Axel Leijonhufvud — the road not taken

10 May, 2019 at 16:26 | Posted in Economics | 17 Comments

The orthodox Keynesianism of the time did have a theoretical explanation for recessions and depressions. Proponents saw the economy as a self-regulating machine in which individual decisions typically lead to a situation of full employment and healthy growth. The primary reason for periods of recession and depression was because wages did not fall quickly enough. If wages could fall rapidly and extensively enough, then the economy would absorb the unemployed. Orthodox Keynesians also took Keynes’ approach to monetary economics to be similar to the classical economists.

axel_press_highresLeijonhufvud got something entirely different from reading the General Theory. The more he looked at his footnotes, originally written in puzzlement at the disparity between what he took to be the Keynesian message and the orthodox Keynesianism of his time, the more confident​ he felt. The implications were amazing. Had the whole discipline catastrophically misunderstood Keynes’ deeply revolutionary ideas? Was the dominant economics paradigm deeply flawed and a fatally wrong turn in macroeconomic thinking? And if this was the case, what was Keynes actually proposing?

Leijonhufvud’s “Keynesian Economics and the Economics of Keynes” exploded onto the academic stage the following year; no mean feat for an economics book that did not contain a single equation. The book took no prisoners and aimed squarely at the prevailing metaphor about the self-regulating economy and the economics of the orthodoxy. He forcefully argued that the free movement of wages and prices can sometimes be destabilizing and could move the economy away from full employment.

Arjun Jayadev

A must-read (not least because of the interview videos where Leijonhufvud gets the opportunity to comment on the ‘madness’ of modern mainstream macroeconomics)!

If macroeconomic models — no matter of what ilk — build on microfoundational assumptions of representative actors, rational expectations, market clearing and equilibrium, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypothesis of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable. Trying to represent real-world target systems with models flagrantly at odds with reality is futile. And if those models are New Classical or ‘New Keynesian’ makes very little difference.

So, indeed, there really is something about the way macroeconomists construct their models nowadays that obviously doesn’t sit right.

Fortunately — when you’ve got tired of the kind of macroeconomic apologetics produced by ‘New Keynesian’ macroeconomists — there are still some real Keynesian macroeconomists to read. One of them is Axel Leijonhufvud.


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  1. Leijonhufvud’s “Keynesian Economics and the Economics of Keynes” is available for free download at

    • Thanks for the link Tom. is GREAT.

  2. Thanks for link. I searched and couldn’t find it..

  3. Great links! Thanks.

  4. The Snowden interview is more interesting and challenging – see the link provided by Jan Milch in Lars’ previous post on Blaug. (Thanks to Jan.)

    • Thank you Henry. Someway i posted it on wrong page by mistake. Excuse me. The old gentlemen on the pictures really look like twins 🙂 Here is another one, all the best.
      Axel Leijonhufvud-The Wicksell Connection: Variation on a Theme

    • The interview uses more accessible language, but the density of insight (as JW Mason might term it) is pleasingly high. Thanks for drawing attention to it. And of course thanks to Jan Milch for the many valuable links. Appreciated.

  5. The more you read of Leijonhufvud the less he seems Keynesian and the more Wicksellian.

    He’s seems to me to want to marry general equilibrium theory (of the neoclassical variety) with intertemporal co-ordination failure.

  6. “there are still some real Keynesian macroeconomists to read. One of them is Axel Leijonhufvud.”
    Maybe this depends on how a Keynesian is defined?
    Leijonhufvud categorically, emphatically and adamantly repudiates Keynes’ Liquidity Preference theory of the interest rate.
    He asserts Keynes obfuscated interest rate theory and that this obfuscation “stems from his (Keynes’) insistence on the savings-investment equality as an identity”.
    Leijonhufvud is more comfortable with a Wicksellian loanable funds and natural interest rate approach.

    • You’re right about the liquidity preference issue, and that is also one of the issues where I — like many other post-Keynesians — don’t agree with Axel!

    • Loanable funds posits savings that somehow magically fuses money as a numeraire with real resources in what amounts to disguised barter and imagines that savings prior enables investment. Leijonhufvud imagines money enabling a transaction with the future in which the promise / expectation of future production is exchanged in the present for resources to invest in enabling the promised future production. Leijonhufvud would say saving prior to investment fails to ensure the effectiveness of demand for that promised future production — that is a very different story from the Loanable funds story, where prior savings is necessary to free resources for investment. L’s story is one where coordination failure can be front and center and the central problem is to understand how money enables deals with the uncertain future.

      • L is still leaving out finance. Finance allows you to trade purely on future prices, not production. Prices for oil go up or down dramatically while production and demand increases at a pretty linear rate. In other words there is an arbitrary nature to pricing and funding that is concerned with pure money production not real goods production … economists have a huge blind spot when it comes to finance.

      • Bruce,
        Leijonhufvud is explicit. He adheres to Robertson’s Loanable Funds Theory with expectational complications. See p. 73 of the Wicksell Connection paper linked above.
        I would think your explanation of Leijonhufvud’s position is correct but not and not incompatible with Loanable Funds Theory. I would say Leijonhufvud’s position is Loanable Funds theory married to coordination failure.

        • I think you may have missed the slightly more than a trace of irony in L’s adopting that somewhat self-contradictory label in what is in the main a full-throated attack on the first neoclassical synthesis.
          L does not have a doctrine. He’s opposed temperamentally and intellectually to substituting a doctrine for developing a way of actually and critically thinking thru a difficult problem without dismissing the difficulties. He’s especially opposed to suspending all critical thought in order to swallow doctrines of dubious sense. Were there more economists like him!!!
          The problem with loanable funds or the neoclassical synthesis of IS/LM -> AS/AD is that they are doctrines (aspiring to become dogmas) built around imagining a system that works and then puzzling over the “rare” or “exceptional” circumstance where it does not. (e.g. “unemployment”? what the heck is that? as Lucas might say from deep in the bowels of a useless theory) The actual economy is a kludge that only sometimes, kinda sorta works, and the theoretical doctrines to which economists cling uncritically simplify but do not solve, which is why the actual economy remains a kludge, even as economists waste their time imagining that it isn’t. You can imbibe the doctrine only by suspending your critical faculty of mind and ignoring the actual institutional phenomena of the actual economy that make, say, intertemporal substitution really, really hard to bring off let alone, “optimize”.
          Every real answer in economics begins with “it depends . . . ” and the really hard part is figuring out what the state of the actual world is. L was really good, really curious about figuring out what the state of the world is, or was, at particular moments.

          • Bruce,
            I didn’t see the irony in the first instance and I don’t see it now that you suggest it is there. As far as I am concerned, he is totally explicit about where he stands.
            “L does not have a doctrine.”
            I’m not entirely sure what you mean by this. He certainly does have positions and is willing to support certain bodies of economic theory – explicitly.
            As far as his Keynesianism goes, he supports what he calls “Z-theory” – the real side of Keynes’ theorizing in the GT. If there is irony anywhere I would suggest it is here. He says at the end of the section dealing with the Neoclassical Synthesis (p.63):
            “Whether Z-theory as a last ditch against Monetarism will hold much water, one should not prejudge.”
            Hardly the resounding endorsement of a true believer.
            The more I think about this the more I believe Leijonhufvud is an economic theory chameleon. And if pressed I would bet he is primarily a general equilibrium theorist with coordination failure strings attached which would, I expect, take him back to his seminal training in Wicksellian thought.

  7. “a situation of full employment and healthy growth.”
    This should not be the goal of public policy. Public policy should encourage less consumption as we learn more. The idea that employment and output are worthy goals itself rests on rational assumptions. If you throw out rational expectations, you should also get rid of the goals of employment and output.
    The fact that suicides are rising should inform economists that employment and output are not good goals.
    Also, figures measuring employment and output should be reported with confidence intervals that would be so wide as to make them useless for public policy consideration.

  8. Thanks Tom much appreciated, I downloaded it as a PDF, Kindle doesn’t work.

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