Philip Pilkington — Financial Markets in Keynesian Macroeconomic Theory 101

Yesterday when I published my post on Krugman and the vulgar Keynesians not understanding the meaning to the term ‘liquidity trap’ I came to realise that many readers — both sympathetic and hostile — do not really understand the Keynesian theory of financial markets. I then realised that this was actually quite understandable given that it is not much discussed today (with some notable exceptions such as Jan Kregel and Minskyians like Randall Wray).

Some years ago the financial markets were very much so discussed and understood. Key references in this regard are the works of Keynes himself (particularly the Treatise on Money), GLS Shackle, Roy Harrod’s book Money and Joan Robinson’s essay ‘The Rate of Interest’. There are also some more minor works but I will not here provide a bibliography. (From a purely theoretical point-of-view I have found Shackle’s work the best while from an institutional point-of-view I have found Harrod’s work best).

Fixing the Economists
Financial Markets in Keynesian Macroeconomic Theory 101
Philip Pilkington

Philip Pilkington — Two Different Approaches to Economics and One Approach to Pseudo-Economics

So, what can we now say about models? Well, those that make the best economists and the most fertile theorists — that is, those that are best able to spot novelty which is essential for any good working economist and any progressive theorist — should adhere as best they can to Keynes’ kaleido-static approach. Or, if they so feel, they should engage in a form of kaleido-dynamics if they can manage it. This requires a great deal of irony on the theorist’s part and a distinct ability to recognise that Truth is a slippery concept and that all we can do is try to weigh up rather general arguments and see which is, ordinally, the most likely. (Yes, readers of Keynes’ Treatise on Probability will see something of his underlying philosophy of knowledge here…). 

Those who are better at writing textbooks and engaging in instruction should try to build the best ‘business-cycle machines’ that they can. In my opinion, the Godley approach — which is an outgrowth of Kaldor’s and Kalecki’s work — is the most promising field of inquiry. Such theorists should be very careful not to stray too far from the real world. I think, for example, that Samuelson and Hicks committed this particular sin (Hicks largely recognised this, Samuelson was blind as a bat). But with some discipline I think that there is little problem if economists build business-cycle machines and use these for didactic purposes. (But don’t try to test these thought-experiments against the data, please!).

Finally, those who are inclined to the ‘hermetically-sealed myopia machines’ should pack up and move on. There are other disciplines where the skills involved in constructing complex, rigidly deterministic systems are required. Engineering is the most obvious example. People inclined toward this sort of theorising would be better placed in these disciplines. They pay quite well and if you fall into this skill-set you will probably find some satisfaction there, but you will not make a good economist. Indeed, as I said, I don’t think that what you will be doing can adequately be called ‘economics’ and you will likely just spoil the discipline for the rest of us and annoy potential students.

Fixing the Economists
Two Different Approaches to Economics and One Approach to Pseudo-Economics
Philip Pilkington