standard interpretation of Keynes is a distortion of Keynesian thought.
All of the above provide reasons why a re-reading of Keynes promises to reveal some new insights into our contemporary economic problems. However, eighty years of experience following the publication of Keynes book in 1936 allows us to provide some additional insights not present in Keynes work. While there are many dimensions in which we hope to enrich the analysis of Keynes, our main contributions will be on the methodological front. It is my hope to use Keynes and Keynesian theory as a test-bed for “The Methodology of Polanyi’s Great Transformation” — in this paper, I describe how the methodology used by Polanyi is fundamentally and radically different from conventional economic methodology. These new methodological principles will be illustrated later, in context of applications. A very brief sketch of some of main ideas is given below, just as a starting point.
- Contemporary economic methodology is axiomatic-deductive. Lionel Robbins wrote that: “The propositions of economic theory, like all scientific theory, are obviously deductions from a series of postulates.” Robbins is mistaken in his belief that science is axiomatic-deductive. This is actually the Greek methodology for mathematics, which failed miserably as a basis for natural science. For details on why axiomatic-deductive is not a suitable methodology for science, see: Economists Confuse pre-scientific Greek Methodology with Science
- The axioms upon which economics is based, the famous micro-foundations, are demonstrably false empirically. The massive amount of evidence against them has been summarized in The Empirical Evidence Against Neoclassical Utility Theory: A Survey of the Literature. Individuals do not maximize utility, firms do not maximize profits, and prices are not determined via a supply and demand equilibrium. All fundamental propositions of economic theory are wrong. For a brief exposition see Fundamental Flaws in Economic Theories.
Further evidence for the failure of methodology is furnished by the large numbers of comments by leading economists about the bankruptcy of modern economic theory. For instance, Romer said that macroeconomics has been going backwards for the past three decades. Loss of knowledge, and failure of cumulation of experience is indicative of serious methodological flaws. Economists never succeeded in escaping from the “habitual modes of thought and expression” which Keynes struggled with; with passage of time, they lapsed back into the same pre-Keynesian errors. My own study of The Methodology of Polanyi reveals several methodological principles which are radically different from those currently in use in modern economic theory. I will mention just one important principle here.
- Theories arise out of the attempt to understand historical experience. In turn, historical experience cannot be understood without the help of theories. This means that the historical context and social science theories are “inextricably entangled”. We cannot understand Keynes without understanding his historical context, the economic crises he lived through, as well as the bank of ideas which was available to him to interpret that experience. The current methodological framework treats economics as a “science” which means trying to understand Keynesian economics as a set of universal laws which operate without any historical, geographical, or political constraints. This makes it impossible to understand Keynes.
In this re-reading of Keynes, we will attempt to understand Keynesian theories within their historical context. The mathematical/scientific school won the battle of methodologies against the German historical school at the end of the 19th century. As in Ecclesiastes, “The race is not to the swift or the battle to the strong.” The wrong side won the battle, which led to loss of knowledge in the economics profession. We cannot put economics back on track without re-absorbing the lessons of history and historical context.
BLOG Posts are useful for discussion and comments, but not for keeping systematic track of an organized collection of materials. For the purpose of organizing materials related to this project, I am using a Google website: 21st Century Macroeconomics This site also provides links to lots of supplementary materials related to the post.