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Thursday, January 22, 2015
Robert Skidelsky — The Fall of the House of Samuelson
Samuelson bastardizes Keynes, and Friedman buries Samuelson. Result? Another global depression that the world is still in the firm grip of as deflation becomes ascendant.
Project Syndicate The Fall of the House of Samuelson Robert Skidelsky | Professor Emeritus of Political Economy at Warwick University and a fellow of the British Academy in history and economics, is a member of the British House of Lords
Tom, sorry, but Skidelsky actually gives us a glimpse of some of the unorthodox views held by Samuelson. He quotes him saying that the proper government budget should be assessed on its inflationary impact rather than on the fiscal balance. Also, he points out that the MIT folks were actually in favor of an income policy, rather than tight money, as were arguing the monetarists. All sounds pretty good to me.
I've always liked this quote by Samuelson: "Every good cause is worth some inefficiency". This sort of thinking was what enabled neoclassical guys like Tobin, Modigliani and Solow to push for thinks like job guarantees and basic minimum income.
Also, he points out that the MIT folks were actually in favor of an income policy DURING THE 70s, rather than tight money, as were arguing the monetarists...
What I meant, circuit, was that Samuelson did not present the real Keynes but his version of Keynes, the central point of which was stickiness. This became the basis of New Keynesianism instead of Keynes, who many subsequent "Keynesians" did not bother to read and understood Keynes through Samuelson.
New Keynesianism is a form of monetarism rather than actual Keynesianism. So the upshot is that now "Keynesianism" is equate with people like Krugman, on one hand, and Mankiw on the other.
Of course, Samuelson was better than Friedman. I didn't mean to suggest otherwise.
Although Samuelson was neither a faithful interpreter of Keyes, nor building on Keynes like the Post Keynesians, he at least retained some of the contributions that Keynes made. So now, even through Krugman and DeLong self-identify as neoclassical economists, they are at least open to using fiscal policy under some conditions, although they prefer monetary policy as a general rule.
But the "Keynesianism" that Friedman's monetarism replaced because of stagflation was not really Keynesianism at all, since Samuelson had largely adopted the neoclassical model, integrating some contributions of Keynes.
But Samuelson either failed to understand or else misrepresented the insights of Keynes that counter key neoclassical assumptions like uncertainty, along with the econometric approach, which subsequently became dominant in large part owing to Samuelson's adoption of a formalism that Keynes had at least questioned as appropriate for economics.
Unfortunately the arrow runs from Keynes to Samuelson to Friedman, rather than from Keynes to Post Keynesianism. Otherwise things would be different now.
Things might have gone much differently if Lorie Tarshis's Elements had become standard instead of Samuelson's textbook, or Robinson and Eatwell's Introduction. Maybe Kaldor would have prevailed rather than Friedman.
I've always liked this quote by Samuelson: "Every good cause is worth some inefficiency". This sort of thinking was what enabled neoclassical guys like Tobin, Modigliani and Solow to push for thinks like job guarantees and basic minimum income.
The holy grail of neoclassical economics is market efficiency. Inefficiency is evidence of market imperfection. The conclusion is that something is interfering with market forces, and removal of it will increase efficiency in the direction of optimizing outcome.
Economists that buy into to the neoclassical paradigm get trapped into this type of framing that goes along with assumption of long run equilibrium. This is the difficulty of compromising with neoclassical methodology. Samuelson et al feel into the trap and got run over by the neoclassical steamroller.
A fundamental point that Keynes made was that the assumption of long run equilibrium is not borne out owing to the operational dynamics of monetary production economies.
So even though the bastard Keynesians and the New Keynesians are more open to making adjustments that the market fundamentalists, they sabotage their position by accepting the framing of efficiency of market forces and "allowing for" some inefficiency for a "good cause." This is admitting a less than ideal situation as a result of this compromise.
Calgacus: Agreed, though the monetarists were in full ascent mode since the early 60s (since around Friedman's Monetary History). Income policies weren't always an easy sell compared t the other side's proposal to just slow the money slow.
Tom: Those are all fair comments. Just one thought. I agree Tarshis's Elements textbook is very good. However, Tarshis always presented Keynes's insight as founded largely on neoclassical principles. Tarshis argued that the revolutionary ideas in Keynes are the notions of the marginal efficiency of capital, liquidity preference, and the propensity to consume. We could get into the details but there's a good argument to be made that Keynes .
One last bit. Amererican Keynesianism was actually a synthesis of old institutionalism and british Keynesianism. Hansen was straight from the american institutionalist school, which was quite skeptical of mathematics, formalism and the other aspects that are now associated with the New Keynesians.
'there's a good argument to be made that the mainstream Keynesianism of the 50 and 60 was close to Keynes's true belief. For one, he DID accept the IS-LM as a good conceptualization of his thought. The focus on uncertainty tends to be overplayed.
I'm hardly knowledge about Keynes but from my understanding, his criticism of Say's law is based on uncertainty, which in a monetary production economy affects liquidity preference.
Neoclassical general equilibrium results from all income being spent iaw Say's law. If aggregate production at full employment creates corresponding aggregate demand, then the economy will remain in equilibrium at FE excepting a shock, and will return to optimal output in the long run as an economy recovers from the shock through the dynamic of interest rates that tends toward FE at the natural rate.
Keynes denied that assumption based on uncertainty leading to increase liquidity preference so that Say's law doesn't hold historically. It is a stylized assumption. Faux Keynesianism substitutes stickiness for Keynes's own analysis, following Samuelson.
Lord Keynes has a short post on Keynes and marginalism here.
The subsequent history of the emergence of Post Keynesianism as a school is of course complicated but, fundamentally, involves rejecting the last mistaken marginalist ideas of Keynes, along with superior theories of capital, prices and distribution
Regarding Tarshis's Elements, Robinson/Eatwell would probably been a better choice but that was not published until decades later. It's forty years old now, and largely forgotten but Samuelson/Nodrhaus is still being used
Circuit: really interesting comments. It seems to me that there is so much debate about Keynes's "true beliefs", that it is sometimes not clear that he had any! Moggridge's Keynes is a red Tory, and we have, according to you, a man who just before his death agreed with Hicks, and then he also gives two, constrasting views on the origins of money, one entirely Chartalist, the othe not. It is tempting to think of him, as post-Keynesians often do, as a kind of wily operator, who anticipated later MMT thinking, but settled for incremental improvements in neoclassical approaches as being better than nothing. But I wonder if he really ever a consolidated view -- is not the point, I think one emphasized by Skidelsky and Harrod, that he was almost entirely consumed by conjunctural responses to current conditions, from 1933 to his death from overwork?
Tom: That's a good point about the problem in assuming equilibrium. However, the major challenge to those who claim rejected classical tenets is the fact that the concluding chapter in the General Theory contains the following:
"...if our central controls succeed in establishing an aggregate volume of output corresponding to full employment...the classical theory comes into its own from this point onwards. If we suppose the volume of output to be given...then there is no objection to be raised against the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportion the factors of production ill be combined to produce i, and how the value of the final product will be distributed between them"
This is straight from the General Theory, not some obscure letter he wrote as a student of Marshall.
Anyway, his point in this passage is that if government ensures effective demand is sufficient to utilize available resources, then the classical analysis applies. Once you realize that it's not prices and wages that move up and down, but rather employment and output, then you are a Keynesian.
As for the issue of sticky wages, Keynes was pretty clear: flexible wages in the modern, industrial setting were an anomaly. The norm was fairly rigid wages, even during downturns. Though he also denied there was any evidence that wages were flexible at any point in recorded history:
"My reading of history is that for centuries there has existed an intense social resistance to any matters of reduction in the level of money incomes..."
Marian Ruccius: That's a very good way of stating it. The way I see Keynes is that he was constantly seeking to improve his "model" (or "intellectual framework", whatever one wishes to call it) so he changed his mind a lot. Also, he was a public servant, which means that his work was really about trying to find ways to convince his political masters of his preferred course of action. I guess he tried different approaches at different times.
From my understanding Keynes argued that flexible wages would not solve the underlying issue of demand anyway, owing to demand leakage to saving resulting from increased liquidity preference in the face of uncertainty — which others might call "lack of confidence" on the part of the private sector — that results in increased saving desire.
Instead, in his view the public sector (government) had to make up for that leakage with its own spending (if exports would not offset) in order for a looser version of Say's law to apply since Say's law doesn't take demand leakage into account under the assumption of neutral money.
As I understand it, Keynes held that private investment was rightly the driver in a capitalistic system geared to satisfaction of needs and wants through the market, but that in a monetary production economy, some government participation would also be required to achieve a full employment general equilibrium, owing to demand leakage to saving.
Keynes was not an advocate of "big government," but rather government participation in the economy of the right size to be effective in stabilizing full employment — which he saw as being in the power of government to do in monetary production economy through fiscal offset of demand leakage.
I don't know whether Keynes said it explicitly, but confidence that government would act in timely way to do this would also increase private sector confidence and reduce demand leakage due to increased liquidity preference arising from uncertainty, thereby lessening the need for government participation in the economy as a stabilizing force in the first place.
At any rate, this seems to me to be the key insight of Keynes, and it seems to have been missed by his monetarist critics who think that interest rates alone are sufficient to equilibrate saving and investment at the natural rate, resulting in full employment long run equilibrium. The only question here seems to be the so-called "Keynesian" liquidity trap where some (Krugman) think that fiscal policy is also needed.
If I am offtrack anywhere here, I'd appreciate hearing about it.
Your quote (from chapter 24) can be reinforced with a quote from the Preface:
"For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises".
Keynes did not see himself as debunking neoclassical economics, but making it more general and clear (or at least this is what it says, and is there in black and white; maybe he had some hidden reasons to say that, but those reasons, if they existed, were, well, hidden).
Now, this doesn't mean Post-Keynesians need to stick with Keynes' views.
This is Milton Friedman in his “The Counter-Revolution in Monetary Theory”, reproduced by The Financial Times on Sep. 7th, 1970:
"A counter-revolution [i.e. Monetarism], whether in politics or in science, never restores the initial situation [i.e. Irving Fisher's views]. It always produces a situation that has some similarity to the initial one but is also strongly influenced by the intervening revolution [i.e. Keynesianism]. That is certainly true of monetarism which has benefited much from Keynes’s work."
So far, this is clearly consistent with Tom's characterization of New Keynesianism as akin to monetarism. Friedman acknowledges that.
This is where the thing gets interesting:
"Indeed I may say, as have so many others since there is no way of contradicting it, that if Keynes were alive today he would no doubt be at the forefront of the counter-revolution. You must never judge a master by his disciples".
Can anyone be sure that Friedman was mistaken on this?
@ Magpie: That's right. Good point about making (macro)economics more general. He believed the classical scheme was applicable to the real world in limited circumstances. Also, he rejected the self-regulating nature of the economy. That is why he pressed the notion of uncertainty (affecting mainly private investment, the first step of the monetary circuit).
@ Tom: A useful way of comparing the neoclassical and Keynesian framework is this:
The neoclassical view is that output is fixed while wages (labor market), prices (money market) and the interest rate (goods market) adjust.
The Keynesian view is that wages tend to be fixed (when inflation is low) while employment and output adjusts. Prices change mainly as a result of wage changes, not due to changes in the quantity of money. Also, there is no endogenous mechanism that adjusts interest rates to enable the goods market (allowing saving to equal investment) when output and employment change.
Thus, the only way a reduction in wages would keep output and employment at the same level is for the interest rate to fall (which is unlikely) to stimulate more investment (the GT has an IS curve) OR for people to reduce the amount they save out of their income (which is also unlikely).
According to Keynes, only if investment rise above saving would output rise and unemployment would fall. Since this is unlikely to occur, a cut in wages will just cause firms to reduce their prices, thus killing profits and causing firms to cut labor.
Uncertainty is emphasized to reinforce the point that the economy is not self-regulating and that exogenous policy actions are required to keep output and employment at the same level.
Tom, sorry, but Skidelsky actually gives us a glimpse of some of the unorthodox views held by Samuelson. He quotes him saying that the proper government budget should be assessed on its inflationary impact rather than on the fiscal balance. Also, he points out that the MIT folks were actually in favor of an income policy, rather than tight money, as were arguing the monetarists. All sounds pretty good to me.
ReplyDeleteI've always liked this quote by Samuelson: "Every good cause is worth some inefficiency". This sort of thinking was what enabled neoclassical guys like Tobin, Modigliani and Solow to push for thinks like job guarantees and basic minimum income.
Thanks for the link. Good article by Skidelsky.
I meant...
ReplyDeleteAlso, he points out that the MIT folks were actually in favor of an income policy DURING THE 70s, rather than tight money, as were arguing the monetarists...
Circuit: Those were not unorthodox views back when Samuelson said them, before the counterrevolution, which was one of Skidelsky's points.
ReplyDeleteWhat I meant, circuit, was that Samuelson did not present the real Keynes but his version of Keynes, the central point of which was stickiness. This became the basis of New Keynesianism instead of Keynes, who many subsequent "Keynesians" did not bother to read and understood Keynes through Samuelson.
ReplyDeleteNew Keynesianism is a form of monetarism rather than actual Keynesianism. So the upshot is that now "Keynesianism" is equate with people like Krugman, on one hand, and Mankiw on the other.
Of course, Samuelson was better than Friedman. I didn't mean to suggest otherwise.
Although Samuelson was neither a faithful interpreter of Keyes, nor building on Keynes like the Post Keynesians, he at least retained some of the contributions that Keynes made. So now, even through Krugman and DeLong self-identify as neoclassical economists, they are at least open to using fiscal policy under some conditions, although they prefer monetary policy as a general rule.
But the "Keynesianism" that Friedman's monetarism replaced because of stagflation was not really Keynesianism at all, since Samuelson had largely adopted the neoclassical model, integrating some contributions of Keynes.
But Samuelson either failed to understand or else misrepresented the insights of Keynes that counter key neoclassical assumptions like uncertainty, along with the econometric approach, which subsequently became dominant in large part owing to Samuelson's adoption of a formalism that Keynes had at least questioned as appropriate for economics.
Unfortunately the arrow runs from Keynes to Samuelson to Friedman, rather than from Keynes to Post Keynesianism. Otherwise things would be different now.
Things might have gone much differently if Lorie Tarshis's Elements had become standard instead of Samuelson's textbook, or Robinson and Eatwell's Introduction. Maybe Kaldor would have prevailed rather than Friedman.
I've always liked this quote by Samuelson: "Every good cause is worth some inefficiency". This sort of thinking was what enabled neoclassical guys like Tobin, Modigliani and Solow to push for thinks like job guarantees and basic minimum income.
ReplyDeleteThe holy grail of neoclassical economics is market efficiency. Inefficiency is evidence of market imperfection. The conclusion is that something is interfering with market forces, and removal of it will increase efficiency in the direction of optimizing outcome.
Economists that buy into to the neoclassical paradigm get trapped into this type of framing that goes along with assumption of long run equilibrium. This is the difficulty of compromising with neoclassical methodology. Samuelson et al feel into the trap and got run over by the neoclassical steamroller.
A fundamental point that Keynes made was that the assumption of long run equilibrium is not borne out owing to the operational dynamics of monetary production economies.
So even though the bastard Keynesians and the New Keynesians are more open to making adjustments that the market fundamentalists, they sabotage their position by accepting the framing of efficiency of market forces and "allowing for" some inefficiency for a "good cause." This is admitting a less than ideal situation as a result of this compromise.
Calgacus: Agreed, though the monetarists were in full ascent mode since the early 60s (since around Friedman's Monetary History). Income policies weren't always an easy sell compared t the other side's proposal to just slow the money slow.
ReplyDeleteTom: Those are all fair comments. Just one thought. I agree Tarshis's Elements textbook is very good. However, Tarshis always presented Keynes's insight as founded largely on neoclassical principles. Tarshis argued that the revolutionary ideas in Keynes are the notions of the marginal efficiency of capital, liquidity preference, and the propensity to consume. We could get into the details but there's a good argument to be made that Keynes .
One last bit. Amererican Keynesianism was actually a synthesis of old institutionalism and british Keynesianism. Hansen was straight from the american institutionalist school, which was quite skeptical of mathematics, formalism and the other aspects that are now associated with the New Keynesians.
Darn...lots of typos in there...gotta get to work. sorry
ReplyDelete"money rate" not money slow...
'there's a good argument to be made that the mainstream Keynesianism of the 50 and 60 was close to Keynes's true belief. For one, he DID accept the IS-LM as a good conceptualization of his thought. The focus on uncertainty tends to be overplayed.
ReplyDeletearghh: "money growth rate"...
ReplyDeleteMNE is the best! ;)
I'm hardly knowledge about Keynes but from my understanding, his criticism of Say's law is based on uncertainty, which in a monetary production economy affects liquidity preference.
ReplyDeleteNeoclassical general equilibrium results from all income being spent iaw Say's law. If aggregate production at full employment creates corresponding aggregate demand, then the economy will remain in equilibrium at FE excepting a shock, and will return to optimal output in the long run as an economy recovers from the shock through the dynamic of interest rates that tends toward FE at the natural rate.
Keynes denied that assumption based on uncertainty leading to increase liquidity preference so that Say's law doesn't hold historically. It is a stylized assumption. Faux Keynesianism substitutes stickiness for Keynes's own analysis, following Samuelson.
Lord Keynes has a short post on Keynes and marginalism here.
The subsequent history of the emergence of Post Keynesianism as a school is of course complicated but, fundamentally, involves rejecting the last mistaken marginalist ideas of Keynes, along with superior theories of capital, prices and distribution
Regarding Tarshis's Elements, Robinson/Eatwell would probably been a better choice but that was not published until decades later. It's forty years old now, and largely forgotten but Samuelson/Nodrhaus is still being used
Circuit: really interesting comments. It seems to me that there is so much debate about Keynes's "true beliefs", that it is sometimes not clear that he had any! Moggridge's Keynes is a red Tory, and we have, according to you, a man who just before his death agreed with Hicks, and then he also gives two, constrasting views on the origins of money, one entirely Chartalist, the othe not. It is tempting to think of him, as post-Keynesians often do, as a kind of wily operator, who anticipated later MMT thinking, but settled for incremental improvements in neoclassical approaches as being better than nothing. But I wonder if he really ever a consolidated view -- is not the point, I think one emphasized by Skidelsky and Harrod, that he was almost entirely consumed by conjunctural responses to current conditions, from 1933 to his death from overwork?
ReplyDeleteTom: That's a good point about the problem in assuming equilibrium. However, the major challenge to those who claim rejected classical tenets is the fact that the concluding chapter in the General Theory contains the following:
ReplyDelete"...if our central controls succeed in establishing an aggregate volume of output corresponding to full employment...the classical theory comes into its own from this point onwards. If we suppose the volume of output to be given...then there is no objection to be raised against the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportion the factors of production ill be combined to produce i, and how the value of the final product will be distributed between them"
This is straight from the General Theory, not some obscure letter he wrote as a student of Marshall.
Anyway, his point in this passage is that if government ensures effective demand is sufficient to utilize available resources, then the classical analysis applies. Once you realize that it's not prices and wages that move up and down, but rather employment and output, then you are a Keynesian.
As for the issue of sticky wages, Keynes was pretty clear: flexible wages in the modern, industrial setting were an anomaly. The norm was fairly rigid wages, even during downturns. Though he also denied there was any evidence that wages were flexible at any point in recorded history:
"My reading of history is that for centuries there has existed an intense social resistance to any matters of reduction in the level of money incomes..."
Marian Ruccius: That's a very good way of stating it. The way I see Keynes is that he was constantly seeking to improve his "model" (or "intellectual framework", whatever one wishes to call it) so he changed his mind a lot. Also, he was a public servant, which means that his work was really about trying to find ways to convince his political masters of his preferred course of action. I guess he tried different approaches at different times.
"
Thanks, circuit.
ReplyDeleteFrom my understanding Keynes argued that flexible wages would not solve the underlying issue of demand anyway, owing to demand leakage to saving resulting from increased liquidity preference in the face of uncertainty — which others might call "lack of confidence" on the part of the private sector — that results in increased saving desire.
Instead, in his view the public sector (government) had to make up for that leakage with its own spending (if exports would not offset) in order for a looser version of Say's law to apply since Say's law doesn't take demand leakage into account under the assumption of neutral money.
As I understand it, Keynes held that private investment was rightly the driver in a capitalistic system geared to satisfaction of needs and wants through the market, but that in a monetary production economy, some government participation would also be required to achieve a full employment general equilibrium, owing to demand leakage to saving.
Keynes was not an advocate of "big government," but rather government participation in the economy of the right size to be effective in stabilizing full employment — which he saw as being in the power of government to do in monetary production economy through fiscal offset of demand leakage.
I don't know whether Keynes said it explicitly, but confidence that government would act in timely way to do this would also increase private sector confidence and reduce demand leakage due to increased liquidity preference arising from uncertainty, thereby lessening the need for government participation in the economy as a stabilizing force in the first place.
At any rate, this seems to me to be the key insight of Keynes, and it seems to have been missed by his monetarist critics who think that interest rates alone are sufficient to equilibrate saving and investment at the natural rate, resulting in full employment long run equilibrium. The only question here seems to be the so-called "Keynesian" liquidity trap where some (Krugman) think that fiscal policy is also needed.
If I am offtrack anywhere here, I'd appreciate hearing about it.
@circuit
ReplyDeleteYour quote (from chapter 24) can be reinforced with a quote from the Preface:
"For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises".
Keynes did not see himself as debunking neoclassical economics, but making it more general and clear (or at least this is what it says, and is there in black and white; maybe he had some hidden reasons to say that, but those reasons, if they existed, were, well, hidden).
Now, this doesn't mean Post-Keynesians need to stick with Keynes' views.
This is Milton Friedman in his “The Counter-Revolution in Monetary Theory”, reproduced by The Financial Times on Sep. 7th, 1970:
ReplyDelete"A counter-revolution [i.e. Monetarism], whether in politics or in science, never restores the initial situation [i.e. Irving Fisher's views]. It always produces a situation that has some similarity to the initial one but is also strongly influenced by the intervening revolution [i.e. Keynesianism]. That is certainly true of monetarism which has benefited much from Keynes’s work."
So far, this is clearly consistent with Tom's characterization of New Keynesianism as akin to monetarism. Friedman acknowledges that.
This is where the thing gets interesting:
"Indeed I may say, as have so many others since there is no way of contradicting it, that if Keynes were alive today he would no doubt be at the forefront of the counter-revolution. You must never judge a master by his disciples".
Can anyone be sure that Friedman was mistaken on this?
Well, at first Keynes recoiled from Abba Lerner's functional finance and then later accepted it.
ReplyDeleteLord Keynes, Would Keynes have endorsed Modern Monetary Theory/Neochartalism?
@ Magpie: That's right. Good point about making (macro)economics more general. He believed the classical scheme was applicable to the real world in limited circumstances. Also, he rejected the self-regulating nature of the economy. That is why he pressed the notion of uncertainty (affecting mainly private investment, the first step of the monetary circuit).
ReplyDelete@ Tom: A useful way of comparing the neoclassical and Keynesian framework is this:
The neoclassical view is that output is fixed while wages (labor market), prices (money market) and the interest rate (goods market) adjust.
The Keynesian view is that wages tend to be fixed (when inflation is low) while employment and output adjusts. Prices change mainly as a result of wage changes, not due to changes in the quantity of money. Also, there is no endogenous mechanism that adjusts interest rates to enable the goods market (allowing saving to equal investment) when output and employment change.
Thus, the only way a reduction in wages would keep output and employment at the same level is for the interest rate to fall (which is unlikely) to stimulate more investment (the GT has an IS curve) OR for people to reduce the amount they save out of their income (which is also unlikely).
According to Keynes, only if investment rise above saving would output rise and unemployment would fall. Since this is unlikely to occur, a cut in wages will just cause firms to reduce their prices, thus killing profits and causing firms to cut labor.
Uncertainty is emphasized to reinforce the point that the economy is not self-regulating and that exogenous policy actions are required to keep output and employment at the same level.
Thanks for summing that up in a simple conceptual model, circuit.
ReplyDelete