Arnold Kling  

Keynes and Anti-Keynes

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John Taylor writes,

In my view, rigidities exist in the real world and to describe accurately how the world works you need to incorporate such rigidities in your models, which of course Keynes emphasized. But you also need to include forward-looking expectations, incentives, and growth effects--which Keynes usually ignored.

In my view the essence of the Keynesian approach to macro policy is the use by government officials of discretionary countercyclical actions and interventions to prevent or mitigate recessions or to speed up recoveries. Since I have long been critical of the use of discretionary policy in this way, I think the Economist is correct so say that I am anti-Keynesian in this sense of the word.

What I call the textbook Keynesian model is one in which you think of everybody as working in a GDP factory, and the aggregate price of labor is fixed. (If you go to the graduate textbook model, you have prices that move, but too slowly, and it can have stickiness in output prices, not just the wage rate.)

In terms of theoretical outlook, I would say that anyone who works with the GDP factory model and the textbook version of aggregate demand and aggregate supply is conducting the conversation in a way that is understandable to the Keynesian tradition. However, there are those on the far left and far right who do not like the GDP factory story and who see things as more complicated.

Some of the "it's complicated" folks are on the left. I think of Minsky, or Akerlof and Shiller in Animal Spirits. These folks advocate Keynesian policies, but without the pretense of mathematical precision that one finds in textbook models.

Then there are the "it's complicated" folks on the right. As I have thought about these issues, I find it less and less plausible that the dominant reason that the economy departs from the full-employment idea is stickiness of nominal prices. There are so many other things that need to change in a dynamic economy.

Is Borders Books going to be closing down and letting go of 10,000 workers because of lack of demand? Yes. But is the problem a lack of aggregate demand, meaning the ratio of the money supply to average prices? I would say no.

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CATEGORIES: Macroeconomics

COMMENTS (7 to date)
Mm writes:

Even if you believe in the keynsian model, the gov't's actual ability to intervene with counter cyclical, discretionary, spending is very limited d/t structural limitations on the gov't-If ircc did not Lloyd bentsen head a commission that reported that such policies typically worsened the boom & bust cycle b/c delays in implementing the counter cyclical spending lead to it hitting after the recession had usually ended therefore fueling inflation. I recall Reagan used such an argument.

effem writes:

So now imagine your GDP factory has record profits and very high returns on capital and STILL isn't hiring workers. To me, that is the glaring data point out there that economists refuse to consider because it does not fit with their models. (And yes, even domestic profits are at record highs - the NIPA data splits domestic and foreign profits).

Of course, the standard answer is that workers still aren't cheap enough but that makes absolutely no sense against a backdrop of record profits.

mark writes:

I think commenter 2 misses the point. The post does not endorse the "GDP factory" perspective, it criicizes it.

effem writes:

I understand that - Arnold is one of the few thinking harder about the issue. However, I still see little discussion of corporate profits. To me, that data point largely invalidates the GDP factory view by itself. After all, to what end to we need higher AD (and therefore lower wages) if not to boost profits?

Chris Koresko writes:

effem: So now imagine your GDP factory has record profits and very high returns on capital and STILL isn't hiring workers.... Of course, the standard answer is that workers still aren't cheap enough but that makes absolutely no sense against a backdrop of record profits.

I don't understand this point. If the marginal product of workers falls below their marginal cost, it seems to me that they won't get hired. This is independent of the overall profitability of the company.

What am I missing?

mark writes:

I don't claim to be an exper on Keynes but I am at least conversant and don't recall anything relevant to his theories about corporate profits, especially the relative historical level thereof. It's not so much that it doesn't "fit" his theory, it's that his theory operates at the macro, nationwide, level and corporate profits are from that perspective irrelevant as the activity of the "corporate" sector is subsumed within other larger variables. Your comment, posing questions about inverse relations between employment and returns on capital, is as much informed by Marx as anyone I suppose

Jonathon Hunt writes:

@ Chris

It's really simple; he's expecting altruistic behavior out of the "big, bad" corporations.

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