Keynes Repudiated Keynesianism?

This is a bizarre meme based on an anecdote about Keynes in his final days, recounted by Skidelsky:

“On Thursday 11 April he had lunch at the Bank after the regular meeting of the court. He sat next to Henry Clay; they discussed the American loan. Keynes said that he relied on Adam Smith’s ‘invisible hand’ to get Britain out of the mess it was in, and went on: ‘I find myself more and more relying for a solution of our problems on the invisible hand which I tried to eject from economic thinking twenty years ago.’ ‘An interesting confession for our arch-planner,’ Henry Clay noted. The now-retired Montagu Norman, the recipient of Clay’s letter, wrote back: ‘About Keynes ... I think he relied on intellect, which perhaps means that he ignored the “invisible hand”, and I guess he was led astray by Harry White. But surely it is easy to arrange a loan if you ignore its repayment, and is there any hope of that, unless there is to be such an inflation across the Atlantic as will affect their claims and provide an easy way out?” (Skidelsky 2000: 470).

The following observations can be made:

(1) Was Keynes being a gracious and diplomatic lunch guest in making what was in fact a mere throw-away remark here?

(2) The context of this statement of Keynes is “the American loan.” That much is clear. The post war problems of the UK in its American loan and balance of payments difficulties were presumably also in Keynes’s mind.

(3) The idea that this statement shows Keynes clearly repudiating the ideas of the General Theory is absurd.

(4) I suspect that Keynes’s thinking in these days was influenced by the policy of the new Labour government and its more wide-ranging policies of economic intervention: on April 18, 1946, Keynes, in a private conversation, attacked the Labour government’s decision to “nationalise the road-hauliers, which he regarded as an unnecessary act of regimentation” (Skidelsky 2000: 471). Keynes was a lifelong liberal and had never supported the Labour party. It is not surprising that in his last days he was out of temper with the nationalisation program and other interventions of the Labour party. These programs were different from what he advocated in the General Theory, and went far beyond his own views.

(5) Let us say for the sake of argument that Keynes did repudiate the General Theory in his last days. Does this, then, provide good grounds in itself for dismissing the fundamental ideas of the General Theory or modern Keynesian economics? It would not.

The ideas of the General Theory stand or fall on their own merits, as do the theories of modern Post Keynesian economics. The attempt to dismiss Keynesian economics by appealing to this anecdote is as wrong-headed and foolish as Christian fundamentalists who try and discredit Darwinian evolution by invoking the fiction that Darwin repudiated his Origin of Species on his deathbed. We know, of course, that this story is a complete lie invented by a Christian apologist called Elizabeth Hope. But suppose it were true: that Darwin recanted the Origin of Species. Would such a thing provide good grounds for rejecting the modern theory of Darwinian evolution? Not in the least. Certainly not if Darwin provided no arguments refuting his original evidence. The theory presented in Origin of Species stands by itself and its truth depends on the cogency of the evidence and arguments. Modern science has reinforced the central ideas of the Origin of Species, and whatever the dying Darwin thought is irrelevant to the case that can be made for its truth. It is the same with the central ideas of the General Theory. In the end, it matters not one whit what Keynes thought in his last days or on his deathbed. Theories in the natural sciences, social sciences and economics stand and fall on their merits, not on what the original inventor of them thought about them in his last days.

(6) But as noted in (3), I see no evidence whatsoever that this comment of Keynes even shows any rejection of the General Theory. Keynes’s program of monetary and fiscal policy interventions to maintain aggregate demand is essentially compatible with private production of commodities and a capitalist economy. A greater concern for Adam Smith’s “invisible hand” does not require that Keynes rejected aggregate demand management.

(7) There are some interesting issues here relevant to my previous post about Jean-Baptiste Say’s later rejection of Say’s law. We should not reject Say’s law merely because Say came to disbelieve it. The fact that Say repudiated the original theory does not by itself constitute good grounds for us doing so, unless actual arguments are offered and we can evaluate them. Say’s law is false because it is flawed, and Say himself clearly worked out why it was flawed in his correspondence with Ricardo, giving arguments. Those arguments have merit.

As I have said in (5) above, it strikes me that this whole business is rather like Darwin’s mythical deathbed conversion, made light of here by Richard Dawkins in the video below.




BIBLIOGRAPHY

Skidelsky, R. J. A. 2000. John Maynard Keynes: Fighting for Britain 1937–1946 (vol. 3), Macmillan, London.

Say Repudiated Say’s Law

This is an interesting point that is rarely mentioned by the apologists for Say’s law. Say did in fact acknowledge that downturns in the business cycle could happen. Baumol has noted:

“Say and other writers recognized that the zero value of the sum of excess demands, or supply creates its own demand (“Say’s identity”), may not hold in the short run. Say’s passage in his Letters to Malthus … even suggests an explanation – a desire to hoard or, as we would now put it, a temporary excess demand for money. But they thought the market would fairly quickly and automatically restore equilibrium” (Baumol 1999: 201).

Thomas Sowell, who is usually regarded as the scholarly expert on Say’s law*, also states that Say “admitted to Malthus that Say’s Law was ‘subject to some restrictions’ and to Sismondi that the fifth edition of his Traite contained a ‘concession’ to the latter’s theory of equilibrium income” (Sowell 2006: 31).

We can see that eventually Say partly (though not fully) understood what Keynes himself believed: changes in liquidity preference can cause insufficient demand and involuntary unemployment. Both Say and J. S. Mill in some writings even appear to have allowed that failures in aggregate demand can cause recession (Hollander 2005: 383-284).

While Say’s recantation is of historical interest, it actually does not provide good grounds in itself for dismissing Say’s law. Why? The reason is that it is possible in principle for Say’s law to be true, even if the original inventor of it later rejected it. E.g., suppose Copernicus rejected the heliocentric theory of the solar system in later life: such a hypothetic repudiation in itself does not in fact provide good evidence for rejection of the heliocentric theory. What matter are arguments and evidence. The evidence for the heliocentric theory is overwhelming. The evidence against Say’s law is also overwhelming:

“The Myth of Say’s Law,” October 7, 2010.

This is why it should be rejected.

NOTE
* N.B. I am not telling readers to believe this just because Sowell says so. So, to the various libertarian readers of my blog: don’t waste my time invoking the argument from authority fallacy; it’s irrelevant. Moreover, not all arguments from authority are necessarily fallacious at all.

BIBLIOGRAPHY
Baumol, W. J. 1999. “Retrospectives: Say’s Law,” Journal of Economic Perspectives 13.1: 195–204.

Hollander, S. 2005. “Review of Two Hundred Years of Say’s Law: Essays on Economic Theory’s Most Controversial Principle,” History of Political Economy 37.2: 382–385.

Sowell, T. 2006. On Classical Economics. Yale University Press, New Haven, Conn.