Oh dear, oh dear, Wren-Lewis gets it so wrong – again!

25 Jul, 2012 at 21:07 | Posted in Economics | 10 Comments

Commenting once again on my critique (here and here) of microfounded “New Keynesian” macroeconomics in general and on Wren-Lewis himself  more specifically – Wren-Lewis writes on his blog (italics added):

Lars Syll gave a list recently [on heterodox alternatives to the microfounded macroeconomics that Wren-Lewis in an earlier post had intimated didn’t really exist]: Hyman Minsky, Michal Kalecki, Sidney Weintraub, Johan Åkerman, Gunnar Myrdal, Paul Davidson, Fred Lee, Axel Leijonhufvud, Steve Keen.

I cannot recall reading papers or texts by Akerman or Lee, but I have read at least something of all the others. I was also taught Neo-Ricardian economics when young, so I have read plenty by Robinson, Sraffa, Pasinetti etc. I do not know much about the Austrians.

But actually my concern is not what any particular author thought, but with the divide I talked about. Mainstream economists can and in some cases have learnt a lot from some of these authors, and a number of mainstream economists have acknowledged this. (One of these days I want to write a paper arguing that Leijonhufvud was the first New Keynesian economist.)

Axel Leijonhufvud the first “New Keynesian”? No way! This is so wrong, so wrong.

The  last time I met Axel was in Roskilde and Copenhagen back in April 2008. We were both invited keynote speakers at the conference “Keynes 125 Years – What Have We Learned?”  Axel’s speech was later published as Keynes and the crisis and contains the following thought provoking passages:

So far I have argued that recent events should force us to re-examine recent monetary policy doctrine. Do we also need to reconsider modern macroeconomic theory in general? I should think so. Consider briefly a few of the issues.

The real interest rate … The problem is that the real interest rate does not exist in reality but is a constructed variable. What does exist is the money rate of interest from which one may construct a distribution of perceived real interest rates given some distribution of inflation expectations over agents. Intertemporal non-monetary general equilibrium (or finance) models deal in variables that have no real world counterparts. Central banks have considerable influence over money rates of interest as demonstrated, for example, by the Bank of Japan and now more recently by the Federal Reserve …

The representative agent. If all agents are supposed to have rational expectations, it becomes convenient to assume also that they all have the same expectation and thence tempting to jump to the conclusion that the collective of agents behaves as one. The usual objection to representative agent models has been that it fails to take into account well-documented systematic differences in behaviour between age groups, income classes, etc. In the financial crisis context, however, the objection is rather that these models are blind to the consequences of too many people doing the same thing at the same time, for example, trying to liquidate very similar positions at the same time. Representative agent models are peculiarly subject to fallacies of composition. The representative lemming is not a rational expectations intertemporal optimising creature. But he is responsible for the fat tail problem that macroeconomists have the most reason to care about …

For many years now, the main alternative to Real Business Cycle Theory has been a somewhat loose cluster of models given the label of New Keynesian theory. New Keynesians adhere on the whole to the same DSGE modeling technology as RBC macroeconomists but differ in the extent to which they emphasise inflexibilities of prices or other contract terms as sources of shortterm adjustment problems in the economy. The “New Keynesian” label refers back to the “rigid wages” brand of Keynesian theory of 40 or 50 years ago. Except for this stress on inflexibilities this brand of contemporary macroeconomic theory has basically nothing Keynesian about it.

The obvious objection to this kind of return to an earlier way of thinking about macroeconomic problems is that the major problems that have had to be confronted in the last twenty or so years have originated in the financial markets – and prices in those markets are anything but “inflexible”. But there is also a general theoretical problem that has been festering for decades with very little in the way of attempts to tackle it. Economists talk freely about “inflexible” or “rigid” prices all the time, despite the fact that we do not have a shred of theory that could provide criteria for judging whether a particular price is more or less flexible than appropriate to the proper functioning of the larger system. More than seventy years ago, Keynes already knew that a high degree of downward price flexibility in a recession could entirely wreck the financial system and make the situation infinitely worse. But the point of his argument has never come fully to inform the way economists think about price inflexibilities …

I began by arguing that there are three things we should learn from Keynes … The third was to ask whether events provedthat existing theory needed to be revised. On that issue, I conclude that dynamic stochastic general equilibrium theory has shown itself an intellectually bankrupt enterprise. But this does not mean that we should revert to the old Keynesian theory that preceded it (or adopt the New Keynesian theory that has tried to compete with it). What we need to learn from Keynes, instead, are these three lessons about how to view our responsibilities and how to approach our subject.

Axel Leijonhufvud the first “New Keynesian” ecoonomist? Forget it! 


  1. I think you are confused. Leijonhufvud’s 1968 _On Keynesian Economics and the Economics of Keynes:A Study in Monetary Theory_ is an assault on orthodox Old Keynesian thinking (particularly attacking aggregations which are inconsistent with micro analysis).

    The 2008 talk by Leijonhufvud attacks one simple type of micro-analysis: representative agent modeling. Further, as far as I know, Leijonhufvud is giving this as an example of stuff he’s learned *since the 2008 crisis.* He may not have had strong feelings about it in the past, but now he definitely thinks that it’s misleading.

    I recommend waiting for Wren-Lewis’s paper and arguing with it conceptually, rather than jumping to conclusions on labels based on “this thing I heard one time.” Cheers.

    • Axel’s 1968 work was a critique of “bastard Keynesianism” and his 2008 work was a critique of “New Keynesianism” and in both cases vindicating Keynes. As is clear to anyone reading my doctrinal history books I think his later work is closer to my reception at least of Keynes.

      • “Neoclassical theory is based on the Assumptions that are a combination of mechanistic analogies, of positivism, beahavourism, utilitarianism, and reductionalistic methodologic individualism: each one is contentious issues in the philosophy of science. Their combination is probably unmatched in terms of logical inconsistencies and unrealistic starting point in Today’s social sciences.” Professor Joachim Israel
        in Klappjakten på välfärden,1993,

  2. Axel Leijonhufvud, Professor of Economics, UCLA speaks on panel entitled “The Challenge of DeLeveraging and Overhangs of Debt I: Inflation and Austerity” athttp://www.youtube.com/watch?v=90zLGjQr6jo

  3. Not sure how to classify Leijonhufvud, but his 1968 book argues that Keynes changed the Marshallian speed of adjustment. Fast in the short was with prices for Marshall, and became quantity adjustment in the short run for Keynes. That certainly has a flavor of fixed prices, and rigidities. By the way, my critique of Wren-Lewis here http://nakedkeynesianism.blogspot.com/2012/07/heterodox-and-mainstream-economics.html

    • Thanks for the link to your blog!
      Re Leijonhufvud I would say it’s more than 40 years ago he wrote his classic book, and it’s pretty natural that he has come to somewhat change his stance on these questions. I think he is closer to Keynes’s postion today than back in 1968.

      • Glad to hear. I always thought his paper “The Wicksell Connection” is a must read for understanding the history of macro ideas. http://www.econ.ucla.edu/workingpapers/wp165.pdf

        • Absolutely! That paper is a gem and a must.

        • Good paper until he reaches his last section on disposing of liquidity preference!

  4. I remember i read Axel Leijonhufvud´s,”On Keynesian Economics and the Economics of Keynes:A Study in Monetary Theory”, (from 1968), long ago and one of his main points was the rejection of IS/LM curve and it´s incompatibilty with Keynes work and that he stressed that Keynes was a disequilibrium theorist.I can hardly see how Axel could be called a “New-Keynsian”in any way.

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