American Economic Association

Keynes and Economics Today

Author(s): Don Patinkin
Source: The American Economic Review, Vol. 74, No. 2, Papers and Proceedings of the
Ninety-Sixth Annual Meeting of the American Economic Association (May, 1984), pp. 97-
102
Published by: American Economic Association
Stable URL: http://www.jstor.org/stable/1816337
Accessed: 31-01-2018 22:29 UTC

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide
range of content in a trusted digital archive. We use information technology and tools to increase productivity and
facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at
http://about.jstor.org/terms

American Economic Association is collaborating with JSTOR to digitize, preserve and extend
access to The American Economic Review

This content downloaded from 148.206.159.132 on Wed, 31 Jan 2018 22:29:56 UTC
All use subject to http://about.jstor.org/terms
 KEYNES, SCHUMPETER, MARX CENTENARY SESSION

Keynes and Economics Today

By DON PATINKIN*

At the end of a centenary year in which generally, the much greater degree of special-
there have been endless speculations about ization in economics and the extension of its
what John Maynard Keynes might have said analysis to many additional aspects of life.
about economic thought and policy today, I There is little, if anything, in Keynes' writ-
am not sure that there is much new to be ings that provides a basis for speculation
said on this question. Indeed, I have some about these last two characteristics. Like
doubts as to its meaningfulness. Neverthe- practically all economists of the interwar de-
less, I shall attempt to offer some general pression period, Keynes was not concerned
observations about it.' with either growth (indeed, in 1937 he de-
To speculate about this question is, first of livered a lecture on "Some Consequences of
all, to ask how the discipline of economics a Declining Population," JMK, XIV, pp.
today (and macroeconomics in particular) 124-33) or the underdeveloped countries.
differs from that of the 1930's. With respect True, Keynes' first book-published in 1913
to the state of economics in general, there are -was devoted to Indian Currency and Fi-
four main characteristics that I would list: nance. But its concern was not with India as
the much greater use of mathematics and the such (which he never visited), but with what
related greater rigor of the analysis; the much the Western world could learn from India's
greater emphasis on empirical work, and on experience with the sterling exchange stan-
the econometric testing of hypotheses in par- dard. In a similar way, I think Keynes would
ticular; the emphasis given today to the eco- have concerned himself today with the im-
nomics of growth in developed, and espe- pact on the financial system of the Western
cially underdeveloped, countries; and, more world of the tremendous liquid holdings of
the OPEC countries, as well as of the recent
debt crises of some of the developing coun-
*The Hebrew University of Jerusalem and the tries.
Maurice Falk Institute for Economic Research, Israel.
With respect to the increased use of
Without burdening them with any responsibility, I thank
Stanley Fischer, Peter Howitt, David Laidler, and Rudy
mathematical analysis, we have Keynes' oft-
Dornbusch for helpful comments on an earlier draft. An cited criticism in the General Theory of
extended version of this paper will appear early 1985 in "symbolic pseudomathematical methods of
a volume edited by Claus Koehler and Jochem Langkau, formalizing a system of economic analy-
Monetary, and Fiscal Policy in the Eighties, to be pub-
sis...which allow the author to lose sight of
lished by Verlag Neue Gesellschaft, Bonn.
'All references to the writings of Keynes are to the the complexities and interdependencies of
new edition of his Collected Writings. For simplicity, I the real world in a maze of pretentious and
shall refer to the two volumes of his Treatise on Money unhelpful symbols" (GT, pp. 297-98). Let
by the short titles Treatise, I (II) or TM, I (II), respec-
us, however, not take this statement too seri-
tively. The General Theory will sometimes be further
abbreviated to GT. Specific volumes in Keynes' Col- ously. First of all, Keynes' own analysis in
lected Writings will be referred to, for example, as JMK, his earlier Treatise on Money (1930) was, in
IX; JMK, XIII, and so forth. I have in the following fact, largely based on fairly mechanical ap-
drawn freely on the material in my Keynes' Monetary plications of the so-called fundamental equa-
Thought (1976) and in chapter 9 of my Anticipations of
tions. Indeed, if ever an author made use of
the General Theory? And Other Essays on Keynes (1982).
These books will be referred to henceforth as KMT and "a maze of pretentious and unhelpful sym-
Anticipations, respectively. bols" that author was Keynes of the Treatise

97

This content downloaded from 148.206.159.132 on Wed, 31 Jan 2018 22:29:56 UTC
All use subject to http://about.jstor.org/terms
98 A EA PA PERS A ND PROCEEDINGS MA Y 1984
(see KMT, chs. 4-7). Furthermore, I strongly
suspect that a comparison of the General
Theory (and a fortiori the Treatise) with the
other works on economic theory that were
written during that period would actually
show Keynes' works to be among the more
mathematical of them. Indeed, in his review
of the General Theory, Austin Robinson
commented that "even for the ordinary
economist, the argument, being largely in
mathematical form, is difficult" (1936, p.
472). At the same time, I am sure that Keynes
would have had little patience with what is
now termed "highbrow mathematical eco-
nomics," and much of the "middlebrow" as
well. In 1944, Keynes agreed (after politely
protesting that he had not done much in the
way of econometrics) to accept the presi-
dency of the Econometric Society; looking at
the contents of Econometrica over the past
decade and more, I think that today he would
have persisted with his protests.
What would Keynes have thought of pres-
ent-day econometrics? Here there im-
mediately comes to mind his famous 1939
review of Tinbergen's work, and let me em-
phasize that this review was devoted not to
the much better known second volume of
this study on business cycles in the United
States, but to the first volume on the princi-
ples of multiple correlation analysis. Accord-
ingly, the criticisms Keynes presented in this
review were leveled not at Tinbergen's
pioneering and (certainly for that time)
ambitious forty-six equation model of the
U.S. economy, but at the use of regression
analysis to estimate even a single equation!
Nor can we dismiss these criticisms, for some
of them dealt with methodological issues
which were subsequently to become basic
concerns of the econometric literature. Thus,
to use current terminology (which Keynes
obviously did not), he criticized Tinbergen's
work for being guilty of both the specifica-
tion bias and the simultaneous-equation bias.
Similarly, Keynes emphasized the basic diffi-
culty of measuring expectations (Anticipa-
tions, pp. 227-30).
Keynes concluded his review of Tin-
bergen's work by saying: " I have a feeling
that Professor Tinbergen may agree with
This content downloaded from 148.206.159.132 on Wed, 31 Jan 2018 22:29:56 UTC
All use subject to http://about.jstor.org/terms
much of my comment, but his reaction will
be to engage another ten computers and
drown his sorrows in arithmetic" (JMK,
XIV, p. 318). And if this is what Keynes said
at a time when one had to think twice before
undertaking the laborious and time-consum-
ing task of estimating a single multiple-
regression equation on a mechanical desk
calculator, what would he say today, in this
age of instant estimation?
In contrast with his attitude toward econo-
metric models, Keynes would undoubtedly
have been an enthusiastic supporter of
a second and related postwar development
in empirical economics: namely the great
development of macroeconomic statistics.
Throughout the interwar period, Keynes
continued to complain about the inadequacy
of such statistics. And though in the early
1930's he did not give Colin Clark's work on
national-income estimates the support he
should have, Keynes played a crucial role in
the subsequent development of national-
income accounting in Britain in World War
II (Anticipations, pp. 248-54).
Let me turn now to Keynes' possible views
on postwar developments in macroeconom-
ics. I begin with monetarism. As we all know,
the policy conclusion of the General Theory
was that the problem of unemployment could
not be solved by monetary policy alone, but
that a program of government investment
(expenditures on public works and the like)
was necessary. Let me first emphasize that
what Keynes meant by monetary policy is
not what today's monetarists mean by it. For
what Keynes always meant by this term was
not a policy of controlling the quantity of
money, but one of controlling the rate of
interest: lowering it by means of central bank
open market purchases to ward off deflation
and unemployment, and raising it to ward
off inflation. Clearly such central bank oper-
ations generate changes in the quantity of
money; but this quantity was not Keynes'
target variable.
What would have been Keynes' view of
monetarism? If by this term we mean the
view that fiscal policy has no role to play in a
contracyclical policy, then I have no doubt
that he would have rejected it. The legend
VOL. 74 NO. 2 KEYNES, SCHUMPETER, MA RX CENTENA R Y 99
that Keynes in the last years of his life had
second thoughts about the desirability of fis-
cal policy and in this context said "I am not
a Keynesian" is such an irresistible one-the
classic motif of the sinner repentant on his
death bed-that I hate to spoil it by noting
that it has never really been corroborated
and is indeed contradicted by Keynes' writ-
ings in the years after the General Theory
(Anticipations, p. 214).
To return to the question of monetarist
policy, I feel that Keynes would have re-
jected it on theoretical and empirical grounds
similar to those on which he rejected interest
rate policy in the General Theory (especially
ch. 19) and in other writings: namely that the
causal mechanism through which monetarist
policy was supposed to work had not been
convincingly specified; and that in any event
experience has shown that this policy could
not be depended upon to assure full employ-
ment.
At the same time, let me say that to my
mind the economist closest to Keynes in his
conception of the role of the economist in
society is none other than the leading spokes-
man of monetarism, Milton Friedman. For
both of these men the purpose of economic
analysis is not only to construct theoretical
models, but to lead to policy recommenda-
tions-and accordingly both had a continu-
ous and detailed concern with the current
empirical data on the workings of the econ-
omy. Furthermore, both regarded as an es-
sential part of their task as economists not
only to formulate policy positions, but to
generate public opinion in support of them.
And both sedulously exploited all means of
communication for this purpose: articles in
leading newspapers and magazines; books
and pamphlets; participation in radio and
television programs (of course, there was no
television in Keynes' day; but can anyone
doubt that he would have been a television
personality if there had been?); appearances
and testimony before government commit-
tees and bodies; and personal contacts with
leading government officials responsible for
formulating and carrying out policy, while at
the same time eschewing (except in wartime)
official government positions. And both tried
This content downloaded from 148.206.159.132 on Wed, 31 Jan 2018 22:29:56 UTC
All use subject to http://about.jstor.org/terms
to achieve their respective goals by tirelessly
hammering away at a single, oversimplified
theme: public expenditures in the case
of Keynes; money supply in the case of
Friedman. Yet another common characteris-
tic is that for both of them the data always
provided the right answer.
Before leaving this subject, I would like to
emphasize that Keynes also shared with to-
day's monetarists a great concern with avoid-
ing inflation. It is not surprising that this was
Keynes' view during the period of the disas-
trous hyperinflations that followed World
War I; but even in his 1930 Treatise, after
more than five years of deflation and unem-
ployment in Britain, Keynes continued to be
concerned with the danger of inflation. Per-
haps because of the even deeper depression
that Britain had fallen into at the time of the
General Theory, this book is little concerned
with the problem of inflation. It is, however,
highly significant that after Britain began its
rearmament program in early 1937-and
when unemployment was still around 12 per-
cent-Keynes expressed concern with the
possible inflationary outcome of such a pro-
gram that might be generated by the immo-
bility of labor (Terence Hutchison, 1977, pp.
10-14). And once war broke out, Keynes
wrote his How to Pay for the War (1940),
whose major purpose was to present a specific
program for financing the war without gener-
ating inflation.
I must also emphasize that a recurrent
theme of the General Theory (pp. 173, 249,
253, 296, and 301) is that as the level of
employment in an economy increased as a
result of an increase in effective demand, the
money wage rate would begin to rise even
before full employment was reached. In this
theme I see an adumbration of one aspect of
the Phillips-curve analysis, namely the co-
existence of inflation and unemployment. But
my main point here is that I infer from
Keynes' view on this matter that he would
not have considered such a coexistence to be
a contradiction to his theory. And I also
conjecture that it would not have surprised
him to see the phenomenon of inflation cum
unemployment manifest itself even more
strongly in the postwar world, with its in-
100 A EA PA PERS A ND
creased economic and political power of labor
and its lessened faith in the antiinflationary
proclamations of governments.
How would Keynes have suggested deal-
ing with this phenomenon? Here, as in some
other contexts, he would probably have ad-
vocated making some institutional arrange-
ment to deal with the problem: in this case,
an institutional arrangement requiring the
cooperation of labor unions, industry, and
government to determine the general level of
money wages. But I suspect that he would
have been quite skeptical about the possibil-
ity of creating and effectively carrying out
such an institutional arrangement-just as in
his 1930 Treatise (II, pp. 336-37), he was
skeptical about the possibility of achieving
the cooperation of the central banks of Bri-
tain, the United States, and France in order
to deal with the problem of unemployment
that then existed.
Let me turn now to Keynes' possible views
about the "new macroeconomics." Of one
thing we can be sure: he would not have
been happy to learn that the title of one
of the early and influential contributions
to this literature was entitled "After Keynes-
ian Macro-economics." Nor would he have
drawn much comfort from the fact that a
defense of his theory was entitled "How
Dead is Keynes?" But let me turn to the
substantive issues involved, distinguishing
between two main components of the new
macroeconomics: the assumption of rational
expectations and the assumption of market
equilibrium.
With reference to the first of these, I must
again distinguish between rational expecta-
tions in the short run and in the long run. I
think that Keynes would have been willing
to accept this assumption within a short-run
context. Thus, in notes which he prepared
for the lectures on monetary theory that he
gave at Cambridge in 1937, he wrote "... the
theory of effective demand is substantially
the same if we assume that short-period
expectations are always fulfilled ..." (JMK,
XIV, pp. 180-81). Frankly, I am not sure
how this statement should be interpreted,
but it does seem to indicate a willingness to
accept the assumption of rational expecta-
tions in a short-run context.
This content downloaded from 148.206.159.132 on Wed, 31 Jan 2018 22:29:56 UTC
All use subject to http://about.jstor.org/terms
PROCEEDINGS MA Y 1984
The situation is entirely different with
respect to the long-run expectations involved
in, for example, investment decisions. Thus
in chapter 12 of the General Theory on "The
State of Long-Term Expectations," Keynes
emphasized that, in view of the great uncer-
tainty about the future, "our decisions to do
something positive ... can only be taken as a
result of animal spirits ... and not as an
outcome of a weighted average of quantita-
tive benefits multiplied by quantitative prob-
abilities" (GT, p. 161). And, at an earlier
point in this chapter (GT, p. 148, fn. 1),
he explained that "by 'very uncertain' I
do not mean the same thing as 'very unprob-
able'," and refers to chapter 6 of his Treatise
on Probability (1921). Similarly, in his 1937
Quarterly Journal of Economics article,
Keynes emphasizes that the uncertainty
which characterizes so much of economic life
is one for which "there is no scientific basis
on which to form any calculable probability
whatever" (JMK, XIV, p. 114). Clearly
Keynes' view about the absence of a proba-
bility calculus in this context is inconsistent
with the basic point of departure of the
rational expectations approach.
Insofar as the assumption of market equi-
librium is concerned, here there can be no
doubt that Keynes would have rejected it.
Indeed, the central policy message of the
General Theory is that
There is, therefore, no grounds for the
belief that a flexible wage policy is
capable of maintaining a state of con-
tinuous full employment; any more
than for the belief that an open-market
monetary policy is capable, unaided, of
achieving this result. The economic sys-
tem cannot be made self-adjusting
along these lines. [GT, p. 267]
And this lack of faith in the efficacy of the
market-equilibrium process in a macroeco-
nomic context also manifests itself in such
earlier writings as The Economic Conse-
quences of Mr. Churchill (1925; JMK, IX, pp.
227-29, et passim) and the Treatise (I, pp.
141, 151, 244-45, 265). Nor would Keynes
have been impressed by the contention
sometimes advanced that the market would
not permit a situation of unemployment to
VOL. 74 NO. 2 KEYNES, SCHUMPETER, MA RX CENTENA R Y 101
persist because contracts could then be made
which would make everyone better off. In-
deed, I would conjecture that, as one who
had seen how the most civilized countries of
the world had engaged for four long years of
stalemated trench warfare in the mutual
slaughter of the best of their young men,
Keynes was not predisposed to believe in
natural forces that always brought agents to
generate a mutually beneficial situation. Be-
cause of the uncertainty of how others react
to our actions, the actual world for Keynes
was one that-in a macro context could
readily lead to the "globally irrational" re-
sults of the prisoner's dilemma; not to the
rational results of the Walrasian auctioneer.
I cannot conclude this paper without some
conjectures about what Keynes would have
said about the many interpretations of the
General Theory that have been presented
since his death. What would he have said of
an interpretation of the General Theory which
claims that it was based on the assumption
of rigid money wages, when he had de-
liberately structured the argument of the
book to lead up to chapter 19 on "Changes
in Money-Wages" (which he prefaced with
the observation that "it was not possible ...
to discuss this matter fully until our own
theory had been developed" GT, p. 257), in
which he applied his theory to show why the
"classical" remedy of a reduction in the level
of money wages could not be depended upon
to increase the level of employment? What
would he have said of an interpretation which
claims that the argument of the General The-
ory is based on the "liquidity trap," when he
had explicitly stated that "whilst this limit-
ing case might become practically important
in the future, I know of no example of it
hitherto" (GT, p. 207)? What would he have
said of an interpretation of the General The-
ory which sees as its main achievement the
analysis of the determination of the price
level, particularly in times of inflation-de-
spite the fact that Keynes wrote his book in
a period of depression and deflation, and
emphasized that "the theory of prices falls
into its proper place as a matter which is
subsidiary to our general theory" (GT, p.
32)? What would he have said of an interpre-
tation of the General Theory which sees as its
This content downloaded from 148.206.159.132 on Wed, 31 Jan 2018 22:29:56 UTC
All use subject to http://about.jstor.org/terms
central message the fact that economic deci-
sions (and particularly those relating to in-
vestment) are made in a world of uncertainty
-when despite the undeniably very im-
portant role of uncertainty in the book,
Keynes did not refer to it explicitly either in
his introductory chapter 3 on "The Princi-
ples of Effective Demand," in which he pre-
sented "a brief summary of the theory of
employment to be worked out in the course
of the following chapters" (GT, p. 27), or in
his summary chapter 18 on "The General
Theory of Employment Re-Stated"? What
would he have said of an interpretation
which, in order to recreate the General The-
ory in the image of Cambridge (England) of
today, claims that this book rejected margin-
al analysis, when-in contrast to the Trea-
tise, in which the word " marginal" does not
appear-Keynes of the General Theory em-
phasized in its Preface that the analysis of
the book was "linked up with our fundamen-
tal theory of value" and accordingly applied
marginal analysis in his treatment of the
markets for labor, consumer goods, and in-
vestment goods, respectively? Finally, what
would he have said of an attempt to dis-
tinguish between "Keynes and the Keynes-
ians" (here is another irresistible, classic
theme: the good Czar, whose attempts to
improve the lot of his people are, unknown
to him, being thwarted by his evil ministers)
-despite the fact that he had "next to noth-
ing to say by way of criticism" of Hicks'
IS-LM interpretation, which was to become
the standard one of " the Keynesians" (JMK,
XIV, p. 79)?2
What would he have said about all these
exegetical attempts? I suspect that he would
have repeated-while raising it to the nth
power-what he said in concluding a long
and tiresome correspondence in 1938 on a
note that someone had sent him on an aspect
of the General Theory: "... the enclosed, as it
stands, looks to me more like theology than
economics! ... I am really driving at some-
2The fact that in recent years Hicks has had some
second thoughts about this interpretation does not
change the basic fact that in 1937 he advanced this
interpretation and that Keynes had no objections to it.
102 AEA PAPERS AND PROCEEDINGS MA Y 1984

thing extremely plain and simple which can-
not possibly deserve all this exegesis" (JMK,
XXIX, p. 282).
REFERENCES
Hutchison, Terence W., Keynes Versus the
'Keynesians', London: Institute of Eco-
nomic Affairs, 1977.
Keynes, John Maynard, The Collected Writings
of John Maynard Keynes, London: Mac-
millan; New York: St. Martin's Press for
the Royal Economic Society, 1972-83.
Patinkin, Don, Keynes' Monetary Thought: A
Study of Its Development, Durham: Duke
University Press, 1976.
, Anticipations of the General Theory?
And Other Essays on Keynes, Chicago:
University of Chicago Press, 1982.
[Robinson, Austini, E.A.G.R., "Mr. Keynes on
Money," The Economist, February 29,
1936, 122, 471-72.

This content downloaded from 148.206.159.132 on Wed, 31 Jan 2018 22:29:56 UTC
All use subject to http://about.jstor.org/terms