Monday, August 19, 2013

It's probably good that that one was cut! Galbraith and Keynes

David Henderson shares a paragraph from a RESTAT article of Galbraith's that he likes, but which was cut from ultimate publication. It reads:
"I am inclined to believe that the development of the concept of full employment in recent years has given us a rather warped technical apparatus for dealing with this problem. Keynes, Mrs. Robinson, Harrod, and the rest have talked glibly about full employment as a flat ceiling which is approached uniformly by all sectors of the economy--they have assumed that the production functions for different industries are similarly shaped and, at any time, the rate of utilization is uniform. Nothing, of course, could be further from the truth."
Very saucy, but I can't help but thinking that it was awfully good for Galbraith's reputation that it was cut (presumably by editors or referees, but maybe by Galbraith himself - I wonder if RESTAT keeps copies of referee reports). I guess I can't speak in detail for Robinson or Harrod (although I'd be shocked if they felt all that differently), but Keynes of course never thought anything like this and I can't recall an instance where he suggested that all sectors approach full employment uniformly.

Recently commenter Blue Aurora asked me something about the General Theory that directed me back to Book V. In discussing Pigou there Keynes makes exactly the opposite claim - he's talking about the employment functions of different industries which he assumes are different. It's in the math, he's assuming different functions, but if you want to skip over the math he writes next (p. 286):
"Let us return to the employment function. We have assumed in the foregoing that to every level of aggregate effective demand there corresponds a unique distribution of effective demand between the products of each individual industry. Now, as aggregate expenditure changes, the corresponding expenditure on the products of an individual industry will not, in general, change in the same proportion; — partly because individuals will not, as their incomes rise, increase the amount of the products of each separate industry, which they purchase, in the same proportion, and partly because the prices of different commodities will respond in different degrees to increases in expenditure upon them.

It follows from this that the assumption upon which we have worked hitherto, that changes in employment depend solely on changes in aggregate effective demand (in terms of wage-units), is no better than a first approximation, if we admit that there is more than one way in which an increase of income can be spent. For the way in which we suppose the increase in aggregate demand to be distributed between different commodities may considerably influence the volume of employment. If, for example, the increased demand is largely directed towards products which have a high elasticity of employment, the aggregate increase in employment will be greater than if it is largely directed towards products which have a low elasticity of employment.

In the same way employment may fall off without there having been any change in aggregate demand, if the direction of demand is change in favour of products having a relatively low elasticity of employment.

These considerations are particularly important if we are concerned with short-period phenomena in the sense of changes in the amount or direction of demand which are not foreseen some time ahead. Some products take time to produce, so that it is practically impossible to increase the supply of them quickly. Thus, if additional demand is directed to them without notice, they will show a low elasticity of employment; although it may be that, given sufficient notice, their elasticity of employment approaches unity."
Well that's awkward for Galbraith! And it's not just here Look in the chapter on Sundry Observations on the Nature of Capital (discussed here recently with respect to a Nick Rowe post), or the discussion of the marginal efficiency of capital. You can also look in the concluding chapter where he says that you cannot give government the job of making decisions about the direction of economic activity - only its volume - because it cannot be easily assessed without the price mechanism.

Now you might argue that maybe in his most important statement of economic theory Keynes thought nothing like what Galbraith claimed he thought, but perhaps he had some off-hand remarks. Maybe. I'm not well-versed in all his public pronouncements (and he was a very public figure). Nothing I've read resembles what Galbraith is claiming, but it's possible. So I'll outsource that - does anyone know of a time when Keynes (or Robinson or Harrod) suggested that all industries would approach full employment uniformly? Feel free to share in the comments.

Otherwise, I think we have to conclude that this paragraph probably wasn't dropped randomly - there was a good reason for doing it!


  1. The comment by Greg Ransom on David Henderson's post may provide a clue: "Galbraith participated in Hayek's faculty and grad student seminar at the LSE -- this sort of criticism would have been second nature for anyone with that background."

    So maybe the place to look is in Hayek's writings; i.e., maybe Hayek taught Galbraith his version of Keynes. But I'm surprised Galbraith hadn't outgrown that by 1941.

    1. Wait a minute... How could Hayek have influenced what anybody thought about Keynes? Or is JKG Hayek's mother?

    2. It's Greg's theory, not mine. Is there evidence for it in Hayek's writings?

    3. He's just yanking your chain over the comment the other day where you very strenuously argued that Hayek had little influence.

      Word choice can make or break you with Bob :)

    4. "Word choice can make or break you with Bob"

      Indeed. Yet somehow I slip through the cracks.

    5. This comment has been removed by the author.

  2. "Recently commenter Blue Aurora asked me something about the General Theory that directed me back to Book V. In discussing Pigou there Keynes makes exactly the opposite claim - he's talking about the employment functions of different industries which he assumes are different."

    Can you please point me to the particular statement which *FINALLY* seems to have gotten you back to rereading Book V of The General Theory carefully? Even if you still haven't proven it for yourself the slope of the aggregate supply function or the constant of integration for the aggregate supply function...

    Speaking of that - one can say that J.M. Keynes made a slip of the pen. In Footnote 2 on Pages 55-56 (which is in Chapter 6 of the book), J.M. Keynes uses the term "aggregate supply curve" and "aggregate supply function". They are *NOT* the same. However, the employment function and the aggregate supply curve *ARE* one and the same (to Daniel Kuehn and any future 'History of Economic Ideas' students of him at American University, please see the following pieces published in the History of Economics Review: Brady 1994, Brady 1995, and Brady 1996).

    Keynes uses Z-subscript r to denote the supply function for the level of the firm, Z-subscript w to denote the aggregate supply function for industry, and simply Z for the aggregate supply curve/employment function for the economy as a whole, IIRC.

    1. Your recollection is faulty. The w-subscript is for quantities measured in wage-units rather than money.

    2. Kevin Donoghue: I'll check again, but if you're correct on that point about the aggregate supply function's w-subscript notation (and I believe that's quite possible you are), allow me to thank you in advance. Out of curiosity, did you check the three articles published in Australia's History of Economics Review in 1994, 1995, and 1996? They were written by Dr. Michael Emmett Brady.

  3. Thanks, Daniel. Just got back from the great white north and couldn't land in Monterey due to fog, so landed at SFO and shuttled down. Bottom line: I just saw this. Will ponder and respond.

  4. Daniel,
    Here's my response:

  5. Dear Daniel,
    J M keynes never stated what J K Galbraith claims he stated at any time in his life.Michael Emmett Brady

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