The black knights of Keynesian economics

July Sloan has an article in today’s Australian she titles, “Robust views build better debate, so let’s have them“. I don’t mean to quibble but there is plenty of debate, just little engagement. No one who visits this site can be in any doubt that there are critics of economics around as not a few of us here bound into the various inanities that are prevalent everywhere.

I have written books, papers and blog posts about Keynesian economics but no one amongst those economists wishes to take me up on any of it or at least they haven’t for the past three years. Even Judy, in her article, never mentions Keynes and Keynesian economics although she lists “the wisdom of the fiscal and monetary policies implemented in the US since the global financial crisis” as her number one problem and uses Paul Krugman as Exhibit A of an engaged economist.

In fact, both so far as politics and policy are concerned, the Keynesians have been routed. I would be glad to hear from any of them who in 2013 would like to repeat in public all of those nonsensical “Keynes the Master” incantations we not so long ago used to hear ad nauseam. The stimulus has been an unmitigated disaster everywhere it has been applied with no exception. And slowly everyone is withdrawing the spending (except in the basket case economy of the US) – even though all have high rates of unemployment – as they edge their way towards a return to prosperity. From Greece to China, in Australia and across the world, Keynesian theory is dead except in our economics texts.

And it’s not just in macro that the academic world of economics is fading. In my Free Market Economics I go after the marginal revenue-marginal cost analysis as shallow to the point of vacuous. I teach marginal analysis, of course, but heaven forfend that I should inflict any of that on my poor unsuspecting students. I also get not a little vexed about the term “perfect competition” which so far from being perfect (not to mention literally impossible as defined) is the kind of world in which no Microsoft, Apple or BHP could every exist. In my view I teach one of the finest economics courses in the world. But engagement from other economists over anything I write, never a word is said or written.

And then again re Keynes, I have written in a published article how he poached immense amounts from others in putting together The General Theory. No one has ever written a reply. I bring it up in conversations and no one even thinks to attempt to rebut what I say. Try this on yourself if you are an economist. The term “Say’s Law” and the phrase “supply creates its own demand” are not classical in origin. Both are twentieth century and both are American, the first entering into common discourse in 1921 and the second first found in a book published in 1933 which Keynes is absolutely 100% certain to have read while writing The General Theory. So how did they get into the book? You tell me without having to acknowledge that there are things about how The General Theory was written that I know that no one who reads the standard account can know or if they do know feel free to ignore.

And lastly, as far as individuals declaring themselves Democrat or Republican in the US, everyone registers with one side or the other so that they can vote in the primaries.

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48 Responses to The black knights of Keynesian economics

  1. Jim Rose says:

    Lucas and Sargent from After Keynesian Macroeconomics (1979):

    For policy, the central fact is that Keynesian policy recommendations have no sounder basis, in a scientific sense, than recommendations of non-Keynesian economists or, for that matter, non-economists

    Robert Lucas from Tobin and Monetarism: A Review Article (1981):

    Keynesian theory is in deep trouble, the deepest kind of trouble in which an applied body of theory can find itself: It appears to be giving serious wrong answers to the most basic questions of macroeconomic policy.

    Proponents of a class of models which promised 3 to 4 percent unemployment to a society willing to tolerate annual inflation rates of 4 to 5 percent have some explaining to do after a decade such as we have just come through.

    A forecast error of this magnitude and central importance to policy has consequences, as well it should. We got the high-inflation decade, and with it as clear-cut an experimental discrimination as macroeconomics is very likely to see, and Friedman and Phelps were right.

  2. Poor Old Rafe says:

    Hutt wrote somewhere regarding Keynes and the Keynesians that there was an almost complete disconnect in the literature between Keynes and his critics. Mainstream journals simply did not want to be bothered by critical reviews of Keynes or any kind of critical exchange over his ideas. Hutt was really worried about the situation where apparently decent and serious scholars did not want to engage with opponents of Keynes.

    The case of Robbins was amazing, he made a transition from friend of the Austrians and Hayek to become a Keynesian and practically apologized for his previous work on the great depression which took a classical line.

    Somone asked Hayek about that, he said off the record that Robbins was probably more interested in a title than the truth on that issue.

  3. Poor Old Rafe says:

    This is a long bow and of course many factors contribute to this state of affairs, one of them the rampant politicization of intellectual life by the left. I want to point a finger at the schools of philosophy in the 20th century.

    Two factors, (1) the specialization and professionalization of the field, like economics, which destroyed the popular readership and enabled academics to spend whole careers writing stuff that made no connection with the world outside the window and (2) the waves of useless fads and fasions that came through, also making no connections – Logical Positivism that morphed into logical empiricism (wasted decades from the 1930s), Wittgenstein in two phases, the first inspiring logical positivism, the second promoting language analysis that paralysed Oxbridge in the 1950s and 1960s, Kuhn and paradigm theory from the 1960s. On the other side, Heidegger and the phenomenologists and existentialists, leading to the POMOS. Etc.

    The point is that dozens of student generations have passed though schools of philosophy getting their heads infected by junk and that has to have an effect on every other discipline where people tried to take philosophy seriously, or those graduates ended up spending their careers.

    What is the antidote? Critical rationalism, simple old-fashioned critical thinking, the scholarship of Hayek, Popper, Oakeshott, Gellner and many others, who have so far exerted little influence compared with the followers of fads and fashions. Most philosophy students would look blank if asked about these guys. Or come up with some glib misrepresentation of their ideas.

  4. steve says:

    I am out of my depth here as far as a deep understanding of economics is concerned so this may seem to be a stupid question. You say Keynsian economics is dead, but hasn’t it been dead before? It rises from the grave (and will again) as time blunts the pain and eventually there will be more Keynsians in Treasuries all over the world. Look at the amount of people who think Gough was a great Prime Minister.
    It is almost as if you think that we, as a species, learn from the mistakes of our forefathers.

  5. Steve Kates says:

    Ah Steve. You are quite right. It is far from dead. It is alive in all economists who have made their way through an introductory economics course and in the great tradition of give me your child for the first seven years and I will give you the man, we have an entire profession that could not even begin to cope with macro problems without using aggregate demand. But we have at least gone this far, that many of them do it with a heavy heart and some are even thinking about alternatives since they can see without any doubt that the policies attached to the theory do not work. Not dead at all, that theory, but so far as a means to understand what is going on and what to do, absolutely dead. Keynesian economics is now almost entirely the province of socialists, academics and public servants.

  6. Andrew says:

    You say Keynsian economics is dead, but hasn’t it been dead before? It rises from the grave (and will again) as time blunts the pain and eventually there will be more Keynsians in Treasuries all over the world. Look at the amount of people who think Gough was a great Prime Minister.
    It is almost as if you think that we, as a species, learn from the mistakes of our forefathers.

    It came back in 2008, it’s hardly dead sadly.

  7. Jim Rose says:

    Friedman was published on a regular basis

  8. The Pugilist says:

    I have written in a published article how he poached immense amounts from others in putting together The General Theory. No one has ever written a reply. I bring it up in conversations and no one even thinks to attempt to rebut what I say.

    This is damning.
    I’ve read your article, and the fact that no-one (especially the hardcore Keynesians) can rebut this is amazing to me. No wonder the history of economic thought is unpopular with the mainstream of the profession.
    In response to Rafe, how much of a role did Beveridge play in facilitating the Keynesian revolution by breaking the will of Hayek and Robbins at the LSE? Once they were out of the way, the Cambridge Keynesians were virtually unopposed in Britain…

  9. sdfc says:

    So what’s damning again?

  10. Abu Chowdah says:

    This is damning.
    I’ve read your article, and the fact that no-one (especially the hardcore Keynesians) can rebut this is amazing to me. No wonder the history of economic thought is unpopular with the mainstream of the profession.
    In response to Rafe, how much of a role did Beveridge play in facilitating the Keynesian revolution by breaking the will of Hayek and Robbins at the LSE? Once they were out of the way, the Cambridge Keynesians were virtually unopposed in Britain…

    Yes, I agree. I was pretty amazed when , in a lecture online, Steve revealed how much of an intellectual thief Keynes was. And this is ignored. But then, the truth about other frauds’ pasts is also ignored. [cough]Obama[cough].

  11. sdfc says:

    How exactly? I’m not surprised this non-event has drawn zero comment among economists.

  12. The Pugilist says:

    So what’s damning again?

    From Keynes…
    A. Intellectual fraud, bordering on plagiarism.
    B. The advocacy of the crank economics/political economy of Malthus.
    C. The complete misrepresentation of ‘classical economics’.

    From Keynesians…
    A. The defence of a fraudulent, defective theory.
    B. Despite the evidence that Keynes attacked and destroyed a straw man as the foundation of his ‘general theory’, this is ignored and not addressed.

    It is plain to see in reviews of the general theory that it was not well accepted by his contemporaries. It is only when the new generation swallowed his garbage as gospel that the Keynesian ‘revolution’ took hold.

  13. Abu Chowdah says:

    Your post sets out your position well, SDFC. Thanks for your honesty.

  14. Abu Chowdah says:

    There’s no point in arguing with someone who thinks intellectual plagiarism is unimportant, pugilist. SDFC has nailed her colours to the mast.

  15. The Pugilist says:

    Not just plagiarism Abu. Keynes stole utter bullshit and successfully passed it off as gold. He lived every shyster’s dream.

  16. sdfc says:

    Pugilist

    Maybe you should point me to some of that plagiarism. Maybe you can point out why “supply creates its own demand” is not an accurate description of classical economics.

  17. The Pugilist says:

    Sdfc, Steve Kates has written heaps of stuff on this. Perhaps you should read some of his published articles and books. The point is that no-one to my knowledge has ever refuted the key themes in Steve’s work.
    May I humbly suggest that you do your own research, read some of Steve’s work and open your mind?

  18. sdfc says:

    I started reading one of his papers but it seemed rather pointless. In your own words give me one of his many examples.

  19. sdfc says:

    Let me help you. Central to Keynes’ theory is that income and must be maintained to support consumption and by extension investment.

    Who did he nick that from?

  20. Chris M says:

    Hey Steve back in a 1975 interview John Wayne had something to say about Keynesianism (@2:15).

    Keynes enjoyed buggering so I think he decided to bugger the world economy.

  21. Poor Old Rafe says:

    Pugilist, I appreciate that Beveridge did a lot of damage but at the LSE he was essentially an administrator and I don’t think he intimidated academics with the stature of Hayek or Robbins. For example when he was about to import the Frankfurt School, Hayek heard about it and ran across the campus to warn Robbins, they immediatley bailed up Beveridge and he reversed the decision so the marxists went to the US instead.

  22. Elizabeth (Lizzie) B. says:

    What is the antidote? Critical rationalism, simple old-fashioned critical thinking, the scholarship of Hayek, Popper, Oakeshott, Gellner and many others

    This is how I am thinking, Rafe, from an admittedly limited reading in this area.

    Speaking very much as an outsider here, Keynesian economists do seem to have been rather blind about the things that have influenced them and their theorising. Perhaps they don’t care. Only interested in the belief system they have carved out, regardless. Bit like climate change believers really.

    Black knights. None so blind as those who cannot see, as my Sainted (and sometimes startlingly perceptive) Mother used to say.

  23. Pyrmonter says:

    OK … wading in

    A good start would be for protagonists to (a) define their terms and (b) avoid ad hominem attacks. The latter are common on both sides – from Krugman’s attacks on credible debaters like Ferguson, Mankiw and Fama; to the incantation on the Cat of the term “Keynesian” as an insult directed at anyone who doesn’t think aggregate expenditure (whether viewed in a “keynesian”, neo-keynesian, New Keynesian, Post Keynesian, orthodox monetarist or market monetarist – that covers a lot of economists btw) is always self-righting. More importantly though, my impression is always that Steve K’s criticisms are of everyone who isn’t a fairly orthodox Austrian; there is more to the argument than a dichotomy between “believers in the market” and “kindergarten keynesians”.

    Finishing up – for a surprising example of a kindergarten keynesian argument … this seems to have been lifted from a first year eco text book – http://www.project-syndicate.org/commentary/balanced-budgets-without-austerity-by-robert-j–shiller – and to ignore some fairly robust criticsms of the keynesian consumption function.

  24. Abu Chowdah says:

    I started reading one of his papers but it seemed rather pointless. In your own words give me one of his many examples.

    So you’re not being serious. We get it.

  25. Judith Sloan says:

    Oh but it were true, Steve. Politically, the Keynesians are winning in the US and elsewhere.

  26. Poor Old Rafe says:

    “Its all about the ideas, stupid”.
    The non-left has been derelict verging on anti-intellectual in the battle of ideas.
    A handy introduction to some of the ideas that can help, from the late Colin Simkin, the kiwi friend of Karl Popper. http://www.the-rathouse.com/James/Simkin-Basic-Popper.html

  27. Sinclair Davidson says:

    Who did he nick that from?

    Harlan McCracken.

  28. Louis Hissink says:

    SDFC, the phrase “supply creates its own demand” is Keynes’ understanding of Say’s law and demonstrates his ignorance of it.

    It is exemplified by the Ford Motor company producing the Edsel car – supply was indeed created but demand did not happen. Same with Sony and the Beta cam video format – technically brilliant but lost to the competing VHS format because Panasonic realised that the video recorder had to be able to record a Super Bowl match – Sony refused to supply that demand by making their tapes record a dupe bowl match one one tape; Sony required you to be there to insert the second tape to record it.

    Entrepreneurs produce stuff in reaction to an observed demand for something, so demand always creates supply.

    Keynes never understood Say’s Law, and hence human action itself.

    Truth be told, Marxism and the whole edifice of socialism was based on an application of Lyellan uniformitarianism and Darwinism to economics, from which two strands emerged – Bolshevism and Fabianism. The former was a catastrophic version of economic progress where the hated rentier class, or middle class, was physically exterminated, Russian, Chinese, Cambodia, Cuba etc. The latter adopted Darwin’s method of minute incremental change to evolve society, and, in typically English establishment superiority, discovered that getting rid of the middle or rentier class could be achieved by debauching money from inflation; far more civilised method, don’t cha know, old chap. The Fabian version is progressivism of economic evolution, slow iterations of the ’cause’.

    Remember that today’s lefties still hate the rentier class as indicated by McTernan’s tweet on 30th Sept when, in responding to a criticism of Gillard’s opposition to gay marriage, tweeted that it was “Perfectly progressive to oppose a bourgeois institution like marriage”.

  29. 1104570 says:

    ‘Friedman was published on a regular basis’

    True Jim, but not entirely the point.

    I studied undergrad economics at University of Queensland in the late 80s-early 90s and in a 2nd year macro course (mandatory) lecturer (Dr [slight edit]) spent most of the lecture in which he was supposed to be introducing us to Friedman’s work, ridiculing it. For many of us it was really the first time Friedman was discussed at any length at university.

    I lost a lot of respect for the lecturer (and to some extent the institution) because it seemed to me that trying to turn us against a set of ideas before we even understood them showed how little he thought of our ability to work things out for ourselves. At the time I thought that if the lecturer truly had the courage of his convictions he would have tried to present Friedman’s work as clearly and fairly as possible. God I was naive.

  30. Louis Hissink says:

    Whoops, Sony’s tapes could not tape a Superbowl match, Panasonic’s did. So the VHS format survived and the Beta format not.

  31. Rabz says:

    There’s a truism on this topic which seems apt for this thread.

    If Keynesianism is the solution, why do we still have a problem?

  32. Steve Kates says:

    Oh but it were true, Steve. Politically, the Keynesians are winning in the US and elsewhere.

    Compared with 3-5 years ago, the rampant and regnant Keynesian dominance has begun to recede. It is slow but everywhere there are limits being placed on expenditure, even in the US with its sequestration. But it is American exceptionalism again that is the tale. But the lessons the US is providing the rest of us will stand us in good stead. But the process will be slow but I think there is only one direction that Keynesian theory can go and that is out the door. Maybe wishful thinking, but if it can survive these present failures, then there will never be a time it can be rooted out.

  33. mareeS says:

    “If it can survive these present failures.”
    Like a persistent weed in the garden, hit it with Zero in the form of rational thinking, it will die off for a while, but as soon as you turn your back, up it pops again, and out comes the Zero again. An eternal cycle.

  34. Thadook says:

    Neoclassical economics ain’t all that either, it didn’t really see the GFC coming. And the Austrians are willfully anti-scientific.

  35. Rafe says:

    In what way are the Austrians anti-scientific? Bearing in mind that there are different schools of Austrians and some make more sense than others on methodology.

  36. sdfc says:

    Sinclair

    Harlan McCracken.

    Keynes wrote about the relationship between investment and expected profit as well as boosting income via deficit spending some years prior to the GT. The evolution of his theory seems a natural progression. Perhaps you can point me specifically to what he nicked.

    Louis

    Say’s Law implies there can be a general deficiency of demand. Whether Ford made a mistake with a model of car is neither here nor there.

  37. sdfc says:

    …implies there can’t be a general deficiency of demand.

  38. But engagement from other economists over anything I write, never a word is said or written.

    Time to invoke the Fisk Doctrine again.

    The purpose of this is to change the nature of the debate, from a defensive discourse about [Friedman et al ], to a more assertive discussion about how to deal with those who oppose [common sense and economic liberty], and who should be sacked or demoted and who should be allowed to stay on.

  39. Abu Chowdah says:

    If Keynesianism is the solution, why do we still have a problem?

    Liberty quote!

    Absolutely brilliant.

  40. . says:

    Thadook
    #1041600, posted on October 20, 2013 at 3:14 pm

    Neoclassical economics ain’t all that either, it didn’t really see the GFC coming. And the Austrians are willfully anti-scientific.

    Imbecile. Wrong on so many levels.

  41. The Pugilist says:

    Say’s Law implies there can’t be a general deficiency of demand.

    Wrrrrrrong. Say’s law implies that a recession or a downturn is never caused by a general glut of all goods and services. All recessions start out structurally. A general glut (or more accurately a rise in demand for the medium of exchange) can develop after a downturn commences. This is what Hayek and others referred to as a secondary depression and it was generally accepted by classical economists that such a situation should be avoided…but the answer was to increase the supply of the medium of exchange and try to maintain business confidence.

  42. Lovely essay, Professor Kates. Speaking from North America (the Dominion and the Republic) it seems that while stimulus and government spending are still advocated vociferously in the media (with at best classical liberal adherents added as ‘benighted’ sparing partners), there is relative little mention that Lord Keynes is the twentieth-century economist whose wisdom should migrate into the twenty-first. Sadly, for what sound policy exists is due largely to exhausted budgets rather than exhausted rhetoric — and little if any acknowledgement that economic intervention is counter-effective.

  43. . says:

    I love it.

    Conservatives want to go back to the 1950s

    Well, the GT was published in the 1930s.

    …and the left wants us to go back to the 1970s…FFS what a horrible fate.

  44. m0nty says:

    The dodgy austerity economics of the tea party GOP

    James Pethokoukis, while working for the AEI, at least realises the seriousness of a sudden 4% drop in GDP.

  45. Capitalist Piggy says:

    From the comments:

    ——————————————
    David R. Henderson | October 19, 2013 at 9:49 am
    James (if I may),
    Thanks for mentioning my study and linking to it. Those who want to see how I handle the issue of pent-up post-World War II demand should read the study and go to the end where I deal with that issue.
    Oh, and I’m not a George Mason University economist, not that that’s an insult. I’m an economics professor at the Naval Postgraduate School and a research fellow with the Hoover Institution.
    Finally, one thing I notice is that while you have criticisms of each of the cases others and I give where spending was cut a lot and the economy didn’t tank, you don’t actually give examples where spending was cut a lot and the economy did tank. I’ve been looking for those and can’t find any. Do you have any?

  46. Sinclair Davidson says:

    Perhaps you can point me specifically to what he nicked.

    Of course. This is what he nicked, from here, and the evidence is here and here.

  47. Jim Rose says:

    1104570, in my Keynesian education, I too sat through one lecture on monetarism. the lecturer ridiculed Friedman as simplistic. No attempt to present his view and the conflicting evidence.

    Mentioning Friedman’s name in the 1980s at job interviews in Canberra would have been extremely career limiting. Not much better in the early 1990s.

    Back in the early 1990s in Australia, the much less radical Milton Friedman was just graduating from being ‘a wild man in the wings’ to just a suspicious character in policy circles.

    If you name dropped Hayek even in the 1990s, any sign of name recognition would have indicated that you were been interviewed by educated people.

    Friedman’s presidential address to the AEA in 1967 is now recognised as perhaps the single most influential journal article of the 20th century.

    That article is the essence of good communication as was his 1976 noble lecture. No wonder it was hidden from impressionable undergraduates.

  48. Jim Rose says:

    Haberler, Jacob Viner, Robertson, Pigou and Frank Knight pointed out in their reviews of the General Theory that it lacked originality, and presented old ideas often incorrectly in confusing new vocabularies that made the book difficult to read. These reviews are worth reading today such as this by Knight:

    Many of Mr. Keynes’s own doctrines are, as he would proudly admit, among the notorious fallacies to combat which has been considered a main function of the teaching of economics.

    To be fair, under Stigler’s rule of scientific epiphany, Keynes deserves credit because he made sure that the old scattered ideas and fallacies stayed discovered.

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