Keynes vs Modern Macroeconomics
This might be a mistake, but I am bringing a discussion from my personal blog over here (links after the jump).
I have a challenge. Can anyone think of a useful insight in macroeconomic theory which isn’t clearly stated in “The General Theory of Employment Interest and Money” ?
By “useful” I mean that it has been used to predict macroeconomic variables. I am not asking about something which is useful in obtaining insights which will, in the future, be useful for prediction macroeconomic outcomes or guiding policy (predictions of predictions don’t count).
Importantly, by useful I definitely do not mean “used by policy makers.” To violate Goodwinski’s law, Lysenko’s research was used by a policy maker, but it was not useful.
By macroeconomic *theory* I mean something other than improved estimates based on new data and uh you know having a computer (or even the idea that such things might exist). Keynes’s estimates of magnitudes were guesses.
Finally, arguments that something added to the literature after the publication of The General Theory was a big mistake doesn’t count, even if it is valid.
My question is about the insights we have obtained and whether any is both actually an insight (as demonstrated by empirical success) and new to Keynes.
Uh oh. I’ve been planning this for days, but I now wonder about an example. I think Keynes assumed prices were flexible and that Joan Robinson and Gardiner Means* had something useful to add.
A final warning: I asked about “The General Theory …” It is very unwise to assume that all ideas in that book were copied or effectively summarized in old introductory Macroeconomics textbooks.
I will respond in comments to proposed examples. The responses will be either
1) The concession that the challenge has been met
2) an argument that there is no evidence that the alleged insight is actually empirically useful
3) a quotation from “The General Theory of Employment Interest and Money” and an explanation of why I think it expresses the allegedly newer idea.
Update: Well that was quick. JW Mason has many suggestions in comments. One is my one concession Robinson had stuff to say about imperfect competition and price setting which was new to Keynes (also Kalecki but he wasn’t exactly after Keynes).
This is related to my key concession. Yes indeed, in the GT Keynes asserted that real wages were necessarily counter cyclical. They aren’t (at least not strongly). I think this is related to the pre-challenge concession above — a popular non crazy explanation is based on sticky prices.
I reply to the other suggestions in comments.
*update 2: Truncated sentence completed and a name corrected.
Simon Wren-Lewis has been writing about the anti-Keynesian school of thought and how he considers the so called new Keynesians (such as himself) to be the mainstream of modern macro.
Also Mark Thoma argued that he was not an old Keynesian and I was very rude to him too. He was kind enough to reply very politely (and link)
The GT is definitely wrong about wages. The claim that wages are generally equal to the marginal product of labor, which declines over the relevant range of output, and that therefore real an n ominal wages typically move inversely, was simply a mistake on JMK’s part, as he himself acknowledged.
In terms of a positive contribution here I think notions of a wage curve showing a negative relationship between real wages and unemployment, plus the idea of labor market monopsony, plus maybe some elements of the wage structure story or efficiney wages, are real progress.
If we have a wage curve (or reserve army, if you like; the alternatives to Keynes aren’t limited to modern macro) theory of wage determination we can make much more sensible predctions about a macro variabl – the wage — than if we followed the GT.
Related: Goodwin cycles. We repeatedly observe the pattern of U down -> w up -> profits down -> I down -> Y down -> U up. Not derivable from Keynes.
I assume you think Minsky’s useful insights were fully anticipated in the GT? Or do you think they’re non-predictive?
There’s a big, genuinely useful literature in development, the best elemetns of which grow out of Keynes’ work but go beyond it. E.g. I don’t think we can say Prebisch-Singer is in the GT. Again, concrete predictions about income divergence between producers of manufactured goods and primary products.
Not much open-economy stuff in the GT. Keynes’ was an elasticity pessimist but you don’t get a formal statement of the Marshall-Lerner-Robinson condition from him, let alone any concretesense of how trade elasticities vary in practice. Elasticies approach is very useful, predictively.
As a matter of fact the defintion of effective deman in the GT is quite different from what we are used to, since it is framed in terms of the decisions by “entrepreneurs” about *output* rather than decisions about final expenditure. But that counts maybe as a clarification rather than an addition.
Okun’s Law. Predictive. Not in Keynes. (But maybe not theory?)
Markup pricing based on imperfect competition. Comes from Kalecki and Robinson, so almsot Keynes, but not in the GT. Possibly not predictive in the sense you are looking for?
(I am writing this incidentally as someone who studied Keynes with Jim Crotty and who still probably looks up passages in the GT several times a week. And if your question were limited to an insight of mainstream mmacroeconomic theory in the apst 30 years, I would say, No, none. So in the big picture I am 100% on your side.)
I conceded Robinson on markup pricing. I think you are right about wages. Okun’s law is not theory. I thought of open economy almost absense too, but don’t see much useful added. I’d consider the wage curve micro not macro. I think Minsky’s thoughts are in the book (and in the air).
You are very right that he was wrong about wages. But I don’t see much improvement in modern macro theory. I think New Keynesians have a lot of the same problem. RBC explains real wages with loony ideas about technology including technological regression. I update to note the wages wiff. I’m not sure things have gotten much better though.
Fair response. It would be really interesting to get Lance Taylor to answer this question….
Time inconcisistency of optimal plans i.e. Kydland and Prescott 1977
The Peltzmann EfFect: the more effective the satefy net is perceived to be, the more risks people will take. Yes, it is micro, but I suspect applied to macro it explains a heck of a lot. It explains why real economic growth rates in this country hit peaks in the 1930s and 1940s, and again in the 1960s, and have been going downhill since.
Very interesting. I’ve been pondering the idea that widespread economic security is a public good, with positive externalities in encouraging “good” risk-taking and allocation of investment. (See the latest at interfluidity.) Ironically, this involves using the Peltzmann Effect to argue for positive outcomes, rather directly contrary to Peltzman’s examples.
Outcomes for all sorts of things are different at the micro and macro levels, and this is one example.
People taking more economic risks is both good and bbad. My guess is that as more people do something econoimcally risky (e.g., starting their own business), not just the basolute number but the percentage of failures will actually increase. And that, of course, is bad for the individuals involved… plus whatever safety net there is has more to contend with.
On the other hand, the increase in the absolute number of new things being tried as a result of a greater safety net often means that potentially game-changing successful things will be tried, which is much greater for society as a whole. Over the long run, that means faster economic growth.
That is a theoretical argument. I ask for something which has been empirically useful, that has made it possible to predict better. In a pinch, something which has made it possible to fit data from the past without fiddling the model.
I think its safe to say that if the sign of the Peltzmann effect on GDP growth is unclear, it has not yet proven empirically useful.
I can only guess from “Kimel” that the original conjecture is that social welfare is positively correlated with growth. This is a true claim about raw correlations — countries with high growth 1960-1985 or 1990 (I forget) have a high ratio of social welfare spending to GDP. But the causation is high growth correlated with high per capita income (the social welfare spending is average over the sample) correlated with high social welfare spending. The evidence is simple, social welfare spending at the beginning of a period (a decade or 5 years) has an insignificant correlation with growth in that period.
There are two alternative hypotheses positive effect and negative effect. Keynes’s implicit guess that he could neglect the issue has not been rejected against either.
It’s my guess too. But we are just guessing we can eventually do better than Keynes. I hope and trust we can. I just wrote that we can’t base that hope on much evidence so far.
“all taxes come out of rents”
an LVT was something that Keynes was surprisingly silent on, given his call for the euthanasia of the rentier.
“…that Keynes was surprisingly silent on, given his call for the euthanasia of the rentier.”
Very interesting, and an idea whose time has come and is long over due. Can you provide some reference for that claim, that it was Keynes that made the call, so that one can interpret the actual words for one’s self. I have some serious doubts of the varacity of the statement in spite of my personal support of the idea.