Monday, June 2, 2008

Defining Keynesian Economics

Via Mark Thoma, I see that the Economists for Obama blog has offered some harsh criticism of John Cassidy's article, "Economics: Which Way for Obama?" in the latest New York Review of Books. Half the article was a review of Richard Thaler and Cass Sunstein's book, Nudge, and the other half was a critique of Obama's economics. Unfortunately, the whole article was bad. I had been meaning to write about Cassidy's strange article, and in particular how Cassidy clearly doesn't understand what "Keynesian economics" actually is. Luckily, Economists for Obama has done most of the leg-work for me. But Economists for Obama didn't address one part of Cassidy's many characterizations of Keynesians, and it's that part that bothered me the most. Cassidy wrote:

Keynesians argue that vigorous regulation and the prohibition of certain activities such as excessive borrowing are often necessary.
Keynesians support "vigorous regulation"? Keynesian economics is a macroeconomic theory, and has little to say about microeconomics at all. Where does this connection between "vigorous regulation" and Keynesian economics come from? Certainly not The General Theory of Employment, Interest, and Money. In chapter 24 of The General Theory, Keynes wrote:
Thus, apart from the necessity of central controls to bring about an adjustment between the propensity to consume and the inducement to invest, there is no more reason to socialise economic life than there was before.
Keynes then went on to sing the praises of individualism, noting that having the government help smooth out the business cycle "is the best safeguard for personal liberty":
It is also the best safeguard of the variety of life, which emerges precisely from this extended field of personal choice, and the loss of which is the greatest of all the losses of the homogeneous or totalitarian state. For this variety preserves the traditions which embody the most secure and successful choices of former generations; it colours the present with the diversification of its fancy; and, being the handmaid of experiment as well as of tradition and of fancy, it is the most powerful instrument to better the future.
So as you can see, Keynesians obviously love "vigorous regulation" and hate freedom. It's also worth noting that in Alan Blinder's description of "Keynesian economics" in The Concise Encyclopedia of Economics, the word "regulation" appears a total of zero times.


Josh Hendrickson said...

Great post. Unfortunately, many have misunderstood both Keynes' applied theory and his general theory over the years. I have recently discussed the latter here.

Terence said...

hhhmmmm...I actually thought that was a good review. But I agree, Keynesianism is macro not micro. Or, at least, it is if you mean Keynesianism as the economic theories of the man himself. On the other hand, if you mean Keynesianism as the centre of economic gravity over the period of time when Keynes had the most influence then it's probably not so wrong (i.e. quite a few economists in the post war years were pro regulation too). I think the first defn. is right but the writer in the New York review is hardly the first person to opt for the second.

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