Keynesian Anti-Economics

17 November 2009 at 4:40 pm 4 comments

| Peter Klein |

A reader objected to my recent portrayal of Keynes as a crank, as a man who never really studied economics or took it very seriously. Note that I never denied Keynes’s intellect, his great skill as a rhetorician, or his personal charm. But Keynesian economics is, in a sense, non-economics or even anti-economics, in that it ignores or contradicts many basic lessons about the allocation of scarce resources among competing ends. Mario Rizzo feels the same way:

Keynesianism is not concerned with the allocation of resources and related niceties. One can see this is the policy prescriptions of the stimulators. Just get people back to work. If a market is depressed: Prop it up. Labor, other resource-owners and entrepreneurs need to stop worrying about searching for the appropriate use of resources. Bankers have to stop fretting about to whom they should lend. They should abandon their ultra-restraint. Those who are holding money should invest; they should buy bonds. No need to worry about inflation because the potential output of “stuff” (however it is allocated across industries) is above the actual less-than-full-employment output.

Where did my microeconomics go?

Keynes and his followers proudly trumpeted his framework as a re-do of standard economics (what he called “classical,” though Keynes was not well versed in the history of economic thought). Standard economics is OK during periods of “full employment” (another aggregate concept, of course), but not in the “general” case, in which case the Keynesian magic comes into play. Credit expansion, according  to Keynes, performs the “miracle . . . of turning a stone into bread.” As Mises noted, “Great Britain has indeed traveled a long way to this statement from Hume’s and Mill’s views on miracles.”

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4 Comments Add your own

  • 1. william  |  17 November 2009 at 8:17 pm

    the claim that Keynes never spent a minute in studying economic theory iwould be equally true as the one that recognized the fact that Keynes spent his life-time in studying (contemporaneous) economic institutions.

    thats the reason why Keynes comment on Hicks Value and Capital, a book almost contemporary to the GT, was about “…a book written by an obviously clever man, and at the same time, almost empty of contents”.

  • 2. koppl  |  18 November 2009 at 12:24 pm

    Machlup said Keynes was a good economist, but not a good economic theorist. (Dick Langlois may have been in the room when he said that. Dick?)

    Machlup’s remark identifies something important, I think. Keynes was a serious guy. He gave us the last best attempt to save induction with his Treastise of [on?] Probability, for example. He was a real thinker. I also think we can all get lots of sustenance from Chapter 12. It is for a reason that Keynes launched a revolution in economics. But all Keynes’s talents and depth did not necessarily make his economic theory right or even very good. It does seem fair to say with Machlup that he was not a good economic *theorist*.

    Roger Garrison taught me that Keynes violated “Mill’s fourth,” i.e. the fourth of Mill’s “four fundamental propositions regarding capital.” The 4th is “Demand for commodities is not demand for labor.” It seems this was once the benchmark test for whether you were or were not an economist. By that standard Keynes didn’t make the cut because C & I move together in his system. Admittedly, he had sophisticated reasons for rejecting Mill’s 4th and Say’s law. He was not merely clueless. But in some sense the result was more anti-economics than economics as previously understood.

  • 3. Peter Klein  |  18 November 2009 at 12:31 pm

    Right, Hayek made that point about Mill’s forth:

    “John Stuart Mill’s profound insight that demand for commodities is not demand for labor, which Leslie Stephen could in 1878 still describe as the doctrine whose “complete apprehension is, perhaps, the best test of a sound economist,” remained for Keynes an incomprehensible absurdity” (Collected Works, vol. 9., p. 249).

  • 4. Bob Layson  |  19 November 2009 at 11:05 am

    Keynes was most certainly not a charlatan as he actually believed in the theoretical revolution he was peddling. He thought that he had had an Einsteinian insight into the process of collapsing demand and unemployment equilibrium. He was intelligent, sincere and wrong.

    Quite the stupidest remark that could be made about the classical economists, and many have made it, is that they had no explanation for the Great Depression. Wages, prices, taxes, tariffs and regime uncertainty can explain it all. Cannan, for one, knew that. What economists could not produce was a political process sufficient to reduce the reserve price of labour. W H Hutt is – in his own way – most clear on this.

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