Bastard Keynesianism Today
-- Posted by Neil H. Buchanan
Paul Samuelson died last week at age 94. The New York Times ran a front-page obituary last Monday, and Paul Krugman wrote a short, but very nice, entry on his blog praising Samuelson. At a time when Keynesian macroeconomic policy has once again become the key to economic recovery, we would do well to think back on Samuelson's contributions to public discourse. While those contributions were important, the story on Samuelson is more complicated than most people realize.
Samuelson was one of the most well-known economists of the 20th century, mostly because of his best-selling introductory textbook. His scholarly work covered a number of major areas within economics, but he was mostly known as a macroeconomist. One of his most famous papers, published in 1939 (when he was 24 years old!), described an important dynamic called "multiplier/accelerator interaction" that seems to me still to hold one of the key insights into why fiscal policy is especially important in fighting a recession. He also had theorems named after him (e.g., the Samuelson/Stolper theorem). In fact, he was such a leader in the field that he deserves to be called a legend.
With such a long and impressive career, it is difficult to know where to begin. On the positive side of the balance sheet is his embrace of activist government policy to fight economic downturns and put people back to work. He engaged in a lifelong intellectual battle with his nemesis Milton Friedman, and he combined academic work with policy work enthusiastically. Surely, the post-WWII economic environment could have been much worse if Samuelson had not been a leader in pushing against a return to pre-Depression economic classicism and its attendant policy passivity.
Postwar economics could also, however, have been much better. If the choice were only between Samuelson and Friedman, Samuelson was obviously the way to go. There was, however, a better choice available; and Samuelson aggressively pushed that choice to the margins of the academy and almost completely out of the policy debate. Now known as "Post Keynesianism," the losing side of that academic fight has never completely disappeared. The public debate, however, is much poorer because of the efforts of Samuelson and his cohorts to push the Post Keynesians to the margins.
The approach to Keynesian economics that Samuelson championed is now alternatively called "the Keynesian synthesis," the "neoclassical synthesis," or the "neoclassical Keynesian synthesis." The basic idea is that economics should be strictly split between micro and macro, not just in terms of the questions asked but also in determining the mode of analysis. Micro was all about supply and demand, rational actors, and efficiency. Macro was about fiscal and monetary policy. Virtually every major American economist of Samuelson's generation, and most in the generation that followed, adopted this approach. Solow, Tobin, Modigliani, and so on, were Samuelsonians. (They were also the leaders in the mathematization of economics, which Samuelson pioneered and promoted throughout his career. But that is another subject entirely.)
The other side of the debate lived on the other side of the Pond. Keynes's academic home, Cambridge University, included one proponent of the "synthesis" approach, John Hicks. Otherwise, the economists at Cambridge were overwhelmingly committed to the idea that the synthesis, or "bastard Keynesianism," was not only a theoretical abomination but a major error in policy. Joan Robinson, Nicholas Kaldor, Piero Sraffa, and others saw the error in conceding the micro side of the slate to the classical economists, and they spent the decades after the war fighting hard against the Samuelson approach.
What was at stake? As a policy matter, the difference between the American Keynesians and the British Keynesians boiled down to the difference between trusting markets and not trusting markets. The American (Samuelson) approach essentially said that the government should be as uninvolved in the economy as possible, intervening only to smooth the business cycle. Otherwise, markets would determine prices efficiently if government would stay out of the way. Inefficiencies like minimum wages were tolerated as part of the infamous "efficiency/equity tradeoff," but one had to hold one's nose in order to do so; and it was merely a matter of "morals" that would cause an economic scientist to deviate from the true path.
The British did not imagine that Adam Smith's fable about the invisible hand could ever be taken so seriously. They (like Keynes) saw the fundamental flaws in even the most sophisticated markets, and they offered a withering critique of the idea that government's role is merely to let rational private actors engage in self-interested action.
To Samuelson's great credit, one of the most important moments in academic history found him accepting defeat in a very humble and public way. When the debate between his camp and the Brits had reached a fevered pitch over something called "the capital controversies," Samuelson wrote a short but fascinating piece in which he admitted that his side had lost that battle. He did not say, "Well, if we only change this assumption ..." or any of the standard dodges in academic debates. He simply said, "They other side has proven that my position on this issue was wrong." Pretty amazing.
Samuelson then pretty much moved on to other issues. Unfortunately, Samuelson's cohorts did not follow his lead. Even people whom I otherwise greatly admire, like Joseph Stiglitz, continued to engage with the Brits on (to my mind) increasingly preposterous grounds. Even so, Samuelson deserves credit for refusing to continue a losing battle.
He did not, however, change his basic approach to policy. While he continued to find situations in which a market "imperfection" might cause us to deviate from the presumed ideal hands-off approach, he had set in motion the basic dynamic that we see to this day. The government is presumed to be a negative force in the economy unless there is something truly unacceptable happening, in which case we must reluctantly deviate from the preferred course.
Readers will recognize the analogy here to the fight within the Democratic party in the U.S. today. Samuelson's intellectual heirs, like Summers and Geithner, hold to a fundamental belief that market actors will end up doing the right thing with minimal regulation. Others, like Robert Shiller and (a changed) Joseph Stiglitz, see the problem quite differently. It is not that markets never do anything right but that markets must be set up in a way to prevent market meltdowns.
The damage that the bastard Keynesians are doing today is manifest. Attempts to do something so basic as making sure that rating agencies operate without conflicts of interest have apparently failed, even after we confronted the most frightening finance-led economic crisis since the 1930's. The political forces that were able to defeat improved regulations were relying in part on the belief buried in people's minds that the economy might occasionally need to be steered back on course, but regulating markets is inefficient and bad. That belief is so widely held to a surprising degree because of Samuelson. It is certainly better than the view that Friedman and his followers espoused (not even to try to right the ship), but that is a low standard indeed.
As Keynes himself said, "practical men" think that academics is irrelevant to them, but they are the slaves to some "academic scribbler." Samuelson's scribblings were better than most, but we should not be blind to the damage that his approach continues to wreak as we try to emerge from the Great Recession.
Paul Samuelson died last week at age 94. The New York Times ran a front-page obituary last Monday, and Paul Krugman wrote a short, but very nice, entry on his blog praising Samuelson. At a time when Keynesian macroeconomic policy has once again become the key to economic recovery, we would do well to think back on Samuelson's contributions to public discourse. While those contributions were important, the story on Samuelson is more complicated than most people realize.
Samuelson was one of the most well-known economists of the 20th century, mostly because of his best-selling introductory textbook. His scholarly work covered a number of major areas within economics, but he was mostly known as a macroeconomist. One of his most famous papers, published in 1939 (when he was 24 years old!), described an important dynamic called "multiplier/accelerator interaction" that seems to me still to hold one of the key insights into why fiscal policy is especially important in fighting a recession. He also had theorems named after him (e.g., the Samuelson/Stolper theorem). In fact, he was such a leader in the field that he deserves to be called a legend.
With such a long and impressive career, it is difficult to know where to begin. On the positive side of the balance sheet is his embrace of activist government policy to fight economic downturns and put people back to work. He engaged in a lifelong intellectual battle with his nemesis Milton Friedman, and he combined academic work with policy work enthusiastically. Surely, the post-WWII economic environment could have been much worse if Samuelson had not been a leader in pushing against a return to pre-Depression economic classicism and its attendant policy passivity.
Postwar economics could also, however, have been much better. If the choice were only between Samuelson and Friedman, Samuelson was obviously the way to go. There was, however, a better choice available; and Samuelson aggressively pushed that choice to the margins of the academy and almost completely out of the policy debate. Now known as "Post Keynesianism," the losing side of that academic fight has never completely disappeared. The public debate, however, is much poorer because of the efforts of Samuelson and his cohorts to push the Post Keynesians to the margins.
The approach to Keynesian economics that Samuelson championed is now alternatively called "the Keynesian synthesis," the "neoclassical synthesis," or the "neoclassical Keynesian synthesis." The basic idea is that economics should be strictly split between micro and macro, not just in terms of the questions asked but also in determining the mode of analysis. Micro was all about supply and demand, rational actors, and efficiency. Macro was about fiscal and monetary policy. Virtually every major American economist of Samuelson's generation, and most in the generation that followed, adopted this approach. Solow, Tobin, Modigliani, and so on, were Samuelsonians. (They were also the leaders in the mathematization of economics, which Samuelson pioneered and promoted throughout his career. But that is another subject entirely.)
The other side of the debate lived on the other side of the Pond. Keynes's academic home, Cambridge University, included one proponent of the "synthesis" approach, John Hicks. Otherwise, the economists at Cambridge were overwhelmingly committed to the idea that the synthesis, or "bastard Keynesianism," was not only a theoretical abomination but a major error in policy. Joan Robinson, Nicholas Kaldor, Piero Sraffa, and others saw the error in conceding the micro side of the slate to the classical economists, and they spent the decades after the war fighting hard against the Samuelson approach.
What was at stake? As a policy matter, the difference between the American Keynesians and the British Keynesians boiled down to the difference between trusting markets and not trusting markets. The American (Samuelson) approach essentially said that the government should be as uninvolved in the economy as possible, intervening only to smooth the business cycle. Otherwise, markets would determine prices efficiently if government would stay out of the way. Inefficiencies like minimum wages were tolerated as part of the infamous "efficiency/equity tradeoff," but one had to hold one's nose in order to do so; and it was merely a matter of "morals" that would cause an economic scientist to deviate from the true path.
The British did not imagine that Adam Smith's fable about the invisible hand could ever be taken so seriously. They (like Keynes) saw the fundamental flaws in even the most sophisticated markets, and they offered a withering critique of the idea that government's role is merely to let rational private actors engage in self-interested action.
To Samuelson's great credit, one of the most important moments in academic history found him accepting defeat in a very humble and public way. When the debate between his camp and the Brits had reached a fevered pitch over something called "the capital controversies," Samuelson wrote a short but fascinating piece in which he admitted that his side had lost that battle. He did not say, "Well, if we only change this assumption ..." or any of the standard dodges in academic debates. He simply said, "They other side has proven that my position on this issue was wrong." Pretty amazing.
Samuelson then pretty much moved on to other issues. Unfortunately, Samuelson's cohorts did not follow his lead. Even people whom I otherwise greatly admire, like Joseph Stiglitz, continued to engage with the Brits on (to my mind) increasingly preposterous grounds. Even so, Samuelson deserves credit for refusing to continue a losing battle.
He did not, however, change his basic approach to policy. While he continued to find situations in which a market "imperfection" might cause us to deviate from the presumed ideal hands-off approach, he had set in motion the basic dynamic that we see to this day. The government is presumed to be a negative force in the economy unless there is something truly unacceptable happening, in which case we must reluctantly deviate from the preferred course.
Readers will recognize the analogy here to the fight within the Democratic party in the U.S. today. Samuelson's intellectual heirs, like Summers and Geithner, hold to a fundamental belief that market actors will end up doing the right thing with minimal regulation. Others, like Robert Shiller and (a changed) Joseph Stiglitz, see the problem quite differently. It is not that markets never do anything right but that markets must be set up in a way to prevent market meltdowns.
The damage that the bastard Keynesians are doing today is manifest. Attempts to do something so basic as making sure that rating agencies operate without conflicts of interest have apparently failed, even after we confronted the most frightening finance-led economic crisis since the 1930's. The political forces that were able to defeat improved regulations were relying in part on the belief buried in people's minds that the economy might occasionally need to be steered back on course, but regulating markets is inefficient and bad. That belief is so widely held to a surprising degree because of Samuelson. It is certainly better than the view that Friedman and his followers espoused (not even to try to right the ship), but that is a low standard indeed.
As Keynes himself said, "practical men" think that academics is irrelevant to them, but they are the slaves to some "academic scribbler." Samuelson's scribblings were better than most, but we should not be blind to the damage that his approach continues to wreak as we try to emerge from the Great Recession.