This is a correspondence that began on the Societies for the History of Economics (SHOE) website that originally dealt with wages and productivity. But as the thread developed, the issues drifted over towards Keynesian economics, and not I emphasise because of anything I had contributed. So on November 15, there was the following contribution which began with a quote from something that had been written by James Ahiakpor:
It was with much amusement that I read Michael Ambrosi’s comments. Amusement because I remain puzzled as to why some historians of economic thought can’t seem to shed their Keynesian beliefs in the face of analysis clearly contradicting them … I’m getting to the point of accepting that some people just can’t be helped with arguments or clarifications. It’s just a waste of time. Would that I did not encounter them in the academic refereeing process …
Following which the following question was asked:
There are ex-Marxists and ex-Keynesians: where are the ex-Austrians?
So on the very same day, I wrote the following response:
Rob asks an interesting question which I think is worth a thread of its own:
‘There are ex-Marxists and ex-Keynesians: where are the ex-Austrians?’
Austrian economics was one strand of pre-Keynesian classical economic theory but an important strand today since it is the only strand that survived the Keynesian Revolution. I don’t classify myself as an Austrian but as a classical economist which gives me an overlap of around 75% with the Austrian School and about 10% with modern neoclassical macro. And there is almost nothing in Mises and Hayek I ever find myself in serious disagreement with.
There are, no doubt, ex-Austrians but I suspect none of them end up in any of the modern strands of economic theory. I often mention Mill but a more modern and accessible version of the classical school can be found in almost any text pre-1930. My favourite for a variety of reasons is Henry Clay’s 1916 Economics: an Introduction for the General Reader but there are many to choose from. Haberler’s Prosperity and Depression published in 1937 moves you closer to the depth and breadth of the classical theory of the cycle.
I have for many years found Keynesian demand side analysis utterly wrong but where was the evidence? Now we have had a radical experiment in economic policy across the world and if it is not obvious beyond argument that a Keynesian stimulus will not work then I don’t know what conceivable evidence there could ever be that would convince anyone just how poorly structured the underlying Keynesian theory is. Y=C+I+G in my view and the view of many others provides no insights into either the causes of recession nor what to do when they happen.
There are therefore no ‘ex-Austrians’ in the same sense as ex-Marxists or ex-Keynesians because the world continues to behave more or less as we classical/Austrian economists expect it to. Classical theory does explain and it does provide policy answers which we are seeing put in place under the name of austerity as an attempt to restore balance after the Keynesian excesses of the past five and more years. Those who are taking this road are guided by intuition without textbook answers but are doing pretty well what a classical economist would have recommended. That is, they are doing exactly what the UK, Australia and others did to take our economies out of the Great Depression.
A series of responses followed this, some reply to Rob and others to me. But the largest complaint about what I had written was not about Keynesian theory but whether I had gone to far in stating that the failures of the Keynesian stimulus had been “obvious”. That the stimulus has made things worse in every economy it has been tried seems so self evident that I still don’t know how the obviousness of the mess the stimulus has caused can be question. Nevertheless, this is what I wrote in reply on 16 November:
I should not have said ‘if it is not obvious beyond argument that a Keynesian stimulus will not work etc etc’ since it is not obvious. But even here in Australia, where for a variety of reasons we probably experienced the least damaging downturn following the GFC, the general assessment is that the stimulus has left us with massive problems that will require a repair job going over many years. No one goes around talking about how well the stimulus turned out and even as unemployment has now returned to its post-GFC high and still heading north, our new government is attempting to cut spending and bring the budget into balance just as the previous government attempted to do. And on this we are not alone.
So it is not obvious what went wrong, merely a conundrum: this is what it says in the textbooks and this is what we feel we need to do. Why are they different?
Every economist seems to be in some ways eclectic. They put their own worldviews together built around one of the existing frameworks that for individual reasons appeal to themselves. And over time they shift and change as they learn more and observe. But with macro just about everyone starts from AS-AD which has now become a major dividing line. Keynesians versus Austrians is the way it is often portrayed but this is a short form which leaves out much of what is relevant.
But however you would like to describe the nature of this divide, we as economists should in my view be having some kind of in-house review on the relevance of AS-AD to the formation of policy. It’s true that AS-AD is a very seductive concept, not obviously wrong. But still, starting from casual empiricism and then working through the econometric work of Alesina, say, but also others, and with theoretical considerations also then brought into this discussion, alternatives to AS-AD might eventually emerge in our textbooks. In the meantime, ever fewer policy makers are willing go near AS-AD to work out what ought to be done in the real world. That much anyway is obvious. Given that our economic texts ought to be a guide to economic policy, all this should be seen as something of concern to the profession.
The only reply since then has been to say this:
If I may offer just one more quote from some people who care about the evidence. Jordà, Òscar and Alan M. Taylor, 2013:
The Time for Austerity: Estimating the Average Treatment Effect of Fiscal Policy
[W]e have a measure of the multiplier that explicitly accounts for failures of identification due to observable controls. Our estimates … suggest even larger impacts than the IMF study when the state of the economy worsens. … It appears that Keynes was right after all.
As Steve now allows, it is *not* obvious that the fiscal responses to the Great Recession invalidate Keynesian claims about the role of aggregate demand. Not in the least.
To prove using a Keynesian model that Keynesian theory delivers the goods in the face of the massive disasters that ought to be the unarguable evidence that the US economy is sinking, only proves there are some people who cannot see because they will not see.
There really needs to be an equivalent to Godwin’s Law in economic discussion. Whoever is the first to bring empirical results into an argument about economic theory automatically loses.