The following are four notes I wrote to the Societies for the History of Economics website back in November 2011. Brad Bateman and Roger Backhouse had written a book on Keynes and Keynesian economics – Capitalist Revolutionary-John Maynard Keynes – and had put up a note to let others know. I had also written a book just then, so thought I would mention it since there are alternative ways of looking at things. As it happens, even four years later, six years following the dead hand of the stimulus was first applied – no one else has written a book explaining what is wrong with Keynesian economics and laying out the alternative. These four posts could have been written yesterday, given how economic theory has dug in and refuses even to so much as notice how useless its advice has been. In reading these, please note that others had written comments as as well, only some of which I mention.
Professors Backhouse and Bateman invite us to indulge in a visionary perspective in dealing with the Global Financial Crisis and the subsequent recession that will not go away. They wish us to look at alternative ways of thinking about the economy and how it works.
As it happens, I have done just that. In August this year, Edward Elgar published my Free Market Economics: an Introduction for the General Reader which outlines the mechanics of an entrepreneurially-driven market economy embedded within a political structure where the rules and regulations that businesses work within are determined by others. And what is particularly notable about the book is that while it explains Keynesian economics as accurately as any other introductory text on the market, it is also at the same time the most relentlessly anti-Keynesian book written in the past forty years. Moreover, if you would like to have an economics text that explains the classical theory of the cycle – the best alternative I know to Keynesian theory – my book does that as well, and I think in this regard, it may be the first book to do so in over three-quarters of a century. To my knowledge, there is no other book like it, although I truly do wish the market was flooded by hundreds of alternative titles along the same lines.
Let me therefore highlight one of the sentences in the Backhouse-Bateman article:
“Even Keynes himself was driven by a powerful vision of capitalism. He believed it was the only system that could create prosperity, but it was also inherently unstable and so in need of constant reform.”
Well I can agree with half of this but the other half is plain wrong. Capitalism is without question the only system that can create prosperity. But as the existence in 1936 of the by then hundred year old classical theory of the cycle should tell you, there has never been much doubt that capitalist systems are subject to instability. Nor was Keynes intention to explain to his fellow economists that our economies were in need of constant reform, whatever that might mean. The point of The General Theory was to introduce into mainstream economic theory the notion of aggregate demand. (Read page 32 of the GT on Malthus and Ricardo if you are in any doubt). There is nothing else in the book that is novel or that has spread like a weed throughout the discipline the way this concept has. And its adoption has been the single most disastrous mistake economic theory has ever made. Because economists now think in terms of aggregate demand we are no longer capable of explaining even the basics of the cycle and cannot provide sound advice to governments when economies fall into recessions as they inevitably will.
Let me finally say that I endorse everything written by James Ahiakpor in his earlier post. But let me also add that while the tremendously faulty structure of the bailouts can only be explained by the need to do something straightaway, that there was a need for government action could have been found by reading Bagehot’s Lombard Street which was published in 1873. It was the stimulus that came after, pure Keynes in both structure and intent, that is the core problem we are dealing with right now. The stimulus packages themselves are the most important cause of the prolonged recession most economies are facing today. It is the problems of debt and deficit that are the major problems we must find answers to, not a failing financial system which was the problem in 2009. So where Backhouse and Bateman ask:
“How do we deal with the local costs of global downturns? … If economists want to help create a better world, they first have to ask, and try to answer, the hard questions that can shape a new vision of capitalism’s potential.”
OK, I’m in. Let’s find a solution to all of this and more. But if you think Keynesian theory is any part of the answer, then my friends, you are in my view part of the problem and in no way part of the solution.
I appreciate Mason Gaffney’s query about the nature of my book. And if I could, I will reply using the text of a note I sent to Roger Sandilands after reading his brilliant compilation of some of the more difficult-to-find works of Allyn Young. Two of the longer parts within Roger’s compilation were Kaldor’s notes of Young’s LSE lectures which were delivered in 1927-29, and the various entries Young wrote in the 1920s for the Encyclopaedia Britannica. If you would like to see how economists thought about economic issues prior to the publication of The General Theory, this is the place to go. Hopefully, Roger will be able to let us know how to obtain copies of his compilation of Young’s work. But to explain what my book is about, I hope this note I wrote to Roger will explain how I think of this book myself:
“I have been meaning to write to you for some time. I took Allyn Young’s LSE lectures and Britannica entries with me as my morning train reading for many many mornings in a row and it was fantastic. The first thing that it confirmed for me was that the book I have written on Free Market Economics is actually what I wanted it to be. It is the book that an economist schooled in the classical tradition would have written in the absence of the arrival of the General Theory. I learned an immense amount from Young but all of it merely deepening my own understanding of things that I had absorbed from the classical literature generally. I attach the flyer for the book which you should ask your library to buy anyway, but if you look at it, you will see that it is classical theory right down to its downward sloping supply curves and its discussion of the theory of the cycle in an almost identical way to Young’s.
“The theory of the cycle as Young portrays it (discussed pp 76-84) is not just the classical stuff in general, but is explicitly soaked through with Say’s Law. He notes that J.-B. Say “pointed out” that “what is commonly called overproduction is merely ill-balance production” (p 77). And then on the next page, “people do not over-save, they miscalculate” (p 78). Where can you find that written in a textbook any more, other than in mine, of course.
“And if you look at my book, you will even find the history of economics discussed more or less in the same place, just half way past the middle (pp 85-88). He not only feels the need to say these things, but the logic of when to put the history into the text occurs to him in just the same way and at just the same point as it occurred to me.
“But it is not merely coincidence that our work is so in parallel, but it is that he and I both think about things in the same sort of way. I have the advantage of actually having seen Keynesian economics in action whereas one can only conjecture just how savage Young would have been about the GT had he seen it for himself. Given what he has written here, there is little doubt he would have found the GT nonsense from end to end. And now, today, instead of discussing Mises and Hayek alone, we would be also discussing Young.”
That is where my letter to Roger ends. But to supplement your reading of Young, for an explanation of the nature of the business cycle as understood by classical economists, the first edition of Haberler’s Prosperity and Depression is hard to beat. That is what I built my own chapters on. But if you go to Young, who unfortunately died at 53 in 1929, you will see these same theories described in more or less exactly the same way by someone writing before there was even a hint of the Great Depression to come.
It is interesting to see just how relentlessly Roger Backhouse and Brad Bateman choose to ignore what I wrote. That was the reason I thought I would bring Allyn Young into the conversation since I understand perfectly well that some faraway economist living in the antipodes would have no standing in such discussions but I thought Allyn might. Nevertheless, I do wish to impress upon them once again that what I am writing about is a direct response to the issues raised. And since the only compass in which these issues can be properly discussed is the evolution of economic theory over the past hundred years, in every way this is a subject matter for this site.
Going back to the original NYT article, let me take the final sentence as the core point Backhouse and Bateman wished to make. What they wrote was: “If economists want to help create a better world, they first have to ask, and try to answer, the hard questions that can shape a new vision of capitalism’s potential.” To do this, they argued, economic theory should include a major recognition of government and its role. To emphasise how important this point is, they criticised Hayek and Friedman for ignoring the important contributions of government, writing:
“In the 20th century, the main challenge to Keynes’s vision came from economists like Friedrich Hayek and Milton Friedman, who envisioned an ideal economy involving isolated individuals bargaining with one another in free markets. Government, they contended, usually messes things up. Overtaking a Keynesianism that many found inadequate to the task of tackling the stagflation of the 1970s, this vision fueled neoliberal and free-market conservative agendas of governments around the world. That vision has in turn been undermined by the current crisis.”
Well, what I am trying to tell them is that I have attempted to do in my book on “Free Market Economics” exactly what they have argued needs to be done. It is not perfect but what is? And because of its hostility to Keynes and what he stands for, I fear that if they read it they would unlikely find much in it that would give them pleasure. But (a) it is obviously about capitalism (although the word does not appear anywhere in the book) and (b) it provides a vision of the world in which economic actions are of necessity buried inside a political structure. Don’t believe it? Here are the opening three paragraphs of the book:
“This is a book about the market economy.
“A market economy is one in which overwhelmingly the largest part of economic activity is organised by private individuals, entrepreneurs, for personal profit. Such entrepreneurs are private citizens not government employees. They make decisions for themselves on what to produce, who to hire, what inputs to buy, which machinery to install and what prices to charge.
“There are, of course, in every nation state legislative barriers put in place by governments which limit every one of these decisions. No market is or ever has been even remotely laissez-faire. Entrepreneurial decisions are circumscribed by the laws, rules and regulations that surround each and every such decision.”
My aim in writing the book was to explain to governments, and to their citizens, how an economy can be run so that prosperity for the largest number is the result. This is not a book about how governments should be kept away from economic interactions, a completely weird and self-defeating idea. This is a book that embeds within the text the very necessity for governments to intervene to make free markets work. The point that I try to make is that since governments not only are going to intervene but must, they should do so in a way that actually does some good.
But Backhouse and Bateman do not just say we need a new vision and leave it at that. In their article and subsequent post, they are promoting a book with the title, “Capitalist Revolutionary: John Maynard Keynes”. In their view, it is in Keynes that we are to find that vision. Well the point I wish to make is that it is precisely in Keynes that we will not find that vision, and that if we economists had any sense we would abandon Keynesian theory and policy root and branch. To draw some inference from Keynes that capitalism is in constant need of reform is about as vacuous a statement as I can imagine. The need for institutional adjustment to the changing nature of the world is hardly some great insight.
Roger Backhouse and Brad Bateman have done us all an immense favour by opening up an issue that really ought to be at the top of the economics agenda today, and that is, given what we have discovered in the past two years, whether the Keynesian policy vision still makes much sense. They think it does, which is why they wrote their book, wrote their article for the NYT, and finally initiated this thread to alert the rest of us to what they have done.
Unless they were of the opinion that no one disagrees with them about Keynes and his vision, they must take it as a rightful expectation that there are some who are of a different persuasion and that they will actually say so in reply. And what seems to trouble some is this comment of mine and particularly the word “rancid”:
“The Keynesian policy vision has created a global nightmare both politically and economically, a nightmare whose end is nowhere in sight. There may be an old guard that wishes to cling to such rancid and outdated ideas but by now it ought to be obvious beyond argument that Keynesian policies do not work. There is not a single economy in the entire world that is safe from the ravages that the stimulus has caused.
“By all means, let us find a new vision, but for heaven sake, the last place we should be looking for that vision is in the works of John Maynard Keynes.”
There is nothing ad hom in this. It is, as Brad Bateman has himself noted, the ideas which I describe as rancid. It may not be a typical word used by economists but it gets my point across. Keynesian economic theory, assuming it was ever valid which I do not, should be seen by now as well past its use-by date and recognised as having become stale and moldy over the past three-quarters of a century. But in the use of this word, it is quite clear that it is the sin and not the sinner being attacked.
Thomas Humphrey has entered into this discussion thread in exactly the right way. A great scholar and one whose writings I admire, he has posted to say that the way Keynesian economic theory has developed since the 1930s has created a macroeconomic theory of immense power and penetration and that my approach would throw baby out with bathwater. And with this, the issues thatI think are important are engaged. And unless there were anything further for me to say on the issue of Keynesian theory and vision, I would have feel there is nothing else to add. I have said my piece. Keynes, yes or no. We report; you decide.
Rob Leeson has now, however, suggested that the moderator not only determine whether something ought to be published depending on its relevance, but also dependant on the choice of words used, on the number of words used and on some determination of the degree of ad hominem involved. I take it that Rob would not therefore have published my posts had he been the moderator which makes me grateful that he is not and Humberto is.
Of course we are all bad judges in our own case but I don’t think any of my posts, nor any of the others on this thread, have been too long. I have read each one through with great interest. And if they are too long, it is only the writer who loses out since eventually others stop reading what they have to say.