Sunday, May 11, 2014

Where Gardiner Means went Wrong

It was in his interpretation of Keynes’ General Theory, and this is clear in Means’ brief article “Which was the True Keynesian Theory of Employment?” (Challenge 19.3 [1976]: 61–63).

When the General Theory of Employment, Interest and Money (1936) was published, Gardiner C. Means – the originator of the administered price thesis – was unclear about what Keynes’ fundamental arguments against the neoclassical system actually were, and whether the theory depended on inflexible wages and prices.

This is illustrated by a fascinating piece of forgotten history told by Means himself: his visit to John Maynard Keynes in July 1939:
“In the summer of 1939, on my way to a holiday in Norway, I made it a point to visit Keynes with the specific purpose of asking him to what extent his explanation of persistent unemployment rested on an assumption of wage-rate or price inflexibility. His answer was a categorical: ‘Not at all.’ I asked the question in several different ways in order to make sure there was no failure of minds to meet and the answer was always the same. I said, ‘Suppose that prices and wage-rates met the classical assumption of perfect flexibility so that, if there were excessive unemployment, the price-wage level would fall frictionlessly. Then with the nominal money stock remaining constant, wouldn’t the rise in the real value of the money stock create added demand which would tend to absorb unemployed workers?’ But still the answer was no. Once interest rates had fallen to their limit there would be no further corrective. We were in complete agreement that, in practice, neither prices nor wage-rates were as flexible as classical theory assumed, but he insisted that his theory of unemployment did not depend at all on this fact.” (Means 1976: 61–62).
Despite these emphatic statements by Keynes, Lee (2000: 403) notes that Means was dissatisfied with Keynes’ replies (see also Ware 1992 for another account of the meeting).

Later, Means (1976) defended the neoclassical synthesis interpretation of the General Theory contrary to the explicit answers Keynes had given to him in 1939, because Means continued to believe in the efficacy of the real balances effect (Means 1976: 63).

Had Means properly read and understood Chapter 19 of the General Theory, he would not have made this error.

What also emerges from this article is that Means himself sent a draft of his famous Senate document “Industrial Prices and their Relative Flexibility” (1935) to Keynes, and Keynes even asked him to publish a version of this in the Economic Journal (of which Keynes was the editor), though Means was unable to do this (Means 1976: 61).

Keynes, then, must have been aware of the empirical evidence on administered prices by the mid-1930s, and he was explicitly aware of them in his work on buffer stocks in 1938 (Keynes 1938: 452–453).

Keynes, J. M. 1938. “The Policy of Government Storage of Foodstuffs and Raw Materials,” Economic Journal 48.191: 449–460.

Lee, F. 2000. “Gardiner C. Means (1896–1988),” in Philip Arestis and Malcolm Sawyer (eds.), A Biographical Dictionary of Dissenting Economists (2nd edn.), Edward Elgar, Cheltenham, UK and Northampton, MA. 399–405.

Means, Gardiner C. 1935. “Industrial Prices and their Relative Flexibility,” Senate Document no 13. 74th Congress, 1st Session, 17 January.

Means, Gardiner C. 1976. “Which was the True Keynesian Theory of Employment?,” Challenge 19.3 (July/August): 61–63.

Ware, C. 1992. “Academic Resistance to Administered Prices,” in Frederic S. Lee and Warren J. Samuels (eds.), The Heterodox Economics of Gardiner C. Means: A Collection. M.E. Sharpe, Armonk, N.Y. 337–348.

1 comment:

  1. Very interesting. But yes, it really must be emphasised again and again that Keynes' theory is not a statement that wages and prices are inflexible and, were they flexible, we would see the markets clear. It is surprising that an Institutionalist couldn't appreciate this given that one of the key points of Keynes' theory is that the assumption of wage and price flexibility clearing markets only exists in a model that makes static rather than dynamic assumptions.