Home > Uncategorized > Secular stagnation and failed interpretations​ of Keynes

Secular stagnation and failed interpretations​ of Keynes

from Lars Syll

Commenting on the Stiglitz-Summers debate on secular stagnation, Roger Farmer writes:

nk-2-2We cannot continue to make unfounded assertions about economic policy using the failed interpretation of the General Theory that evolved from John Hicks’ attempt to reconcile Keynes with the classics. The current manifestation of that approach is so-called New Keynesian Economics, which Summers himself has rightly rejected because it is inconsistent with secular stagnation. But it is not enough to assert that secular stagnation is possible. It is time to confront alternative theories of secular stagnation with empirical evidence, as I have done. The assertion that money wages are downwardly rigid is not, in my view, a credible explanation of persistent unemployment. Nor was it a credible explanation for Keynes, who asserted that his theory did not rely on the assumption of rigid wages …

In my work, expectations – or so-called animal spirits – are a new and independent fundamental that determines the steady-state unemployment rate. When we feel rich, we are rich. And if animal spirits are indeed fundamental, it becomes important to understand the factors that determine swings in confidence.

If a large dose of expansionary fiscal policy is not the answer, what is? My response is that the right way to respond to financial crises is with policies that restore the value of private assets. And the right way to prevent financial crises in the first place is to intervene in the financial markets to moderate swings in asset values and to head off recessions before they happen.

Maintaining that economics is a science in the ‘true knowledge’ business, I cannot but concur with Farmer. We have to remain skeptical of the pretences and aspirations of ‘New Keynesian’ macroeconomics. So far, I cannot really see that it has yielded very much in terms of realist and relevant economic knowledge. And there’s nothing new or Keynesian about it. 

counterfeit‘New Keynesianism’ doesn’t have its roots in Keynes. It has its intellectual roots in Paul Samuelson’s — partly following in John Hicks’ footsteps — ill-founded ‘neoclassical synthesis’ project, whereby he thought he could save the ‘classical’ view of the market economy as a (long run) self-regulating market clearing equilibrium mechanism, by adding some (short run) frictions and rigidities in the form of sticky wages and prices.

But — putting a sticky-price lipstick on the ‘classical’ pig sure won’t do. The ‘New Keynesian’ pig is still neither Keynesian nor new.

The rather one-sided emphasis of usefulness and its concomitant instrumentalist justification cannot hide that ‘New Keynesians’ cannot give supportive evidence for their considering it fruitful to analyze macroeconomic structures and events as the aggregated result of optimizing representative actors. After having analyzed some of its ontological and epistemological foundations, yours truly cannot but conclude that ‘New Keynesian’ macroeconomics, on the whole,​ has not delivered anything else than ‘as if’ unreal and irrelevant models.

The purported strength of New Classical and ‘New Keynesian’ macroeconomics is that they have a firm anchorage in preference-based microeconomics, and especially the decisions taken by inter-temporal utility maximizing ‘forward-looking’ individuals.

To some of us, however, this has come at too high a price. The almost quasi-religious insistence that macroeconomics has to have microfoundations – without ever presenting neither ontological nor epistemological justifications for this claim – has put a blind eye to the weakness of the whole enterprise of trying to depict a complex economy based on an all-embracing representative actor equipped with superhuman knowledge, forecasting abilities and forward-looking rational expectations.

And then, of course, there is that weird view on unemployment that makes you wonder on which planet those ‘New Keynesians’ live …

  1. Helen Sakho
    September 8, 2018 at 12:23 am

    Is it my lack of technical insight or is this a double posting dear Lars?

  2. September 8, 2018 at 10:46 am

    I agree with the above, except that I think that macroeconomics should have microfoundations – just not the conventional ones. I would base such foundations on the notion of habits adapted to experience, a bit like the theory of learning in games. As a start, I would even go along with the idea of ‘rational agents’, provided that we allow such agents to take account of radical uncertainty rather than assuming that all the significant actors are blind to it. They clearly aren’t! Some actors do learn from experience, hence the mess we are in. (My own view is that things would go better if economists learnt from experience, hence my blog. ;-)

    • Frank Salter
      September 8, 2018 at 12:12 pm

      The first principles of production theory are the definitions of productivity and of technical progress. (They might be described as micro-foundations) Integration of these relationships provides the theoretical description of production possibilities. The description fits the empirical facts.

      It is impossible to develop an analysis based on what people might do next. One example, which demonstrates this, has been when economies have been switched from peace to war. How could that have been predicted. But even in such an extreme case, the abstract description of production will still be true.

      • September 8, 2018 at 6:48 pm

        We seem to agree that any reasonable micro-founded macro theory is inconsistent with the neoclassical notion of unconditional ‘prediction’, and that predictions based on no substantive changes are of little use, except perhaps in the short term, e.g. ‘until the next war’ or ‘until the next financial crisis’. You deduce this from production theory. I take it from Keynes and Turing as a general observation on ’emergence’ and ‘critical instabilities’ (implying radical uncertainty) in stochastic dynamic systems. I would perhaps need to make this more concrete as I noted above.

  3. September 8, 2018 at 1:53 pm

    Is Lars Syll thinking that, everything goes well, if we get a correct, right interpretation of John Maynard Keynes? Did Lars really studied The General Theory? If he did, I suppose he should have acknowledged that there are full of contradictions in Keynes’s writings. Before attacking the New Keynesians that they have mistakenly interpreted Keynes, it is necessary to save the rational core of The General Theory and discard many other confusing assertions of Keynes.

  4. Helen Sakho
    September 8, 2018 at 2:35 pm

    In the spirit of democracy, we really ought to let Lars answer for himself?

  5. September 8, 2018 at 4:54 pm

    1 Did Lars Syll study GT? Yes. Again and again for more than 40 years.
    2 Is Keynes — and GT — always right? No. Certainly not. Science is not religion.
    3 Are there contradictions in Keynes’ writings? Yes. And they are well-known to every serious Keynes-scholar.
    4 Is it intellectually honest to call something ‘New Keynesian’ when it is neither new nor Keynesian? No.
    5 Can we learn important things about how our economy works by studying Keynes? Yes. As we can by studying the works of people like Marx, Minsky, Robinson, Kalecki, Åkerman, Lerner, Galbraith, Shiller et al.

    • September 10, 2018 at 5:23 pm

      Thank you for this rare reply. If there are contradictions in Keynes’s writings, let us know your anatomy of Keynes. Please present us the core theory that you think will be the starting point of the Reformation.

  6. Edward Ross
    September 8, 2018 at 11:21 pm

    As usual a sensible precise answer from Helen Sakho.
    For my part as an eighty +plus citizen what I do know from my experience backed by the stories of my elders experience, is that even if they had no education they were aware that Keynes ideas were what played a large part in lifting them out of the great depression.

    What I have always found interesting is that those old friends who were still alive in the 1970s and eighties were deeply concerned about the probability of another great depression unless Keynes warnings of (1933) were heeded.

    “He believed the evidence showed that free trade , the international mobility of capitalism and foreign ownership of national assets were more likely to promote war than peace Keynes(1933)” Ted Wheelwright The Complicity of Think-Tanks cited in The Human costs of Managerialism1995edit Stuart Rees and Gordon Rodley. Pluto press

    Here in my view acknowledging the above statement of Keynes is far more important than arguing about personal interpretation of his general theory. Ted.

  7. paul davidson
    September 9, 2018 at 7:22 pm

    My article entiled ” rational expectations: a fallacious foundation for crucial decision making” which demonstrated that the Keynes concept of uncertainty involved non ergodic processes convinced Hicks that his ISLM model of Keynes’ general theory was wrong. I then encouraged Hicks to write on article entitled “ISLM: An Explanation” which was published in the JOURNAL OF POST KEYNESIAN ECONOMICS in which Hicks admitted ISLM was not Keynes and nonergodic processes indicated uncertainty was central to THE GENERAL THEORY

    • September 10, 2018 at 12:39 pm

      Paul, If life were totally non-ergodic then no kind of induction would be useful. But ‘clearly’ life is ‘sort of kind of’ partially ergodic, since conventional rationality (including the ignoring of radical uncertainty) sort of kind of works for some purposes some times.

      Can you point me to an accessible and credible account of the ‘dynamics’ of life and the implications for reasoning. Keynes was commended by Whitehead, Russell, Turing and Good, but is hardly ‘accessible’. A positive yet widely applicable theory of induction might be a good start.

  8. paul davidson
    September 10, 2018 at 10:09 pm

    Keynes wrote an article entitled “Mr Tinbergen;s methodology” — was not applicable to the study of economics over time. This means that econometric models based on time series data are not very useful in predicting the quantitative value of GNP and other economic variables in the future

  9. September 16, 2018 at 11:56 am

    Theoretical frameworks are good things, they say. According to advocates these frameworks serve such purposes as,

    • Identifies the concepts that describes a phenomena of interest
    • Clearly delineates the variables for any study of these phenomena
    • Directs the operational definitions of the variables
    • Provides direction for data analysis

    Among the many problems such frameworks and purposes create these standout,

    • What’s the source of the concepts of interest? I suggest it is observation, or in the case of less scrupulous scientists random guesses.
    • “Variables” as areas of concern for study are chosen before even one “official” observation takes place
    • Similarly, “variables” are defined prior to observation
    • Data analysis approaches (e.g., statistics, tables, mathematics) are chosen prior to any observation

    The common theme here is “prior to observation.” This creates the very real risk of obscuring the subjects of research. The actor-networks that make up societies and explain how each succeeds or fails.

    • Craig
      September 16, 2018 at 6:08 pm

      The four most important characteristics of what will most likely become a good new theory are:

      1) Does it actually consider conceptual opposition

      2) What is it willing to thoughtfully dispense with like for instance today, private finance’s money creating ability. In other words how radical is it?

      3) Does it have paradigm perception via historical examination of actual paradigm changes

      4) What are its philosophical bona fides

      • September 17, 2018 at 6:13 am

        Sapiens creates things and people, up to and including entire societies and world communities. If social science has any purpose it is the study of this work and its description to make it as visible to all as possible. Thus, providing the feedback for changes in structure or action.

        Such work always involves opposition, conceptual and otherwise. Movement down blind alleys. Revelation of the “schools of thought,” paradigms, or other principles humans create to explain and control their work. And unending efforts at justification. Social scientists try to observe all these as accurately as they can, but the social scientists do not either support or give preferential treatment to one of these over the other options being observed. It’s not possible for social scientists to observe with unfettered neutrality. But they must attempt to remain self-aware enough that they don’t in any major way misrepresent the subjects of their work. Wherever and in whatever direction that work takes social scientists.

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