Friday, July 15, 2011

Was Keynes a Pessimist?

Russ Roberts has two posts up about the strong post-war economy here and here. He quotes me in the second one. Russ thoughtfully emailed me for a reaction to the second post. I provided one, which I may repost here too.

But on a more basic level, I find it bothersome that a lot of people have this view of Keynes as a perennial pessimist - as if he thought that the economy couldn't ever get along without government. I think if you read Keynes, this clearly isn't true. Economic Possibilities for Our Grandchildren, published during a terrible point in the Depression, is one of the most optimistic economic essays ever written. And if Keynes ever claimed that the economy would be necessarily depressed without government spending, this is not a passage that I've ever stumbled on.

One of the best statements about the problems with viewing Keynes as a pessimist was provided by Lawrence Klein in his book The Keynesian Revolution (1966):

"It is wrong to think that Keynes’ system fails if it cannot predict pessimistic results. The pessimism is not inherent in this system; instead the determinants behind the system make it operate either pessimistically or optimistically, depending on the current state of affairs in economic and non-economic life."

If you applied the facts on the ground to Keynesian theory in the early post-war period, you would get optimistic, not pessimistic results. And as Klein says, it is wrong to think that Keynes' system fails if it cannot predict pessimistic results.

This view that Keynes always predicts terrible things for the economy, which he sees as always in need of government intervention is an odd perspective indeed. Keynes said that essentially the entire 19th century was characterized by such a high marginal efficiency of capital that it lulled people into imagining that full employment was some kind of natural or guaranteed outcome for the capitalist system. He essentially said not only is fiscal and monetary intervention not always necessary, but there was an entire century when it wasn't necessary at all for tremendous prosperity. Keynes is usually thought of as a proponent of the idea that ideas exercise a powerful influence on reality. His characterization is something of a reversal of this idea. In looking back at the 19th century, Keynes discusses how material conditions shaped the economic thinking of the period around issues of full employment.

So no, I don't think Keynes is a pessimist. He's a realist at all times, and at least in terms of the big picture he's an optimist.

Would a pessimist do this?:


  1. Is that Keynes trying to get a grant from the Ministry of Silly Walks?

  2. And for those who have no idea what I am getting at:

  3. My first question: where did you get that awesome photo!! Is that Keynes and Lydia Lopokova??

    Can I steal it?

    Regarding the post-war boom, in 1943 — the same year Samuelson got it wrong — Keynes was giving a lecture at the Federal Reserve and was asked by Abba Lerner about the possible economic problems of the post-war period. Keynes’s reply is significant:

    “Keynes harshly rejected the risk of post-war stagnation, holding that because of Social security there would be a large reduction in private saving and so that would be no problem”

    D. C. Colander and H. Landreth (eds), The Coming of Keynesianism to America, E. Elgar, Cheltenham. 1996. p. 202.

  4. Daniel,

    What do you think the MEC is exactly? Is it something that varies depending on who is doing the measuring?

    If an entrepreneur thinks that a particular asset can earn him a very high return and consequently he values it highly does that mean that the MEC of that asset is high?

  5. Current - It's a subjective value like anything else, if that's what you mean, yes.

    LK - re: "Can I steal it?" Sure - I did. I have no idea if it's legitimate to do or not, but I just pluck these off of Google Image searches. Nobody's bothered me about it so far.

  6. What exactly do you mean then when you say it's low or high?

    Do you mean in the "high" case that it's seen as high for very many entrepreneurs and in the "low" case that it's seen as high for only a few entrepreneurs.

  7. That's what bothered me about the MEC as well. He makes a lot of to-do about the marginal efficiency of capital, how it sometimes correlates with the interest rate, but most of the time it doesn't. And how it's dependent on effective demand for products (which is then understood as proceeds entrepreneurs expect to receive for their product).

    But how can something subjective, like entrepreneurial expectations, take on something of macro importance that affects everyone equally? Keynes talks all the time about what happens when MEC is low - but low for whom????

  8. It is unfortunate that the Pythons never did anything on Smith, Keynes, Hayek, etc. like they did on Mao, Lenin, Marx, etc.

  9. I criticised Keynes' MEC here:

    But my intention here isn't to criticise it, it's to understand what Keynesians mean by it.


All anonymous comments will be deleted. Consistent pseudonyms are fine.