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The Keynesian Revolution and the Monetarist Counter-Revolution

from Asad Zaman

Before Keynes, Classical Economic Theory (CET) was based on three principles. The First Principle is that Unemployment is automatically eliminated by the free market. The Second Principle is the Quantity Theory of Money, which states that money supply makes no difference to real economic outcomes. The Third Principle is that private investors automatically find the right investment opportunities to create the best economic outcomes for future. The realities of the Great Depression of 1929 clashed violently with these three principles which hold only in an imaginary world bound by axioms and logic. Keynes followed scientific methodology to create a new theory which rejected all three axioms of CET, so that Keynesian theory would match the experienced realities of the Great Depression. This is the distinguishing feature of science, that theories are devised and changed in light of experience. In contrast, Greek axiomatic-logical methodology disregards conflict with observational evidence.  read more

  1. Paul Davidson
    June 5, 2016 at 11:10 pm

    The problem is worse than Zaman indicates. It was not only the University of Chicago that undermined Keynes’s revolution.

    Paul Samuelson’s Neoclassical Synthesis Keynesianism had the same microfoundations as classical economics and therefore undermined Keynes’s theory.

    In Fact, as I show in my latest book POST KEYNESIAN ECOMOMIC THEORY AND POLICY, Samuelson is quoted as insisting that the only cause of involuntary unemployment was the stickiness of the money wage and administered prices. Ergo, the Chicago school is correct if we had a competitive free market — instead of unions controlling wages, the government forcing a legal minimum wage floor, and monopolists controlling prices– full employment is the inevitable outcome of free markets!.

    The New Keynesians accepted Samuelson’s theory and added the rational expectations approach, where the future can be known with actuarial certainty — so that there is no uncertainty.

    When will economists go back to what was Keynes’s general theory — as given in my textbook POST KEYNEIAN MACROECONOMIC THEORY. But I guess I am too naïve to think that economic professors who call themselves “Keynesians” will throw over the false Samuelson “Keynesianism” theory and learn and teach the students of today the correct General Theory of Keynes an its implication for the global economy we are in — and the Great Recession which policy makers can not figure out how to end!

    • Guilherme da Fonseca-Statter
      June 6, 2016 at 10:55 am

      Yes… Why not just make the reading of «The General Theory» (and, just for measure «Das Kapital» and «The Great Transfoprmation» and…) mandatory reading and subject matters of discussion… But then the discussion of acquired knowledge is a dangerous exercise…

    • June 7, 2016 at 12:03 am

      As Keynes once asided to Joan Robinson, “I am NOT a Keynesian.” He was referring to having met with those who claimed to be following in his footsteps, like Samuelson.

  2. blocke the
    June 6, 2016 at 6:24 am

    These are all “penetrating glimpses into the obvious,” please shut up your opponents.

    • June 7, 2016 at 8:56 am

      There are two surprises here:
      A: The sharp decline in wealth share of top 0.1% from 35% to 5% from 1930 to 1980 surprised me, I did not think that Financial Regulation and Full Employment would have such a drastic effect on fortunes of the super-rich
      B: The completeness of the monetarist counter-revolution is again very surprising — how can such OBVIOUSLY FALSE theories hold sway and become dominant even after the truth was known, and the rapidity with which Keynesian economics was sent into exile. How nearly obviously lies can be made to replace sound and valid theories EVEN within the academia who are intellectual leaders given the responsibility to safeguard the truth.
      C: We must study the strategies used by the Monetarists to shut up their opponents since they have proven eminently successful. These strategies are the subject matter of the Alkire-Ritchie paper on WINNING IDEAS, cited in the post.

  3. June 6, 2016 at 10:21 am

    Keynes, the methodologist
    Comment on Asad Zaman on ‘The Keynesian Revolution and the Monetarist Counter-Revolution’

    Keynes’s lasting scientific contribution relates to methodology. He spoke it out loud, so that every fellow economist could hear it: Throw over the classical axioms and put economics on new foundations: “For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises.” (1973, p. xxi)

    With the revolutionary shift in mathematics and physics from Euclidean to non-Euclidean axiomatics (Hilbert, Einstein) right before his eyes, Keynes called his fellow economists to arms. “The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight — as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.” (1973, p. 16)

    As Asad Zaman puts it: “Keynes followed scientific methodology to create a new theory which rejected all three axioms of CET [Classical Economic Theory], so that Keynesian theory would match the experienced realities of the Great Depression. This is the distinguishing feature of science, that theories are devised and changed in light of experience.” (See intro)

    To change a theory means to change the axiomatic foundations. This is what a paradigm shift is all about. Consequently, Keynes formulated the foundational syllogism of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income – consumption. Therefore saving = investment.” (1973, p. 63)

    This elementary two-liner, though, is conceptually and logically defective because Keynes did not come to grips with profit and therefore “discarded the draft chapter dealing with it.” (Tómasson et al., 2010, p. 12). As a result, the whole Post Keynesian theoretical superstructure is false (2011; 2014).

    Because Keynes did not get the macrofoundations right the Keynesian Revolution ultimately failed. Just like the Walrasians, Keynes had no idea of the fundamental concepts of economics, viz. profit and income.

    In the neoclassical synthesis of Samuelson, Keynes’s new ‘non-Euclidean axioms’ and the old ‘Euclidean axioms’ of marginalism were cobbled together. Textbooks consisted of two well-balanced halves: micro and macro. Needless to emphasize that both halves did not fit together. Economic textbooks are blatantly inconsistent since 1947.

    Gradually, the majority of economists fell entirely back to the pre-Keynesian formal foundations of marginalism. As Krugman put it “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

    It is pretty obvious to anyone with a modicum of scientific instinct that the axiomatic starting point of the neoclassical paradigm is methodologically unacceptable (2013). By sticking to the obsolete microfoundations Orthodoxy violates scientific standards that hold since the ancient Greeks introduced the axiomatic-deductive methodology.

    As Morgenstern reminded economists already back in 1941: “In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (1941, pp. 369-370)

    Orthodox economists will burn in scientific hell because they stick to microfoundations that are false since Jevons/Walras/Menger. Post Keynesian economists will burn in scientific hell because they stick to macrofoundations that are false since Keynes.

    The axiomatic foundations of economics are provably false since more than 140 years. Because of this, economic policy advice of BOTH Walrasians AND Keynesians has no sound scientific foundation (2015).

    Egmont Kakarot-Handtke

    Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL http://ssrn.com/abstract=1966438.
    Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like
    an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL http://ssrn.com/abstract=2207598.
    Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
    Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
    Keynes, J. M. (1973). The General Theory of Employment Interest and Money. London, Basingstoke: Macmillan.
    Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL http://www.jstor.org/stable/1824735.
    Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34. URL

    • June 6, 2016 at 7:36 pm

      For some strange reason (perhaps not understanding the subtleties of English), still lying about page 63, I see. When someone rejects a falsehood and gets nearer the truth, it is hardly fair to emphasise their new theory is still not perfectly true (as if anything could be): especially when the earlier form led to catastrophe and the later form made life better for everyone except dogs-in-the-manger while it was still taken seriously. I can understand your frustration about Keynes having failed to bite the bullet and deal with the profiteering which empowers capitalist government, but his prime aim was that practical matter of resolving the catastrophe, which he could hardly achieve by denigrating those who pulled the political strings.

      Let me try putting p.63 to bed once and for all. Axioms aren’t just about objective structure, they need to include logical definitions of how we are to relate the structures to reality and mathematicaldefinitions of how operational symbols are to be interpreted. Thus Greek logic settled on the family tree relationship whereby a child truly is (or is not) the son of his apparent father, or more generally a whole is the sum of its parts; but this last does not account for mathematical relationships concerning motion, which can be in opposite or completely different (sideways) directions, nor Russell’s seemingly paradoxicial case of the set of all sets, where the relationship of differences of type with more or less general rules first became apparent, the continuous case amounting to Keynes’s non-Euclidian geometry. Keynes rejected the orthodox argument axiomatically presuming sums of money, his problem being money going from the poor to the rich when the need was vice versa. He also introduced a difference of type into his axiom set. His observations as a very successful stockbroker managing the endowment of Cambridge University was that stock markets were not dealing with real objects but with uncertainty, so if you like there was another factor which the orthodox axioms were not accounting for, i.e. uncertainty and the need for insurance in each phase of the circulation of money, i.e. sufficient liquidity and collateral in the forms of property, produce and continuing entitlement to credit; this last being, I suppose, what you call profit.

      Try what (in idiomatic English) we call “reading between the lines”.

  4. June 7, 2016 at 11:47 am

    Politics or Science? Decide and act accordingly
    Comment on Asad Zaman on ‘The Keynesian Revolution and the Monetarist Counter-Revolution’

    Economics consists since Adam Smith of political and theoretical economics. It is, though, pretty obvious that the political sphere is ontologically different from the scientific sphere and because of this it is of utmost importance to separate the two. Yet, it is an outstanding characteristic of the representative economist to persistently flip-flop between them.

    This lack of focus guarantees all-round confusion in both the scientific and the political sphere. Because of this, the representative economist has become the very epitome of the confused confuser (2013). This mental state materializes in four sects: Walrasians, Keynesians, Marxians, Austrians. So, every student of economics is faced with the scientific Ur-question: “There are always many different opinions and conventions concerning any one problem or subject-matter…. This shows that they are not all true. For if they conflict, then at best only one of them can be true.” (Popper, 1994, p. 39)

    The fact of the matter is that none is true. As a consequence, economic policy advice since Adam Smith has no sound scientific foundation. Yet: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30)

    Walrasianism, Keynesianism, Marxianism, Austrianism is PROVABLY false and consists of nothing more than educated common sense and personal opinion. Economics is a scientific failure, there is no valid theoretical economics but only political economics, that is, agenda pushing and propaganda.

    This point gets entirely lost in actual political discussions because the criterion for political economics is whether or not it fits an agenda and NOT whether the underlying theory is true or false. As soon as political economics dominates the very task of the theoretical economist — to explain how the monetary economy works — is forgotten and the well-defined scientific standards of material and formal consistency are ignored.

    This happened to Asad Zaman. His focus is not on whether a theory is true (= materially and formally consistent) or false but on propaganda strategies: “We must study the strategies used by the Monetarists to shut up their opponents since they have proven eminently successful. These strategies are the subject matter of the Alkire-Ritchie paper on WINNING IDEAS, cited in the post.” (See post of Jun 7)

    Both, orthodox and heterodox economists have to be reminded of what science implies and why politics and science have to be strictly separated: “A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision.” (Mill, 2006, p. 950)

    The history of political economics can be summarized as perpetual violation of scientific standards and as an abject failure. Not one of the political economists and agenda pushers from Smith, Ricardo, Marx to Keynes, Hayek, Friedman, Krugman or Varoufakis will in the final assessment be accepted as scientist.

    Politics and science are ontologically different. Because of this, an analogue to the Pauli Exclusion Principle* strictly applies, that is, one person cannot be both a politician and a scientist. The economist who sees and uses economic theory as a means to promote an agenda is out of science. This is the very first principle of methodology and it holds since the ancient Greeks in the genuine sciences. However, it has yet to take root in the so-called social sciences, first and foremost in economics.

    Both, the Keynesian Revolution and the Monetarist Counter-Revolution were scientific non-events.

    Egmont Kakarot-Handtke

    Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL http://ssrn.com/abstract=2207598.
    Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected View of the Principles of Evidence and the Methods of Scientific Investigation, volume 8 of Collected Works of John Stuart Mill. Indianapolis, IN: Liberty Fund.
    Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality. London, New York, NY: Routledge.
    Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.

    * Wikipedia https://en.wikipedia.org/wiki/Pauli_exclusion_principle

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