Monday, June 13, 2011

It's encouraging to realize you read Keynes like Bob Solow reads Keynes

The other day, Don Boudreaux wrote a post about McCraw's biography of Schumpeter, and specifically cited a passage on Keynes:

"But their [the young economists of the late 1930s and 1940s] focus on the techniques of Keynesian macroeconomics – which are amenable to mathematical modeling and very useful in the new methods of national income accounting – had diverted attention from the vision that underlay the whole apparatus. Even though the Keynesian creed of stagnationism “has petered out with the situation that had made it convincing” – the Great Depression having given way to unprecedented prosperity – most economists had remained so enthralled with Keynesian technique that they seemed “bound to drift into one of those positions of which it is hard to say whether they involve renunciation, reinterpretation, or misunderstanding of the original message.” And in taking this tack, as Schumpeter had said many times before, most economists had lost sight of the heart of the capitalist process, which in its endless dynamism was the opposite of Keynesian stagnationism."

Bob Solow reviewed the biography at The New Republic (this link to Thoma has the most ungated text), and this portion of the review on Schumpeter's view on Keynes was especially good:

"The internalized rivalry with Keynes, his exact contemporary, for the title of World's Leading Economist seems to have nagged frequently at Schumpeter.

But he seemed not to understand what Keynesian economics was about, or why it won over the younger generation. For example, he described Keynes as the apostle of consumer spending (in contrast to his own emphasis on innovational investment). But in fact consumer spending is passive in Keynes's General Theory. The driving force of the aggregate economy is actually investment spending; and Keynes put great causal weight on "animal spirits" and "the state of long-run expectations," both of which are much more akin to entrepreneurial drive.

Similarly, Schumpeter charged Keynes with being a "stagnationist" (in contrast to his own belief that there was no natural limit to entrepreneurial energy and innovation). This is a more complicated matter. The Keynesian framework could accommodate stagnationist ideas about the drying-up of profitable investment opportunities; and in other hands it did. Keynes certainly did not admire "money-grubbing," and he would have classified a hot-to-trot Schumpeterian entrepreneur as a money-grubber. That is not stagnationism. It is probably more accurate to say that Keynes erred in a different way, by thinking that consumers might become satiated as their incomes rose

First, Bob Solow - unlike a lot of critics of Keynes knows that Keynesianism is not a consumptionist theory. This is something I've highlighted many, many times. This is something the critics regularly stumble on. At the end, Solow also notes where we can criticize Keynes - he's alluding to the essay Economic Possibilities for Our Grandchildren, which is a great read but has one prediction about consumption satiation that was a poor prediction. As I've noted in an exchange with Mattheus, it was this essay and this essay only where Keynes was ever much of a utopian (and here not even for the same reasons that Don Boudreaux accuses him of being a utopian in the General Theory!).

If you have to choose between getting your Keynes from Bob Solow or getting your Keynes from Don Boudreaux, for God's sake pick up something of Solow's (or, if you prefer, read this blog!)!!!

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