New Keynesian Economics / Post Keynesian Alternatives

Roy Rotheim, Roy Rotheim

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781134804757
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The New Keynesian Economics has been the most significant development in economics in recent years. Does it actually build upon Keynes' work? In this volume, leading post Keynesian economists challenge New Keynesianism both on the grounds that it is not Keynesian, and does not provide an adequate account of our current economic problems.

Part I

PRICES, OUTPUTS AND MARKETS

Part I

PRICES, OUTPUTS AND MARKETS

The first part of this book contains chapters which consider the broader theoretical issues underlying New Keynesian economics. As was pointed out in the Introduction, there are so many ways that economists have used the name Keynesian, that it is hard to know which writer is falling into which frame of reference. For example, New Keynesians admonish New Classical economists for their assumption of instantaneous market adjustment, despite the fact that they share a heuristical framework of thinking in terms of markets and factors underlying market phenomena. Still, on which side of the market clearing fence they fall determines their particular acceptance of government intervention as a device for smoothing business cycles, confirming their self-assigned terminological distinction between New Keynesian and New Classical economics.

New Keynesians and Post Keynesians share the Keynesian mantle, along with, alas, Neo-Keynesians, as well. Neo-Keynesians share the importance of policy activism with New Keynesians, and play down (although do not abandon) market metaphors when thinking in terms of aggregate structures. However, both of these latter types of Keynesians embrace notions of a future outlined by probability distributions (risk) which force their thinking about economic phenomena into conjunctions of events yielding relatively determinate solutions (see Lawson, 1994).

The next four chapters consider these myriad incarnations of the phrase Keynesian from a Post Keynesian perspective. Together, they attempt to set the tone by which the remainder of the chapters in this book may be appreciated. The common foci of these chapters are the extents to which thinking in terms of markets to understand employment and output as a whole are methodologically and theoretically tenable. The reader is asked to think, as he or she works through this first part, about Keynes’s critical point in the Preface to the General Theory, that theories based on market metaphors can explain shifts in employment and output between and among firms and industries in an economy, but that such frameworks are not capable of analysing situations in which employment and output change for industry as a whole.

Appropriately, the story gets off the ground with a contribution by Paul Davidson. In his ‘Setting the Record Straight’, Davidson takes on both the Neo-Keynesians and the New Keynesians as he attempts to clarify what he believes to be among the salient issues which distinguish their Keynesian views from his own Post Keynesian programme. Davidson investigates how James Tobin has attempted to distinguish between what he believes is Keynes’s framework of economic analysis and that provided by New Keynesians. Tobin insists that Keynes’s General Theory logic is still the appropriate analytical system for solving today’s major macroproblems. In this regard he finds the New Keynesian perspective to be a caricature of Keynes and therefore not very useful for policy purposes. Consistent with a proper Keynesian perspective, Tobin asserts that the correct focus should be on the principle of effective demand and not price rigidity in the face of nominal shocks. However, Davidson asserts that in presenting what he believes to be this proper Keynesian analysis, Tobin insists that he will not ‘defend the literal text of The General Theory’. Such a dismissal, according to Davidson, has given Tobin a licence to promulgate an updated version of the old (neoclassical synthesis) Keynesianism, focusing on a partial view of Keynes, maintaining too many of those limiting assumptions that Keynes, himself, was attempting to overthrow.

Thus, Davidson attempts to set the record straight on what Keynes believed to be his revolutionary analysis. By comparing Keynes’s literal text with the analyses of Tobin and those of the New Keynesians, this chapter demonstrates that both Tobin’s Old Keynesian as well as New Keynesian models require restrictive analytical foundations which were explicitly rejected by Keynes as necessary conditions for his General Theory. Davidson’s identification of Tobin’s asserting that ‘all Keynesian macroeconomics really requires that product prices and money wages are not perfectly flexible’, becomes an admission that New and Old Keynesian models are merely special cases requiring, for logical consistency, additional restrictive classical axioms that are not necessary for a general theory. Here it is evident that Tobin has not rejected the traditional market metaphor of orthodoxy in favour of Keynes’s theory of effective demand.

At the heart of much of the New and Old Keynesian logic are still questions pertaining to speeds of adjustment of prices and quantities in market-based logical frameworks. Among the many contributions one finds in this chapter by Davidson is the identification of a correct interpretation of Keynes’s theory of effective demand in which the very question of the speeds of adjustment between prices and quantities is inappropriate and meaningless. One cannot have it both ways: a theory of effective demand deals with the interdependent natures of aggregate demand and aggregate supply regardless of the degree of competition, and therefore regardless of the existence of constraints on individual behaviour which cause the analysis to slip back into traditional modes of reasoning.

To repeat, what needs to be considered, then, is the possibility that any programme which calls itself Keynesian must reject market metaphors along with all of the heuristical implications that such metaphors require. This conjecture runs like a thread through all of the chapters contained in the first part of this book, as well as in many if not most of the chapters in subsequent parts.

Next, Jan Kregel takes up some of the points addressed by Davidson, in the second chapter entitled ‘Keynes and the New Keynesians on Market Competition’. Kregel asserts that interpretations of the 1930s’ Depression, including the rather interesting ones put forth by Irving Fisher, were not consistent with Keynes’s. Any attempt to understand those events in terms of ‘a pathological malfunctioning of the competitive price mechanism’ was misguided. Keynes’s interpretation, that there could exist an excess supply of goods and labour, had no grounding in a market-based framework and thus questions surrounding the degree of competition as an explanation for such excess supplies were immaterial. Whether wages and prices were flexible or not made no difference whatsoever to the framework being proposed by Keynes to understand the problem.

As Kregel points out, such a warning was not heeded by the host of economists during and following Keynes’s lifetime who continued to think in terms of market metaphors, enquiring about the extent to which wages were or were not rigid and markets were or were not perfect, all in attempting to understand the causes of economy-wide unemployment. Questions at the heart of Keynes’s own framework, centring on money and uncertainty, were relegated to secondary status.

Kregel explores the ideas of Joan Robinson, G.B.Richardson and Ronald Coase on market process and price adjustment in an attempt to show that, like Keynes, their analyses lead to the conclusion that the extent to which free market economies adjust does not rely on the flexibility of wages or prices: ‘The real problem’, we see Kregel saying, ‘concerns the impact of imperfect information and the ways individuals respond to uncertainty over the future implication of currently available information, including prices.’

From here Kregel focuses his attack on the New Keynesian theories of wage and interest rate rigidities, having a common lineage in Akerlof’s writings on asymmetric information.

Then, the goal of my own contribution to this volume, ‘New Keynesian Macroeconomics and Markets’, is to identify Keynes’s own criticisms of market-based interpretations of economic fluctuations. From a New Keynesian perspective, economic downturns, unemployment and sluggish capital accumulation emanate from imperfections in output, labour and capital markets, respectively. Keynes rejected any methodological individualist interpretation of market failure as the basis for economic disequilibria, contending that such heuristical frameworks could only be considered if output and employment in the aggregate were not capable of changing. As such, one can only wonder, as Keynes did about A.C. Pigou’s understanding of the situation over sixty years ago, how it is possible to enquire into the causes of fluctuations in output and employment in the aggregate, when the method underlying such an investigation only has validity when neither of those variables may change. Continued adherence to a New Keynesian perspective after it is shown to have no consistent theoretical foundation can only be explained by an equally suspicious adherence to the crudest form of positivism, another element of coherence between New Keynesian and New Classical (neoclassical) perspectives.

The second half of this essay addresses newer incarnations of New Keynesian economics, what Barkley Rosser has referred to as ‘Strong New Keynesianism’, in which irregularities in market-based scenarios can cause strategic complementarities, spillovers and multipliers, which allows for the possibility of cumulatively caused changes in aggregate output and employment. What I indicate in this section is that such innovations come a long way to considering the organic interdependencies that were on Keynes’s mind as he formulated his theory of effective demand. However, it was these organic interdependencies that also laid the foundation for Keynes’s rejection of market-based metaphors in macroeconomic analysis. As such, in their effort to push outward and beyond the limits of the weak New Keynesian analysis, i.e. with their acceptance of many of the salient thrusts of Keynes’s perspective, they have unwittingly rejected the very foundation of the weak New Keynesianism that provided their initial impetus into considering such questions.

The final chapter in this first part of the book, ‘Price Theory and Macroeconomics: Stylized Facts and New Keynesian Fantasies’, is written by Edward J.Nell. In light of the development of New Keynesian economics, Nell wants us to think about whether economic relationships are timeless (as seems to be the case underlying all neoclassically based theories of rational choice) or whether they should be considered to be ‘historical, in the sense that they hold for particular periods of history’? He observes that general equilibrium theories of price (included in which is New Keyensian economics) are abstracted from time or historical context, such that many of the rich institutional factors which originally provided the impetus for such theories have been lost. What Nell contends is that the stylized facts which provided for the foundation of price theories and macroeconomics (and which are implicitly retained) do not reflect the world in which we now live and function. In an earlier period, Nell believes that markets were more akin to the representations depicted by orthodoxy, whereas now ‘the stabilizing aspects of market adjustment appear to have vanished…market responses appear to exacerbate fluctuations, as would be expected from Keynesian theory and from early Keynesian accounts of the business cycle’. In the former, output was more inflexible over sectors, such that prices might have been considered as stabilizing factors. However, with new and modern technologies, the ability of output and employment to be more liable to change causes the focus of stabilization and destabilization to switch from prices to output and employment.

Put succinctly, Nell’s aim in this chapter is to indicate that history matters, that the conditions which underlaid what he calls the Old Trade Cycle of the Nineteenth Century, which still appear to permeate neoclassical thinking (small business units, inflexible methods of production, flexible prices and money wages, a functioning price system which helped indicate cyclical changes), are profoundly different from conditions that have been evident in the era after World War II.

1

SETTING THE RECORD STRAIGHT

Paul Davidson

On page IX of the Preface to the printed German language edition of The General Theory of Employment, Interest and Money, published by Duncher and Humblot in 1936, the following sentences appear:

This is one of the reasons which justify my calling my theory a General [emphasis in the original] Theory. Since it is based on fewer restrictive assumptions [weniger enge Voraussetzungen stutz] than the orthodox theory, it is also more easily adopted to a large area of different circumstances.¹

These sentences echo Keynes’s insistent theme that a general theory required fewer restrictive axioms. For example, Keynes declared classical economists

resemble Euclidean geometers in a nonEuclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight…. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required in economics today.

(1936, p.16, emphasis added).

In any logical argument, it is for those who adopt highly special assumptions to justify them, rather than for those who dispense with such axioms to prove a general negative. Thus, by declaring that his analysis was a general theory that required fewer restrictive axioms, Keynes placed the onus on the classical economists to justify their assumptions that an economic system required the axioms of gross substitution (i.e. everything is a substitute for everything else), neutral money and an ergodic economic processes so that the future was not uncertain—rather future outcomes were controlled by immutable objective probability distributions.²

Galbraith (1994) has noted the relationship between the ‘first three words’ of Keynes’s book (i.e. ‘The General Theory’) and Einstein’s General Theory of Relativity. Galbraith demonstrates that ‘The parallels between Keynes’s economics and Einstein’s relativity theory are deep enough, and evidently intentional enough, to provide a useful framework for thinking about what Keynes meant to do with his scientific revolution’ (ibid., p.62).

Tobin, on the other hand, provides a different interpretation of what Keynes meant by calling his analysis ‘The General Theory’. Tobin does declare that ‘the crucial issue of macroeconomic theory today is the same as it was sixty years ago when John Maynard Keynes revolted against what he called the ‘classical’ orthodoxy of his day’ (1992...

Table of contents

• Cover Page
• Half Title page
• Series Papge
• Title Page
• Copyright Page
• Contents
• List of Contributors
• Foreword
• Introduction
• I Prices, Outputs and Markets
• I Prices, Outputs and Markets
• II The Labour Market
• II The Labour Market
• III Money, Credit Rationing and Asymmetric Information
• III Money, Credit Rationing and Asymmetric Information
• iv New Walrasian and Strong New Keynesian Macroeconomics
• iv New Walrasian and Strong New Keynesian Macroeconomics
• v Public Policy
• v Public Policy
• Bibliography
• Index