Edmund Phelps, who is probably one of my favorite living economists, was recently interviewed on EconTalk by George Mason economist Russ Roberts. I admire Phelps because he really saved Keynes from the Keynesians when he provided an expectations-based explanation for the stagflation of the 1970s. Phelps's work on expectations and wage determination grew out of Keynes's very strong emphasis on uncertainty and expectations - an emphasis which was downplayed by many American Keynesians in the '50s and '60s. In this interview, Phelps mentions other economists - including Friedrich Hayek and Frank Knight - who also influenced his views on uncertainty and expectations. That's one of the most rewarding parts of this interview in particular: that it reveals the considerable common ground shared between the Austrian School and Keynes on these questions. It's unfortunate that the interviewer (Roberts) tries to highlight this as a Hayekian side of Phelps, but Phelps himself squarely acknowledges the influence of Keynes as well. Another important critique that Phelps makes of American Keynesians is that Keynesian economics doesn't not require a bloated public sector.Many other interesting topics are covered in this interview. Two I would note are (1.) Phelps's anticipation of New Keynesian economics with his model of efficiency wages, and (2.) at the end of the interview he discusses recent work he has been doing on "the good life".
It was interesting to listen to this, having recently finished Keynes's Tract on Monetary Reform (1923) myself. As I was reading the Tract, I couldn't help but think "if Keynesians in the '50s and '60s had spent as much time reading this as they did reading Keynes's General Theory, Phelps probably wouldn't have had to make the innovations that he did in the '60s and '70s. And then, lo and behold, a week after finishing the book EconTalk interviews Phelps himself.
One other thing I'd like to point out about Phelps is that he is a strong proponent of job subsidies, something I have also taken great interest in recently. The Senate recently produced a new (smaller) stimulus bill that includes a small job subsidy that is roughly along the lines that Phelps suggests.
I should also note, for those of you that aren't aware, that Phelps was the recipient of 2006 Nobel Prize in Economics. His Nobel lecture can be found here.
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"...Keynesian economics doesn't not require a bloated public sector."
ReplyDeleteI think you may have unintentionally put a double negative in there, which dramatically changes the idea you are trying to communicate. Nonetheless, this is correct. While Keynes' recommendations were a break with the ideas of the neo-classical economists of his time, if I'm not mistaken he remained very much a British classical liberal. He also believed that government spending should never exceed 25% of the national product - a point which it seems that modern "liberals"/Keynesians seem to conveniently ignore (I say "liberals" as, being Australian, I am frequently outraged at the way American social democrats, whose agenda is incredibly illiberal, describe themselves as liberals).
I too have noticed there are certain parallels between the Austrian school and the Keynesians. That said, I definitely lean towards the Austrian school. And despite that it is fair to say Keynes has been widely misinterpreted by economists after his death, I would still posit that some of the ideas central to Keynesianism are deeply flawed, to wit the consumption multiplier, his definition of savings, his conception of the interest rate and his "refutation" of his own distorted definition of Say's Law.
I would be interested to know which works/authors you believe most ably represent the ideas of JM Keynes. I have noticed that many of Keynes' disciples (and detractors) exhibit a very poor understanding of Keynesian ideas beyond the simple C+I+G=Y found in college textbooks.
Thank you for the correction and the comment.
ReplyDeleteI wouldn't say Keynes is pro-small-government, but a lot is claimed in his name that probably shouldn't be. What Keynes called the "operative factor" was expenditure, and also borrowing. He certainly did entrust this task to the state during depressions, but I think the point is that he didn't necessarily see the point as being a direct jobs creation program that a lot of people associate with real Keynesian stimulus. He was a strong supporter of public works bills in the UK and the US, so his support for public expenditure is clear. But it was purposive government expenditure that was necessitated by specific depressionary conditions, not a general advocacy of large government. I think people also misinterpret his understanding of the "socialization of investment". People usually interpret this to mean public investment, but the example of "socialization of investment" that Keynes provides in the General Theory is the joint stock company, not a state owned enterprise. I'd have to think a little more on it, but I agree - people oversimplify Keynes and unfairly minimize his dedication to the market, overstating his faith in the state.
I recently finished reading Keynes's "Tract on Monetary Reform", and I'm currently reading Hayek's "Monetary Policy in the United States after the Crisis of 1920" (Keynes published in 1923, Hayek in 1925). It is uncanny how similar their views are. They both obviously have different emphases. Keynes thinks the orthodox perspective (one that Hayek shares) is naive on certain points, and Hayek explicitly mentions Keynes's (1923) naivete on other points, but overall they have a very similar framework and approach. Of course all of that changes with the 30s, but I think it's important to note the civility and the commonality of their foundations.
As for works interpreting Keynes - I'm also currently reading Lawrence Klein's "The Keynesian Revolution". It's very good. I don't think I agree with everything that he says, but he's arguably more faithful to Keynes than many American Keynesians in the 50s and 60s. Klein is representative of what would now be called the Post-Keynesians, as opposed to the Neo-Keynesianism that you think of with Stiglitz, Mankiw, Krugman, etc. A couple weeks ago I read Skidelsky's "Return of the Master". I was less impressed with that - don't waste your time with it if you haven't read it yet. The first two chapters were very ideological. The rest was a fairly decent summary of Keynes, but it was too general to be very useful. The one redeeming part of Skidelsky's book was the heavy emphasis it placed on Keynes's views on uncertainty and expectations. A lot of people make an issue out of the "pre-General Theory" Keynes an the "post-General Theory" Keynes, but I think these concerns about uncertainty regarding the future run through all of his works - and they underpin his liquidity preference theory, so they are very important to keep front-and-center. And as I said in this blog post - Keynes's views on expectations really anticipated a lot of what Phelps had to say.
ReplyDeleteI think we can be fairly certain that Hicks's representation of the General Theory in "Mr. Keynes and the Classics" is a reasonable one. Keynes leaves the concept of the liquidity trap underdeveloped. Some have suggested that Hicks's formalization of the liquidity trap fundamentally altered the General Theory, but I don't see any great reason for concern about this. One of these days I should read his "Value and Capital" - but my understanding is he wrote that independent of Keynes so it might not really be good as an interpretation of Keynes. Still, when you think about "Keynesian economics" I think you have to distinguish that from Keynes himself, and accept the innovations that have been made over time. One consistent critique I have of the Austrians is that as far as I can tell they haven't really innovated on any of their ideas since the 20s and 30s.
Sebastian, as a self described Austrian, I have to ask - how did you come across our blog? I comment on a couple Austrian blogs - did you find it through one of those comment sections?
ReplyDeleteThank you for the references. I read many criticisms of Keynesianism, but these mostly (but not always) tend to be assaults against the various manifestations of politicised Keynesianism which appeared after Keynes' death. Lately I've been more curious as to how these particular policies deviate from the true ideas of Keynes. My macroeconomics lecturer (a staunch classical liberal) seemed to hold Keynes in high regard while no doubt disagreeing with several of his ideas. I for one would like to make sure I am not attacking a straw man, or following theories simply because they correspond to my own personal political bias.
ReplyDeleteI came across one of your comments on mises.com, I think it may have been the "Austrian Flamethrowers" article, I'm not entirely certain however. I was quite surprised to encounter a Keynesian who has obviously put some time and effort into studying the Austrian Business Cycle Theory; a great many people who attempt to criticise Austrian economics tend to just put their own ignorance on display, which is frustrating (a sentiment perhaps shared by more insightful Keynesians).
As for the Austrian economists not having innovated any of their ideas since the 30s, well, perhaps it is a case of "if it ain't broken, don't fix it"? I don't know. I don't think the fact that it's old necessarily means it's wrong or hopelessly antiquated, or that it contains no universal truth, but I understand what you mean. It could be due to the relative obscurity of the brand, in which case, given the growing popularity of Austrian ideas, we may see some more developments. I enjoy reading mises.org, but I would hardly see it as being at the vanguard of Austrian scholarship. Also, having studied economics in the neo-classical/new Keynesian tradition, I notice that many Austrians needlessly differentiate themselves from the mainstream on several points or have ignored the developments that have been made in the interests of adhering to a "pure" Austrian theory. I anticipate that this will change over time.
ReplyDeleteI will have to read further into the sources you mentioned before commenting. I would also be interested in reading up on the post-Keynesians as well if you know anything about them.
One comment on innovation in the Austrian School - Murray Rothbard has absolutely innovated on Mises and Hayek. He's innovated in the wrong direction, IMHO, which was perhaps why I neglected him :)
ReplyDeleteAs for the post-Keynesians, Paul Davidson is the lead in that contingent. He has a new book out - I think it's called "The Keynes Solution". I haven't read it yet. I also recommend this blog, which I've recently started following: http://neweconomicperspectives.blogspot.com/. They come from a Post-Keynesian perspective. They also have a journal... I think it's called "The Journal of Post-Kenyesian Economics". It might be more faithful to Keynes - I'm not entirely sure about that yet - but I'm not sure that means it's good for Keynesianism. I'm currently very much on the fence about what Keynes had to say on nominal wage adjustments. I buy the importance of the liquidity trap. I buy the insensitivity of investment to the intereset rate. I buy consumption and savings as a function of output. I'm still having trouble accepting his views on nominal wage reductions - which is one of the main differences between the Post-Keynesians and Keynes on one hand and the New/Neo-Keynesians on the other.