Tuesday, January 30, 2007

Bastard Keynesianism From Krugman

Consider this claim:
"Until John Maynard Keynes published The General Theory of Employment, Interest, and Money in 1936, economics - at least in the English-speaking world - was completely dominated by free-market orthodoxy. Heresies would occasionally pop up, but they were always suppressed. Classical economics, wrote Keynes in 1936, 'conquered England as completely as the Holy Inquisition conquered Spain.' And classical economics said that the answer to almost all problems was to let the forces of supply and demand do their job." -- Paul Krugman
A lot of historians of economics have been discussing this claim, under a thread titled "QUERY - All pre-1936 economists were laissez-faire advocates".

I want to consider why Krugman understates the impact of the General Theory, if you read this as a statement about policy. In Britain, some economists certainly opposed both the building of Keynesian institutions and fiscal countercyclical policy, as later promoted, for example, by Abba Lerner. As such opponents, I cite Hayek and Robbins at the London School of Economics and the "Treasury view". I also think that many economists were arguing for something like Keynesian policy.

But I think these "Keynesian" advocates were not basing themselves on a theory strongly integrated with the central neoclassical (Marshallian?) price theory. For example, American Institutionalists of the time could be accused of advocating "measurement without theory", as Koopmans later put it. And those, such as some Keynes' British colleagues, looking into business cycle theory or monetary theory could be accused of ad-hoc short term theory.

A Post Keynesian perspective is that Keynes was addressing this lack of theoretical support for pragmatic policy more than the lack of reasonable policy itself. He says so himself in the second sentence of the preface:
"But [this book's] main purpose is to deal with difficult questions of theory, and only in the second place with the applications of this theory to practice." - John Maynard Keynes, The General Theory of Employment, Interest, and Money, p. v
I find this perspective lacking in the HES discussion so far. (I do not want to argue, in this place, against any argument that, for example, (early) Joan Robinson is a source of what she later labeled "bastard Keynesianism.")

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