Heterodox
I claim that what mainstream economists teach about what Keynes wrote is often false and nonsenical. Unfortunately, this is quite impressionistic in that I do not give examples of these misrepresentations. I am writing here only about the General Theory. I suppose some mainstream economists might respond that they do not teach about Keynes at all. Some say Keynes work was about policy, not theory. Keynes specifically says otherwise in the first sentences of the preface to his major work: "This book is chiefly addressed to my fellow economists. I hope that it will be intelligible to others. But its main purpose is to deal with difficult questions of theory, and only in the second place with the applications of this theory to practice. For if orthodox economics is at fault, the error
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I claim that what mainstream economists teach about what Keynes wrote is often false and nonsenical. Unfortunately, this is quite impressionistic in that I do not give examples of these misrepresentations. I am writing here only about the General Theory. I suppose some mainstream economists might respond that they do not teach about Keynes at all.
Some say Keynes work was about policy, not theory. Keynes specifically says otherwise in the first sentences of the preface to his major work:
"This book is chiefly addressed to my fellow economists. I hope that it will be intelligible to others. But its main purpose is to deal with difficult questions of theory, and only in the second place with the applications of this theory to practice. For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises."
Some say Keynes claimed that persistent unemployment was caused by sticky wages or prices. Franco Modigliani (1944) is the locus classicus for this view. But Keynes starts Chapter 19 by stating exactly the opposite:
"...the classical theory has been accustomed to rest the supposedly self-adjusting character of the economic system on an assumed fluidity of money-wages; and, when there is rigidity, to lay on this rigidity the blame of maladjustment.
It was not possible, however, to discuss this matter fully until our own theory had been developed. For the consequences of a change in money-wages are complicated. A reduction in money-wages is quite capable in certain circumstances of affording a stimulus to output, as the classical theory supposes. My difference from this theory is primarily a difference of analysis; so that it could not be set forth clearly until the reader was acquainted with my own method."
Keynes thinks institutions that make money wages sticky downward are stabilizing, not an explanation of persistent unemployment. He notes that workers and employers may have no means of negotiating over real wages, instead of money wages. And he argues that it is rational for workers to be concerned with relative wages.
Some say Keynes confined his theory to the short run. At least one model in the General Theory is set in Marshall's short run. Investment is ongoing, but the stock of capital equipment is taken as given. This short run equilibrium is suppose to point of attraction in a very short run dynamics. Keynes, however, introduces a notion of long run equilibrium in chapter 5:
"If we suppose a state of expectation to continue for a sufficient length of time for the effect on employment to have worked itself out so completely that there is, broadly speaking, no piece of employment going on which would not have taken place if the new state of expectation had always existed, the steady level of employment thus attained may be called the long-period employment corresponding to that state of expectation. It follows that, although expectation may change so frequently that the actual level of employment has never had time to reach the long-period employment corresponding to the existing state of expectation, nevertheless every state of expectation has its definite corresponding level of long-period employment."
Some say that Keynes' major policy position was to recommended counter-cyclical fical and monetary policy. It is surprisingly hard to find any such argument in the General Theory. I think, as far as policy goes, Keynes recommended institutional changes, especially in Chapter 24, the final chapter of the General Theory. Keynes wants a less unequal distribution of income. He thinks there is some justification for some inequality:
"For my own part, I believe that there is social and psychological justification for significant inequalities of incomes and wealth, but not for such large disparities as exist to-day. There are valuable human activities which require the motive of money-making and the environment of private wealth-ownership for their full fruition. Moreover, dangerous human proclivities can be canalised into comparatively harmless channels by the existence of opportunities for money-making and private wealth, which, if they cannot be satisfied in this way, may find their outlet in cruelty, the reckless pursuit of personal power and authority, and other forms of self-aggrandisement. It is better that a man should tyrannise over his bank balance than over his fellow-citizens; and whilst the former is sometimes denounced as being but a means to the latter, sometimes at least it is an alternative. But it is not necessary for the stimulation of these activities and the satisfaction of these proclivities that the game should be played for such high stakes as at present."
Keynes looks forward to permanently low interest rates, "the euthanasia of the rentier", progressive taxes, and "communal saving through the agency of the State". These changes will lead to the disappearance of rentier aspect of capitalism, which is a transitional stage. The goal is to deprive "capital of its scarcity-value within one or two generations". Keynes thinks these changes are consistent with entrepreneurship:
"Thus we might aim in practice (there being nothing in this which is unattainable) at an increase in the volume of capital until it ceases to be scarce, so that the functionless investor will no longer receive a bonus; and at a scheme of direct taxation which allows the intelligence and determination and executive skill of the financier, the entrepreneur et hoc genus omne (who are certainly so fond of their craft that their labour could be obtained much cheaper than at present), to be harnessed to the service of the community on reasonable terms of reward."
Probably the most famous policy pronouncement in the General Theory is a phrase in the following:
"I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative."
It might be helpful to think of the General Theory as containing several models, not all worked out, in a broader setting. The IS-LM model is only one of these models. Keynes theory is set in historical time, with business cycles occurring. A major point is to abolish a seperation between a microeconomic analyis in terms of real values and a monetary theory of nominal values.
I suppose one motivation for this post is Matias Vernengo's recent response to James Crotty. It seems every decade or so some Post Keynesian writes a book putting forth something like the unoriginal claims in this blog post.
References- A. Asimakopulos. 1991. Keynes's General Theory and Accumulation. Cambridge University Press.
- Victoria Chick. 1983. Macroeconomics after Keynes: A Reconsieration of the General Theory. MIT Press.
- James Crotty. 2019. Keynes Against Capitalism: His Economic Case for Liberal Socialism. Routledge.
- Paul Davidson. 2007. John Maynard Keynes. Palgrave Macmillan.
- Stephen A. Marglin. 2021. Raising Keynes: A Twenty-First-Century General Theory. Harvard University Press
- Hyman Minsky. 1975. John Maynard Keynes. McGraw-Hill.
- Robert Skidelsky. 1983 - 2001. John Maynard Keynes (Three volumes). Viking.