Debating Keynesian theory – the story so far

I am in the midst of a debate on the Elgar blogsite with the editor of the Review of Keynesian Economics over the question: How to Promote a Global Economic Recovery. The issue is the validity of Keynesian theory and policy. Such debates are strangely rare, and what is more astonishing is that there really is very little of it at the present time, even with our economies having been subjected to a Keynesian stimulus with no apparent positive results. Even Paul Krugman has insisted that the stimulus has been disastrous, but in his view because there was too little and not too much.

I, of course, represent the anti-Keynesian side of the story which, as surprising as this may seem, is not all that common. There are some who are non-Keynesian, but who do not make much if any effort to draw distinctions between their own theoretical arguments and the arguments of modern Keynesians. Whatever it is they might believe, they do not spell out chapter and verse what they believe is wrong with Keynesian theory. They argue on behalf of their own views and leave it at that. They therefore provide little assistance in policy debates to those who are trying to explain what is wrong with the single most common treatment found in macroeconomics texts across the world, and in particular, what is wrong with public spending as a means to bring recessions to an end.

There are also some who rest whatever disagreements they have with Keynes on the results of empirical investigations. They also do not specify any particular disagreement with Keynes but rely on the specifications of their own empirical results to show that the results of Keynesian policies do not lead to the outcomes that were expected. The theoretical side is either played down or ignored altogether.

Thus far there have been four posts, two from each of us.

Here are the four in order of publication.

First I weighed in on The Free Market approach which is as much a critique of Keynesian theory as can be fitted into 1700 words.

Louis-Philippe Rochon replied with “The worst infliction we can impose on our economies is to leave them to the tyranny of the markets”.

To this, I replied with “Markets… have been the single most liberating institution in possibly the entire history of the human race” which, in spite of its title, is almost entirely devoted to criticising Keynesian theory.

LPR then replied with this: “It is pure fantasy to believe that anything but demand is the driving force of economic activity” which puts the issue squarely before us. This is his opening para:

I read with much interest your most recent letter and I will confess I agree with you … we are indeed far apart! But surely this is not surprising as we both defend not only a very different vision of economic theory, but also a different vision of markets and society. At the core of our disagreement lies an understanding of markets, which you see as self-regulating, whereas I claim they are not. I view markets as chaotic and prone to instability and, quite honesty, capable of exploding (or rather deteriorating) into crises, with unimaginable consequences. Perhaps you are OK with that, but I am not. So when I said that the ‘worst infliction’ is to leave us exposed to the ‘tyranny of markets’, I meant precisely that: because of periodic crises, but also because of oft-occurring recessions, we cannot place our complete faith in free-markets. I see unregulated markets and unfettered capitalism as a scourge that must be tamed. To deny or ignore this would be a grave mistake, which would condemn us all to misery, and worse. How else would you characterize the massive inequality of income and wealth around the world and in particular in the United States, which is one of the most unequal developed economies? Is the fact that 40% of the wealth in the US rests within 1% of the population not a tyranny? Does this not shock you? It shocks me, and I will say it again: unless we address this calamity, we are bound to relive a crisis – and soon. Mark my words: another crisis is coming.

Although Keynesian theory comes in many different disguises – there is a different Keynes for every Keynesian – this is pretty close to the real thing. Any thoughts would be welcome.