How Richard Posner became a Keynesian

22 Jan, 2021 at 16:18 | Posted in Economics | 5 Comments

Until [2008], when the banking industry came crashing down and depression loomed for the first time in my lifetime, I had never thought to read The General Theory of Employment, Interest, and Money, despite my interest in economics … I had heard that it was a very difficult book and that the book had been refuted by Milton Friedman, though he admired Keynes’s earlier work on monetarism. I would not have been surprised by, or inclined to challenge, the claim made in 1992 by Gregory Mankiw, a prominent macroeconomist at Harvard, that “after fifty years of additional progress in economic science, The General Theory is an outdated book. . . . We are in a much better position than Keynes was to figure out how the economy works.”

adaWe have learned since [2008] that the present generation of economists has not figured out how the economy works …

Baffled by the profession’s disarray, I decided I had better read The General Theory. Having done so, I have concluded that, despite its antiquity, it is the best guide we have to the crisis …

It is an especially difficult read for present-day academic economists, because it is based on a conception of economics remote from theirs. This is what made the book seem “outdated” to Mankiw — and has made it, indeed, a largely unread classic … The dominant conception of economics today, and one that has guided my own academic work in the economics of law, is that economics is the study of rational choice … Keynes wanted to be realistic about decision-making rather than explore how far an economist could get by assuming that people really do base decisions on some approximation to cost-benefit analysis …

Economists may have forgotten The General Theory and moved on, but economics has not outgrown it, or the informal mode of argument that it exemplifies, which can illuminate nooks and crannies that are closed to mathematics. Keynes’s masterpiece is many things, but “outdated” it is not.

Richard Posner

5 Comments

  1. Did Keynes talk about insurance? The 2008 crisis was about insurance, but they’ve fixed that because defaults these days aren’t bringing down markets.

    Comment by rsm— 23 Jan, 2021 #

    • Yet in advance of that was risk assessment, then again what should have been a sharp quick recession ballooned into a global Minsky on the backs of aggressive and mercenary shorts E.g. naked being banned.

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      In light of that observation Tether is showing concerns for that vaporware market and would be devastating under the currant circumstances.

      Comment by skippy— 24 Jan, 2021 #

      • If the Fed had rescued Lehman’s in 2008, would there have been a panic at all?

        Comment by rsm— 24 Jan, 2021 #

        • If you remember there were a few aggressive bespoke firms that signaled what was to come and everyone was whistling past the graveyard two years before, then Bears, then Lehman, plus the undermining of the GSEs – all based on the maths that Lars takes to task.

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          This may be of interest to you – https://crypto-anonymous-2021.medium.com/the-bit-short-inside-cryptos-doomsday-machine-f8dcf78a64d3

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          Part of me would not mine seeing this non productive activity go splat, on the other hand now is not a good time and as said here the poor always end up paying for others mistakes[?].

          Comment by skippy— 24 Jan, 2021 #

  2. What a timely post, Lars, many thanks!

    Comment by shaikh945— 22 Jan, 2021 #


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