I'm interested in your thoughts. I know what I think, and I think a common explanation is probably wrong. The question is raised in my mind by Russ and John's discussion of the second Keynes/Hayek rap in 2011.
What I take to be the right explanation and the wrong explanation are not unrelated.
Friday, December 7, 2012
Subscribe to:
Post Comments (Atom)
Posts
Milton Friedman won the debate about the slope of the Phillips curve. Then the Lucas critique sent Keynesians scrambling for a response, which they eventually reached by incorporating microfoundations.
ReplyDeleteI think you might find some insight into why the economics of Keynes and the neoclassical-Keynesian synthesis consensus formed by Paul A. Samuelson and Sir John R. Hicks and other Neo-Keynesians fell into disrepute in this review, Daniel Kuehn.
ReplyDeletehttp://www.amazon.com/review/R1CWP15DVWEU5Y
Stagflation. The Keynesians did not immediately come up with a good explanation for stagflation; this left an opening for attack by the 0.1% elitists, who promptly hired Milton Friedman to come up with a plausible-sounding alternative theory.
ReplyDeleteIncidentally, stagflation was, I believe, due to an oil-dependent economy being subject to a supply shock in oil. Most of Keynesian economic theory assumes substitutability of practically any resource except labor. But that is simply untrue. Our 1970s economy was oil-dependent -- as our 2010s economy sadly still is -- and therefore the exogenous rise in oil prices had to pass through into every other price in the economy, causing the inflation.
The economic situation couldn't be cured by printing money (as it can with a normal high-unemployment situation). Normally the money goes to employ people. But this time the people needed oil to do their jobs, so there was no point in employing people without the oil.
This, I claim, was a simple microeconomic "joint factors of production" issue on a grand scale.
Normally, with labor being the main factor of production which may be limited. inflation is related to excess demand for *labor* which cannot be met (hence, inflation goes along with high employment rates -- a labor supply shortage). But this time it was related to excess demand for *oil* which could not be met, because oil was also a vital factor of production.
-----
So the Keynesians really didn't need to reconsider their theories for the most part. *But they did anyway* -- stagflation was *treated as* a failure of Keynesianism. And that left an intellectual opening for the likes of Milton Friedman, Lucas, and whatever other right-wingers happened to be available for the 0.1% to hire. If the self-questioning hadn't been going on, the right-wing cranks would have remained shut out of the discussion, as they should have been.
The Chicago School never really accepted the Keynesian ascent or let go of the quantity theory of money. They were fairly restrained in attacking Keynesian theory in the 40s, 50s, and 60s because the economic performance and employment record of those years was so strong. But come the 70s, they could scream "OMG TEH INFLATION IS KILLING US!!!!!!! BECAUSE OF EVIL KEYNESIANS!!!!!!!" , so they did. Basically, anything that made the guys running things look bad, could be used to strike down their theory. And the Chicago guys found a receptive audience since most economists were politically conservative and were always uncomfortable with the "socialistic" implications of macro, which sat uneasily with the libertarian implications of micro. The fact that Keynes himself, and Samuelson and Tobin as well, had already described the possibility of stagflation was of no importance.
ReplyDeleteEmpirical falsification of the unemployment equilibrium theory.
ReplyDeleteWe have reviewed your blog favorably and directed readers to your blog.
ReplyDeletehttp://stlouiseconomics.blogspot.com/2012/12/st-louis-blogs-what-not-to-read.html
We hope that in the future you will write as Coase challenges (HBR, Dec. 2012): to provide businesses with confidence so that they don't have to look to the Government, first, for solutions.
It seems to me that one cannot tell that story without taking a broader look at the the influences of society, history, culture, and politics on the working of the economy and on the workings of the minds of the people who thought about economics.
ReplyDeleteIn particular, Vietnam and Nixon happened then, remember. Plus we had the start of Goldwaterism/the Southern Strategy and the ever developing backlash against the Civil Rights effort.
Recall that Johnson said that we would loose 3 generations of common sense in the South, with the passage of the Civil Rights laws.
In sum, for 40 years we have had people in the Temple who weren't searching for the truth.
Did it decline?
ReplyDeleteDepends on the region, I guess. My professors in college studied in the 1970s, and they got plenty of exposure to Keynes, it seems. I am in India, for the record.
And considering that some of Reagan's policies were considered Keynesian, perhaps it is an error to say it declined in the US as well.
1. We baby boomers got sick of the cruddy Keynesian economy as we graduated from college.
ReplyDelete2. The Marxist socialism we all learned in college made sense, even if it was based upon incorrect assumptions. Keynesianism transparently makes no sense at all which is especially noticeable once one had been a Marxist or Austrian (and I've been both.)
3. The loathsome Nixon was a Keynesian.
http://www.flickr.com/photos/bob_roddis/3520131008/in/set-72157600951970959
4. Vietnam antiwar types are anti-authoritarian so anti-authoritarianism was in the air. Keynesians are suck-ups and brown-nosers.
5. Keynesianism has always been wrong and a scam. People finally figured that out, however temporarily.