Axel Leijonhufvud and the Post-Walrasians

I see someone has brought up the topic of Axel Leijonhufvud’s theories in a comment on a previous post.

Axel Leijonhufvud is a so-called “Post-Walrasian” (or disequilibrium Keynesian/coordination Keynesian), and – like Post Keynesians – he is critical of neoclassical synthesis Keynesianism based on neo-Walrasian theory. The leading economists in the Post-Walrasian movement are Don Patinkin (1922–1995) and Robert W. Clower (1926–2011), as well as Axel Leijonhufvud. What is most fascinating is that Robert M. Barro and Herschel I. Grossman made contributions to early Post-Walrasian thought, but moved away from it and became members of the New Classical school.

Leijonhufvud presented a bold new interpretation of Keynes’s General Theory and a critique of the neoclassical synthesis in On Keynesian Economics and the Economics of Keynes: A Study in Monetary Theory (New York and London, 1968).

Both Clower and Leijonhufvud became heterodox macroeconomists after the 1970s, and seem to share these common ideas:

(1) they criticise neo-Walrasian theory, and in particular the supposed market clearing mechanisms summed up in the metaphor of the “Walrasian auctioneer” who clears all markets;

(2) a dynamic disequilibrium approach to economics and interpretation of Keynes’s theory;

(3) the recognition that incomplete information of economic agents prevents market clearing mechanisms;

(4) we have an economic world of slow price adjustments and sometimes false price signals: the Walrasian assumption of instantaneously or near instantaneously adjusting prices is a myth, and once it is rejected we see there is no guarantee at all that decentralised market systems will coordinate economic activity to create full employment, and

(5) the idea that what is needed today is a reconstructed “Post Walrasian macroeconomics” which is derived from Marshallian microfoundations, not Walrasian microfoundations.

All in all, that is not a bad critique of modern economics, and there is a great deal here Post Keynesians can agree with. The Post-Walrasians believe that market economies can lead to unemployment equilibriums and that there are no automatic mechanisms for fixing this. They think that Keynes’ theories, properly understood, will have an important place in a future macroeconomics.

In the previous comment on my last post, I am told that if I “read more Axel Leijonhufvud” my blog would be much improved. I frankly think that most of what Leijonhufvud says is also said by Post Keynesians, but Post Keynesians do it better. For example, Leijonhufvud’s view on what causes recessions:

Leijonhufvud rejects interpretations based on wage rigidity, and he rejects explanations of depression that depend on monopolies, labor unions, and the like. These interpretations of involuntary unemployment imply that “if ‘competition’ could only be restored, ‘automatic forces’ would take care of the employment problem” ... Leijonhufvud notes that Keynes was critical of such explanations (Meltzer 1988: 267).

A very good discussion of the similarities and differences between Leijonhufvud’s thought and the Post Keynesians can be found in Littleboy (1997). In short, Leijonhufvud errs in thinking of the money supply as exogenous, and pays insufficient attention to uncertainty in the Keynesian/Knightian sense.

Finally, we can hear from the man himself. Here is an interesting interview with Leijonhufvud held at the Central European University (Budapest) during the Institute for New Economic Thinking conference (held from September 6–8, 2010). I note that Leijonhufvud’s comments on the poor state of private sector balance sheets at the moment (from 10.35) seem to approach the Post Keynesian concern with debt deflation.





BIBLIOGRAPHY

Leijonhufvud, A. 1968. On Keynesian Economics and the Economics of Keynes: A Study in Monetary Theory, Oxford University Press, New York and London.

Littleboy, B. 1997. “On Leijonhufvud’s economics of Keynes,” in G. C. Harcourt and P. A. Riach (eds). A ‘Second Edition’ of the General Theory (vol. 2), Routledge, London.

Meltzer, A. H. 1988. Keynes’s Monetary Theory: A Different Interpretation, Cambridge University Press, Cambridge.

F. H. Hahn in a Candid Moment on Neo-Walrasian Equilibrium

The neo-Walrasian economist Frank H. Hahn is a respected neoclassical economist. Unlike other neoclassicals, however, he has been rather more honest in admitting the limitations of neo-Walrasian general equilibrium theory.

John Maynard Keynes stressed that money has special properties. Money has a zero or very small elasticity of production, and money and financial assets have zero elasticity of substitution with producible commodities. Keynes and modern Post Keynesians thus reject the “gross substitution axiom,” an idea held by neoclassicals and probably by many Austrians as well.

As Paul Davidson has noted (Davidson 2010), Frank H. Hahn in 1977 came to a similar conclusion about money and financial assets:

“there are ... resting places for saving other than reproducible assets. In our model this is money. But land, as Keynes to his credit understood, would have just the same consequences and so would Old Masters. It is therefore not money which is required to do away with a Say’s Law-like proposition that the supply of labour is the demand for goods produced by labour. Any non-reproducible asset will do. When Say’s law is correctly formulated for an economy with non-reproducible goods it does not yield the conclusions to be found in textbooks. As I have already noted Keynes was fully aware of this and that is why he devoted so much space to the theory of choice amongst alternative stores of value” (Hahn 1977: 31).

Furthermore, Hahn also questioned the role that flexible money wages are supposed to play in clearing markets and reducing unemployment:

“One can certainly now see that the view that with ‘flexible’ money wages there would be no unemployment has no convincing argument to recommend it … Even in a pure tatonnement in traditional models convergence to an equilibrium cannot be generally proved. In a more satisfactory model matters are more doubtful still. Suppose money wages fall in a situation of short-run non-Walrasian unemployment equilibrium. The argument already discussed suggests that initially this will lead to a redistribution in favour of profit. The demand for labour, however, will only increase on the expectation of greater sales since substitution effects in the short run can be neglected. If recipients of profit regard the increase as transient (as they sensibly might) their demand for goods will not greatly increase. On the other hand, if wage-earners have few assets their demand will decrease. But that means that producers get a signal to reduce output. Wages continue to fall and prices begin to fall also. Real cash balances increase but expectations about future prices may give a positive rate of return to money. There may be many periods for which falling money wages go with falling employment. Where the system would end up in the ‘long run’ I do not know” (Hahn 1977: 37).

Hahn (1977: 39) also noted that in any economy “which is not a barter economy … any non-reproducible asset allows for a choice between employment inducing and nonemployment inducing demand.” Hahn was right, but Keynes knew this long before Hahn.

BIBLIOGRAPHY

Davidson, P. 2002. Financial Markets, Money, and the Real World, Edward Elgar, Cheltenham.

Davidson, P. 2010. “Keynes’ Revolutionary and ‘Serious’ Monetary Theory,” in R. W. Dimand, R. A. Mundell, and A. Vercelli (eds), Keynes’s General Theory after Seventy Years, Palgrave Macmillan, Basingstoke, England and New York. 241–267

Hahn, F. H. 1977. “Keynesian Economics and General Equilibrium Theory: Reflections on Some Current Debates,” in G. C. Harcourt (ed.), The Microeconomic Foundations of Macroeconomics, Macmillan, London. 25–40.