Keynes is Dead, Long Live Keynesian Economics

The 21 April, 2011 marked the 65th anniversary of Keynes’ death. That is not a happy anniversary for me, as I regard Keynes as one of the greatest economists of all time, and his true legacy to be modern Post Keynesian economics, with Modern Monetary Theory/Chartalism firmly within the Post Keynesian family (though others might disagree with the latter assertion).

Keynes died of a heart attack on 21 April, 1946 at the age of 62, not long after his return from America. Keynes was survived by his wife Lydia Lopokova, a Russian ballerina, who actually lived until 1981. Keynes’ passing was a few years after he had attended the Bretton Woods conference in 1944, at which the world’s post-WWII international monetary system was organised. The International Monetary Fund (IMF) was one of the institutions that emerged from the transactions at Bretton Woods.

How interesting it is, then, to see the IMF’s managing director Dominique Strauss-Kahn paying lip service to Keynes and his ideas in a recent speech, even while the IMF continues to wreak neoliberal havoc on many of the world’s economies (see Mark Weisbrot, “Emerging out of the IMF’s Shadow,” Guardian.co.uk, 18 April, 2011 and “The Ghost of Keynes at the IMF?, Lofty Rhetoric, Hollow Policies”, Counterpunch, April 19, 2011).

It is rather astonishing to see Strauss-Kahn making statements like this:

“At the end of his magnum opus, The General Theory, Keynes stated the following: “The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes” ….

“Let me start with employment. Just as we managed to tame inflation in the 1980s, this decade should be the decade that takes full employment seriously once again ….

Collective bargaining rights are important, especially in an environment of stagnating real wages….”

All true, but I don’t expect a conversion to Keynesian truth at the IMF board any time soon, though there have of course been some promising changes at the IMF recently, not least of all the recognition that discretionary capital controls are now needed in developing and even some developed countries to control destructive short-term capital flows.

But the real test of whether Keynes is still relevant is what happened during the global financial crisis and world-wide recession in 2008–2009. Faced with the plunge into global depression, most governments returned to the tried and tested Keynesian medicine of fiscal stimulus. That policy worked well, but more stimulus was, and is now, required.

It is sad to note the anniversary of Keynes’ death, but his economics is alive and well, as is the struggle to return us to Keynesian full employment.

Keynes might be dead, but long live Keynesian economics.

Hayek and Keynes: Not So Far Apart?

I see some abuse directed at Keynes in the comments on the last post. Not all Austrians are so hostile in their assessment of Keynes, however.

Consider this remarkably fair-minded post by Mario Rizzo:

“Lord Keynes: A Hayekian Appreciation,” ThinkMarkets, March 31, 2009.

Rizzo takes up comments made by Ludwig Lachmann in “John Maynard Keynes: A View from an Austrian Window” (South African Journal of Economics 51 [1983]: 253–260):

“In the field of methodology Keynes and the Austrians agree that economics is a social science to which methods that have proved successful in the natural sciences should not be applied without careful inspection, and that, in particular, all attempts to ‘give numerical values’ to the parameters of economic models ignore the essential meaning of economic theory. It is hardly surprising that even here we find differences of accent and perspective, but, with the area of agreement so broad and significant, they do not amount to much ….

Keynes concurs with Hayek’s misgivings about numerical values. In his letter to Harrod of 16 July 1938 we read ‘In chemistry and physics and other natural sciences the object of experiment is to fill in the actual values of the various quantities and factors appearing in an equation or a formula; and the work when done is once and for all. In economics that is not the case, and to convert a model into a quantitative formula is to destroy its usefulness as an instrument of thought’ ….

But Keynes’s mind also moves in another direction. ‘I also want to emphasize strongly the point about economics being a moral science. I mentioned before that it deals with introspection and with values. I might have added that it deals with motives, expectations, psychological uncertainties. One has to be constantly on guard against treating the material as constant and homogeneous. It is as though the fall of the apple to the ground depended on the apple’s motives, on whether it is worthwhile falling to the ground, and whether the ground wanted the apple to fall, and on mistaken calculations on the part of the apple as to how far it was from the centre of the earth’ (ibid, p. 300). Keynes sees in social facts manifestations of the human mind. While to Hayek it is the complexity of these facts, their multitude and diversity, that defies the attribution of numerical values to social concepts, to Keynes it is their mental character (‘mistaken calculations on the part of the apple’) that does so. Rather to the surprise of some of us, Keynes emerges as being more deeply committed to subjectivism than is his Austrian opponent” (Lachmann 1983: 256).

It might come as a surprise to the various Austrian sympathizers (who think Austrian economics begins and ends with Mises and Rothbard) that their school includes the Lachmann wing and some of the moderate subjectivists who are able to appreciate Keynes, rather than engage in endless abuse.

As I have pointed out before, Post Keynesianism has some affinities (but also major differences) with the radical subjectivist Austrian economics of Ludwig Lachmann (and Austrians influenced by him like O’Driscoll and Rizzo). You might think that this would be a starting point for building bridges, and O’Driscoll and Rizzo once in fact said so (see The Economics of Time and Ignorance, Oxford, UK, 1985, p. 9). I personally regard ThinkMarkets as the best Austrian blog on the net, miles ahead of the others.

But then I find the ignorant “pop” Austrians – ignorant even of the intellectual diversity of the Austrian school – who do nothing but foam at the mouth at the mention of Keynes’ name.

This ignorance extends to the inability to understand that the debate between Austrians and Keynes and his followers was intense in the 1930s and 1940s, and the Austrians lost that debate. The notion that Keynes was ignorant of Hayek or Austrian ideas is nonsense.