Keynes betrayed

23 Dec, 2016 at 11:43 | Posted in Economics | 5 Comments

To complete the reconciliation of Keynesian economics with general equilibrium theory, Paul Samuelson introduced the neoclassical synthesis in 1955 …

51zdd7pouql-_sx323_bo1204203200_In this view of the world, high unemployment is a temporary phenomenon caused by the slow adjustment of money wages and money prices. In Samuelson’s vision, the economy is Keynesian in the short run, when some wages and prices are sticky. It is classical in the long run when all wages and prices have had time to adjust….

Although Samuelson’s neoclassical synthesis was tidy, it did not have much to do with the vision of the General Theory …

In Keynes’ vision, there is no tendency for the economy to self-correct. Left to itself, a market economy may never recover from a depression and the unemployment rate may remain too high forever. In contrast, in Samuelson’s neoclassical synthesis, unemployment causes money wages and prices to fall. As the money wage and the money price fall, aggregate demand rises and full employment is restored, even if government takes no corrective action. By slipping wage and price adjustment into his theory, Samuelson reintroduced classical ideas by the back door—a sleight of hand that did not go unnoticed by Keynes’ contemporaries in Cambridge, England. Famously, Joan Robinson referred to Samuelson’s approach as ‘bastard Keynesianism.’

The New Keynesian agenda is the child of the neoclassical synthesis and, like the IS-LM model before it, New Keynesian economics inherits the mistakes of the bastard Keynesians. It misses two key Keynesian concepts: (1) there are multiple equilibrium unemployment rates and (2) beliefs are fundamental.

Not that long ago Paul Krugman had a post up on his blog telling us that what he and many others do is “sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point” and that “New Keynesian models are intertemporal maximization modified with sticky prices and a few other deviations.”

newkeyBeing myself sorta-kinda Keynesian, I side with Farmer and remain a skeptic of the pretences and aspirations of ‘New Keynesian’ macroeconomics.

Where ‘New Keynesian’ economists think that they can rigorously deduce the aggregate effects of (representative) actors with their reductionist microfoundational methodology, they have to put a blind eye on the emergent properties that characterize all open social systems. The interaction between animal spirits, trust, confidence, institutions etc., cannot be deduced or reduced to a question answerable on the individual level.

So, I cannot concur with Krugman – and other sorta-kinda ‘New Keynesians’ – when they try to reduce Keynesian economics to “intertemporal maximization modified with sticky prices and a few other deviations.”

The purported strength of New Classical and ‘New Keynesian’ macroeconomics is that they have firm anchorage in preference-based microeconomics, and especially the decisions taken by inter-temporal utility maximizing ‘forward-looking’ individuals.

To some of us, however, this has come at too high a price. The almost quasi-religious insistence that macroeconomics has to have microfoundations – without ever presenting neither ontological nor epistemological justifications for this claim – has put a blind eye to the weakness of the whole enterprise of trying to depict a complex economy based on an all-embracing representative actor equipped with superhuman knowledge, forecasting abilities and forward-looking rational expectations. It is as if – after having swallowed the sour grapes of the Sonnenschein-Mantel-Debreu-theorem – these economists want to resurrect the omniscient Walrasian auctioneer in the form of all-knowing representative actors equipped with rational expectations and assumed to somehow know the true structure of our model of the world.

And then there is also the fact that ‘New Keynesians’ share the New Classical economists extraterrestial view of unemployment as voluntary.

The ‘New Keynesian’ microfounded dynamic stochastic general equilibrium models do not incorporate such a basic fact of reality as involuntary unemployment. Of course, working with microfounded representative agent models, this should come as no surprise. If one representative agent is employed, all representative agents are. The kind of unemployment that occurs is voluntary, since it is only adjustments of the hours of work that these optimizing agents make to maximize their utility. In this model world, unemployment is always an optimal choice to changes in the labour market conditions. Hence, unemployment is totally voluntary. To be unemployed is something one optimally chooses to be.

To Keynes it was an obvious and sad fact of the world that not all unemployment is voluntary. But obviously not so to New Classical and ‘New Keynesian’ economists.


  1. Even though Farmer does not consider himself heterodox in any way, the heterodox crowd should welcome him into their camp. In this book, he has smashed the mainstream citadel to pieces. While I like the even handiness of Michel De Vroey’s recent book, Farmer has done a better job in intellectual creative destruction.

    • Can’t but agree 😃

  2. Overall, the book is well written and easy to understand. Kudos to Farmer for tilling the soil nicely.

  3. “The Lotka-Volterra equations, also known as predator-prey equations, are a system of nonlinear differential equations of the first order. These equations provide a mathematical model capable of describing the dynamics of an ecosystem in which only two interacting species …”in the research phase and precise location, intuitively the above equations could be those functions which could be adapted to describe the trend in monetary cyclical crises …or ..‘bastard Keynesianism.’… ….
    ..I had write about this on “Riodialogues”,a new theory macroeconomic,new conception monetary system to reduce the gap uncontroled increasing development,whithout demage economy, contemporanely to introduce aid:I suppose a new rule for Central Bank: when one of the CB, respectively of each country or through international agreements ,have a new emission of money whith each rate the same bank print corresponding quantity of money of rate off balance ,and give this quantity for free , to compense the monetary mass, at a pubblic commission that use for pubblic necessity etc etc…we resolve three problem :pubblic necessity,pubblic balance,and market crisis,;for example : the B.C. have a emission of hundred billion unit and fix a rate of 3% and give this money to privat bank or pubblic… at the same moment print 3 billion extra and give these to “pubblic commission” that spend for pubblic problem .. to compense the monetary mass to solve the lack natural compensation previously provided by ‘gold mining …a model that integrates the concepts between von Hayek and J.M. Keynes,because it keeps the economic freedom of enterprise and market , creating resources that can be used by the government but to the extent that they are created and without increasing the tax burden.. ..i hope to be clear bat if not you can read more or leave me a message here :

  4. Keynes betrayed. He wasn’t a demigod. Keynes was interpreted in different ways.because he was not always crystal clear. As such, we end up with multiple interpretations. In fact, even if he had been clear we would have competing interpretations. Farmer has a tendency to sow some rather confusing ? and thus making harvest time more difficult than maybe it should be (hehe)

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