Wednesday, March 05, 2008

Why Isn't "New Keynesianism" Called "New Pigouvianism"?

Axel Leijonhufvud had at least this part right decades ago:
"That a model with wage rigidity as its main distinguishing feature should become widely accepted as crystallizing the experience of the unprecedented wage deflation of the Great Depression is one of the more curious aspects of the development of Keynesianism, comparable in this regard to the orthodox view that 'money is unimportant' - a conclusion presumably prompted by the worst banking debacle in U.S. history. The emphasis on the 'rigidity' of wages, which one finds in the 'new economics', reveals the judgement that wages did not fall enough in the early thirties. Keynes, by contrast, judged that they declined too much by far. It has been noted before that, to Keynes, wage rigidity was a policy recommendation and not a behavioral assumption." -- Axel Leijonhufvud (1976). "Keynes and the Keynesians: A Suggested Interpretation", American Economic Review, V. 57, N. 2: 401-410.
Lots can be argued about in Leijonhufvud's interpretation of Keynes, and Joan Robinson came to argue about it.


Anonymous said...

It does seem to be the case that Keynes's "General Theory" is one of the most influential unread books of the 20th century.

The wages issue is a case in point. I've read both von Hayek and libertarian marxist Paul Mattick assert that Keynes argued the exact opposite of what he actually did.

An Anarchist FAQ

Robert Vienneau said...

I don't know Paul Mattick. Are you referring to his 1955 essay "Marx and Keynes" or the 1969 book subtitled "The Limits of the Mixed Economy"?

He looks interesting, given, for example, three essays on Korsch (who is often grouped with Lukas) and two essays on Pannekoek who I only know from Lenin attack in "'Left-Wing' Communism, an Infantile Disorder". Maybe I should add him to my infinitely high to-read pile.

Anonymous said...

I can clear this up for you, since I think I cleared it up for myself a month ago.

The point is that Keynes sort of assumed that there was excess supply - who could argue that in the 30's? Hence, the multiplier and aggregate demand determine output. That is a part of Keynes and all Keynesians, and I think just about everyone now, and not Pigou.

Where they disagree is with *why* the supply curve is flat or upward sloping. This is where New Keynesians postulate sticky wages. So Pigouvianism is only half the story - the supply part. Pigou did not have the Keynesian demand part.

I will assert here that Keynes did not explain why our aggregate supply curve was upward sloping - because for him he did not have a P and Q supply for starters, but nonetheless he did say that at full employment increases in aggregate demand would result in price increases. So Keynes did not explain why the Hicksian or what we now call the aggregate supply was upward sloping.

Robert Vienneau said...

I prefer comments be at least pseudonymous.

And I don't think anonymous addresses Axel's point. Why does unemployment sometimes persist? Pre-Keynesian theory could point to price or wage stickiness or rigidity preventing equilibrium from being achieved. This was the sort of explanation Keynes specifically disavowed.