Home > Uncategorized > Good reasons to become a Keynesian

Good reasons to become a Keynesian

from Lars Syll

Until [2008], when the banking industry came crashing down and depression loomed for the first time in my lifetime, I had never thought to read The General Theory of Employment, Interest, and Money, despite my interest in economics … I had heard that it was a very difficult book and that the book had been refuted by Milton Friedman, though he admired Keynes’s earlier work on monetarism. I would not have been surprised by, or inclined to challenge, the claim made in 1992 by Gregory Mankiw, a prominent macroeconomist at Harvard, that “after fifty years of additional progress in economic science, The General Theory is an outdated book. . . . We are in a much better position than Keynes was to figure out how the economy works.”

adaWe have learned since [2008] that the present generation of economists has not figured out how the economy works …

Baffled by the profession’s disarray, I decided I had better read The General Theory. Having done so, I have concluded that, despite its antiquity, it is the best guide we have to the crisis …

It is an especially difficult read for present-day academic economists, because it is based on a conception of economics remote from theirs. This is what made the book seem “outdated” to Mankiw — and has made it, indeed, a largely unread classic … The dominant conception of economics today, and one that has guided my own academic work in the economics of law, is that economics is the study of rational choice … Keynes wanted to be realistic about decision-making rather than explore how far an economist could get by assuming that people really do base decisions on some approximation to cost-benefit analysis …

Economists may have forgotten The General Theory and moved on, but economics has not outgrown it, or the informal mode of argument that it exemplifies, which can illuminate nooks and crannies that are closed to mathematics. Keynes’s masterpiece is many things, but “outdated” it is not.

Richard Posne

  1. April 3, 2020 at 12:22 pm

    I would add that Keynes’ General Theory has another advantage. It is well confirmed empirically by data, and so are some more recent developments of the theory. This is shown in detail in a paper of mine: Ideology and Science in Economic Theory, which has been submitted to Economic Thought and is at the moment available in its Open Peer Review Forum. Donald Gillies

  2. ghholtham
    April 3, 2020 at 4:03 pm

    Herbert Simon from the 1940s onwards insisted that economists had to look at how people actually made decisions under uncertainty rather than proceed by simply assuming that whatever happened was an equilibrium reflecting the best possible choices. Simon got the Nobel prize for economics in 1978 and has subsequently been largely neglected. That was when economics missed the boat. The sad thing is you can do a course in economics now and not be asked to read anything by Kalecki, Simon or Minsky, the three guys who between them can tell you what’s going on.

    • Meta Capitalism
      April 3, 2020 at 11:51 pm

      Interesting Gerald. I wonder if Müller-Kademann is like Kalecki, Simon, and Minsky?

      Assuming, for example, that humans have been faced with uncertainty ever since they have populated the earth, humans probably have developed efficient strategies to cope with it. It is therefore a matter of taste to refer to these empirical identifications as an evolutionary approach. Researchers, in turn, uncover those strategies and, potentially, improve upon them. (Müller-Kademann 2019, 26)
      Without claiming completeness, the following list provides some of them. For reasons that will be explained below, we will call this list “decision enabling factors”: (Müller-Kademann 2019, 26)
      • emotions (Damasio, 1995; 2012)
      • anchor values (Kahneman, Schkade and Sunstein, 1998)
      • endowment (Tversky and Griffin, 1991)
      • institutions
      • belief
      • credible information (Druckman, 2001)
      • status quo (Samuelson and Zeckhauser, 1988)
      • heuristics (Goldstein and Gigerenzer, 2002)
      • uncertainty aversion (Ellsberg, 1961)
      • inattention (Bacchetta and van Wincoop, 2005)
      • deliberate ignorance
      • science
      • whim (Keynes, 1936, pp. 162–163)
      • sentiment (Keynes, 1936, pp. 162–163)
      • chance (Keynes, 1936, pp. 162–163)
      • prejudice (Müller-Kademann 2019, 26-27)
      In the presence of uncertainty these factors are not merely “explainawaytions” (Thaler, 2016, p. 1582) or stains on an otherwise-perfect homo economicus. Rather, they are indispensable tools for making decisions in most circumstances because they help to bridge the gap between the not-knowable outcome of a certain choice and its utility for the individual. (Müller-Kademann 2019, 27)

      Battling Covid-19 like symptoms so my reading speed has decreased substantially. But what I have read I agree with. Humans are not machines and cannot be copied or modeled as algorithms (reminds me of Lars egodictiy argument); we have minds and we act creatively and unpredictably.

  3. ghholtham
    April 4, 2020 at 6:03 pm

    Meta, We agree that there is no substitute for empirical research. You can’t intuit behaviour from an armchair, even an armchair in Chicago. You can overdo the argument about unpredictability though. Given a knowledge of context, which is important, the behaviour of groups of people is not entirely unpredictable. Individuals may be idiosyncratic but there are usually tendencies in a population that the law of large numbers helps to expose. Shout “fire” indoors and perhaps not everyone will look for the exit but most people will. Still, we all agree that you have to study what certain people do in particular situations to develop useful models. Just assuming they act “as if” they can see the future and solve optimal control problems in their head doesn’t get us anywhere interesting. People often take on the values of an organisation, for example, and serve it in a balance with their own interests, so you can’t ignore organisational structures..

  4. Yok
    April 4, 2020 at 11:24 pm

    Refuted by Friedman! That’s rich.

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