LARS P. SYLL

Why economists need to study history

.

Axel Leijonhufvud In Memoriam

In physics,​ it may possibly not be straining credulity too much to model processes as ergodic — where time and history do not really matter — but in social and historical sciences it is obviously ridiculous. If societies and economies were ergodic worlds, why do econometricians fervently discuss things such as structural breaks and regime shifts? That they do is an indication of the unrealisticness of treating open systems as analyzable with ergodic concepts.

The future is not reducible to a known set of prospects. It is not like sitting at the roulette table and calculating what the future outcomes of spinning the wheel will be. Reading leading mainstream economists today one comes to think of Robert Clower’s apt remark that

much economics is so far removed from anything that remotely resembles the real world that it’s often difficult for economists to take their own subject seriously.

Anyone can construct models. To be seriously interesting, models have to come with an aim. They have to have an intended use. If the intention of a model is​ to help us explain real economies, it has to be evaluated from that perspective. A model or hypothesis without specific applicability is not really deserving our interest.

Without strong evidence,​ all kinds of absurd claims and nonsense may pretend to be science. We have to demand more of a justification than a rather watered-down version of ‘anything goes’ when it comes to the postulates on which mainstream economics is founded. If one proposes things like ‘rational expectations’ one also has to support its underlying assumptions. None is given, which makes it rather puzzling how rational expectations have become the standard modelling​ assumption made in much of modern macroeconomics. Perhaps the reason is that economists often mistake mathematical beauty for truth.

Axel Leijonhufvud (1933-2022)

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.

Leijonhufvud 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 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

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