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I was surprised by the excellence of Hazlitt's _The Failure of the "New Economics"_. I'd also recommend it.

I didn't know the Soviet Union embraced Keynesianism. I thought they rejected that as just more bourgeious economics attempting to deal with the internal contradictions of a capitalist economy.

Great post, Pete. I think this is my favorite Boettke post since I started reading this blog.

I fear though that your recommended readings are a bit intimidating for someone who is on the fence. I.e. suppose I am an undergraduate econ major who has a vague feeling that something is crazy about standard Keynesian analysis. If you tell me the _first_ stop is Hazlitt's humongous line by line critique of the General Theory, I will probably go to the bar instead.

So for that type of person, I would first recommend Rothbard's critique of Keynesianism in Man, Economy, and State. The relevant chapter (if memory serves) is 11, and it's online here:
http://mises.org/rothbard/mes/chap11a.asp

More generally Pete (or Steve or Dave P.), can you guys comment on what the "normal" mainstream economist thinks of this stuff? I have to say, I have been flabbergasted that even some people at GMU (no names) as well an Mankiw, seem to accept the basic validity of the aggregate demand framework. I had sortof thought (from Dr. Ebeling's critiques way back in Hillsdale) that there were 7 remaining true Keynesians. Now I realize it's more like 7,000.

Whoops sorry Pete, you listed the collection of Hazlitt essays first, and _then_ the humongous line by line critique of the GT. So your reading plan is A-OK. :) You might want to see if the sections where Rothbard rips the multiplier etc. are worth adding though. (I haven't looked at the Hazlitt collection in a long time.)

Jeez, one more clarification: Dr. Ebeling didn't say, "There are 7 Keynesians left." What I meant was, I thought the "paradox of thrift" etc. had been so thoroughly debunked, that nobody could possibly believe it anymore. And yet you see both liberal and conservative economists talking about it as a neat little economist's secret that we unveil during deflations to an amazed public.

Bob,

I interpret Pete's point as being not so much that many/most economists accept the details of old school Keynesianism (like the paradox of thrift or the liquidity trap). Rather Keynesianism created a larger structure for thinking about macro (like AD and AS, like the monetary theory of the interest rate, like the multiplier, the S, I disconnect, and the primacy of consumption) that remains in play for the most part today. Yes, some folks are more skeptical of gov't intervention, but they aren't skeptical of the theoretical apparatus.

Yeager rightly termed this all the "Keynesian Diversion" and we continue to be "diverted" 75 years later.

Just compare the core theory chapters of any standard intermediate macro text (even a good one like Froyen) with what you find in my book or Roger G's. It's a whole different world.

Thought I'd add my appreciation of this post to the general chorus here.

What I can't figure out is how Keynesian economics, which has been applied liberally over the last several decades, including the monetarist monetary policy, can be applauded as the solution to these problems. In other words, how can this mess be construed as free market failure when we haven't even had a free market in this country for a really long time.

I don't know about anybody else, but it seems like the rest of the world is trying to fight fire with gasoline, because someone told policy makers that gasoline is wet. How do we keep our sanity during this tough times?

I have just had occasion to read much of Allan Meltzer's book "Keynes's Monetary Theory: A Different Interpretation" and some of Bradley Bateman's book "Keynes's Uncertain Revolution." If you read these and then Mankiw's NYT's article you will see that Mankiw has no idea of what Keynes actually said. He learned his "Keynes" from some (perhaps advanced) textbook and continues to think that the Keynesianism of the textbook is the real Keynes. First surprise: In the "General Theory" and to the end of his life, Keynes was not an advocate of countercyclical fiscal policy. He was a strong advocate of "socialization of investment" as a means of avoiding the speculative fevers of financial markets.He wanted quasi-public bodies to become the primary sources of investment. Is Mankiw for that?

Young Austrians who dislike dogma should consult this page:

http://post-austrianeconomics.blogspot.com/

When I read Mankiws piece, I think all the time: He laments savings in crisis times, as if saved money would suddenly disappear form the market-place... So, dear Mankiw, what happens with all this saved money? Do they buy more "necessary" goods (f.e. food etc.)? Is the money saved, just lost to the economy? I think not.

What's more dogmatic?

A series of philosophical viewpoints logically assembled and ordered for the purpose of coherently explaining a body of knowledge and/or behavior?

Or the retreat to ascribing that body of knowledge to the mild epithet that has become the word "dogma" in place of reasoned debate?

I have just finished reading Hyman P. Minsky´s _John Maynard Keynes_ and while there is of course a lot in this book Austrians would disagree with - in particular the huge amounts of liquidity preference stuff - I was struck by Minsky´s open-mindedness, openly criticizing Keynes, explaining and correcting where Keynes went wrong etc. Such open-mindedness vis-à-vis the work of the masters is rare among Austrians...

Are any of these texts available under a Creative Commons license, or are they all pay-to-read?

Barkley has a point, Pete. Sure, of course, I'll pick "Economics and Knowledge" over Chapter 12 any day. But Keynes posed the problem of uncertainty quite forcefully in Chapter 12. In doing so, he made some technical points of enduring value.

Supposedly, Gerald Shove once said, "Maynard never spent the half hour necessary to learn price theory," You can really see the sting in that remark when you notice how many margins along which adjustments do *not* occur in Keynes. Similarly, Keynes has his diving duck line dismissing the time structure of production. That's an important limit in Keynes thought. If the interest rate does no work, there can be no unsustainable boom. You can see the same limit in Mankiw's post when he says, "In normal times, the Fed can bolster aggregate demand by reducing interest rates." So there is plenty cause for dismay in any rehabilitation of Keynes. But we should still recognize, I think, the value and importance of Chapter 12. I don't like the hydraulic Keynes, who does exist in the General Theory IMHO, but I respect the epistemic Keynes, who has much to teach us.

Yes. This "collective delusion among economists" is frightening. I fear that economists have a herding mentality that grasps onto popular figures and then economists cling to the models of these "brilliant" chosen ones. But those who are chosen are not brilliant, they are only popular -- they generally have, like Keynes or Marx, gotten the ear of government. They come up with simplistic models that are easily used to churn numbers or explain phenomena, even though a child could see right through them.

When I took intermediate macro we used Mankiw's book. It was filled with Solow, Keynesian AS/AD, phillips curve, and on and on. I could barely believe that it was for real. None of it made any sense, none of it had any microfoundations (read: basis in reality).

I spent class time with a horrified gawking stare frozen on my face, wondering about the future of mankind if these were our leading economists, and asking the most basic of questions ("If savings is what drives growth according to the Solow model, then wouldn't communism work just as well or better than capitalism? Where are policies and institutions in this model?") and get answers such as "Well, this is just to simplify and explain the basics. Those details can be added later."

And I would be left wondering, about Solow and Keynes: who decided that the aggregate level of saving is more important than whether an individual, or a collective or government owns that savings? Who decided that aggregate investment is more important than whether it is private investment or investment by government in make-work programs? Doesn't it matter if the economy is split 90/10 private or 50/50 private or 10/90? When these models were being made economies spanned that whole spectrum, and yet these guys did not seem to think it mattered who was consuming resources - government or private consumer - who was investing or saving, just so long as the aggregate totals fit into the equations and made them balance nicely.

There were other problems - contradictions about what was better, savings or consumption? and so on - but the idea that private and public spending could be considered equal after the experiment with socialism and the interventionist state was well under way was just crazy. How could anyone think these models were useful at all? These seemed like child's play, fantasy, mind candy maybe. But not important, not something economists or policymakers should be using.

Why would economists fall for these models? And perhaps even worse: why do so many economists still cherish them, and hold them in esteem? What is this collective delusion? Is it that they love the "logic game" of it? Or is it the political clout they love? If they feed politicians with what they want to hear, they will be famous and win a Nobel -- isn't that better than being a no-name who sticks to reality? Isn't it more fun to make convoluted logic games, and be out in the public square?

Roger and everyone,

First, reading chapter 12 does address uncertainty, but without price theory you don't see a way out, and also you are led astray to believe that ultimately interest rates can be driven to zero and socialization of investment is viable because we no longer live in a world of scarcity. I would rather get my discussion of uncertainty from Mises and Hayek, but that isn't being recognized.

Second, I agree with Bob Murphy that Rothbard's discussion in M, E & S should be there as well as in America's Great Depression.

Third, Horwitz is right that my point is about the general vision of the Keynesian revolution in economics that was embodied in the neo-classical synthesis. It is this textbook Keynesianism (Samuelson) that came to dominate the economics profession. And it is that general thrust of the Keynesian revolution and its consequences that I am arguing against.

Fourth, with regard to the Soviet Union --- first, see my discussion of the growth models in the Industrialization Debate and their further development in my book THE POLITICAL ECONOMY OF SOVIET SOCIALISM: THE FORMATIVE YEARS, 1918-1928. A form of Marxist-Keynesianism just became the operational model after the model of comprehensive planning proved to be impossible. They didn't call it that, but if you look at the development discussions and also what they advocated as policy exports to the "third world" then I think you will see what I mean.

Fifth, it is not dogmatic to make an argument subject to refutation. Pluralism is not a position, it is a result of a healthy intellectual dialogue. I have a position, I try to make an argument for that position, and in the proper setting provide evidence to meet an argumentative burden. But I hold a position. Others challenge that position with their arguments and evidence. Pluralism results from the tug and pull of academic/scientific discourse. Dogmatism is a problem if and only if we advocate the shutting down of that process of argument through logic and evidence. To call someone who holds a position dogmatic is to "argue" not by logic and evidence, but by name-calling. I'd think an aspiring scholar would do better.

Open-mindedness is a function of giving people a fair hearing, reading charitably, but also critically. One must seriously study an author, but one does not have to agree with an author to prove you are open-minded. I can be open-minded but ultimately unpersuaded by an author. I imagine that with the exception of Dave Prychitko, I have read more Marx and Marxist literature than anyone associated with the Austrian school, and I might say that might be true for Old Institutionalism as well. I tried to read these figures charitably and with a certain sympathy for their project, but ultimately I found them unpersuasive. To point out the reasons why I remain unconvinced is neither close-minded nor dogmatic. It is instead a judgment rendered after careful study. This is my position on Keynes and Keynesian economics as well.

BTW, and this is directed at Matt Mueller, you made a claim earlier -- Shackle taught us that scarcity doesn't apply in the 1930s because of expectations, I wrote back and gave you a citation from 1959 in which Shackle fully embraces not only scarcity, but the importance of relative price movements (Economics for Pleasure [Cambridge University Press]) and you remained silent --- why? The Shackle you present us with, is not the G. L. S. Shackle who actually made contributions to ECONOMICS. Why should we value your Shackle over the real Shackle? I also might recommend to you Shackle's Expectation, Enterprise and Profit ... I don't agree with all the economics in this book, but it is Economics and that means that there are preferences and constraints, prices and profits, and systemic forces and equilibrating tendencies. Words such as uncertainty and process, cannot substitute for economic analysis, they have to instead be part of the analysis.

Finally, I think Mario Rizzo is right. Not only do those who mention Keynes today NOT know the real Keynes, the real Keynes actually made arguments that are far worse than the neoclassical synthesis Keynes. So if I reject the neoclassical synthesis Keynes, guess what I might say about the real Keynes. However, I do think you can in reading Keynes also find the neoclassical synthesis Keynes (at least for practical purposes). So that for the purposes of the practical affairs of today, the critique of Keynesianism also entails a critique of Keynes's economics.

Pete

P.S.: To follow up on Roger's point --- I value Keynes (as I do Galbraith) as a literary intellectual in economics, except for the General Theory he actually is a lively writer with wonderful turns of phrases, and I value Keynes as someone who recognized the fundamental problem situation that actors in the economy confront (rather than assuming it away for sake of formal tractability). But he was not a very good economic thinker --- his intellectual history was shoddy, his theory of human choice was divorced from his theory of the economy, and his policy advice was simultaneously populist and elitist.

Keynes does not really suggest a post scarcity world. What happens in general theory is that in Chapter 4 section III he assumes that capital equipment is constant for the period under consideration. So in Keynes' world an precisely specifiable maximum amount of production is possible. Other economic variables may only have the effect of reducing the amount realized from this maximum. (I'm nicking this point from Roger Garrison.)

To Chapter 12 Keynesians.... Here is the problem and the tragedy, the rest of the book is wrong. So we may be in a situation with a high level of Knightean uncertainty. But, the government cannot really do anything about it.

Perhaps this blog post had better been entitled "The Legacy of Lord Keynes in Economics". Don´t forget that even today his work on probability theory goes on being quoted by the best among probabilists, philosophers of science etc.

Hazlitt's book The Failure of the 'New Economics': An Analysis of the Keynesian Fallacies is *here as are others

*http://www.mises.org/books/failureofneweconomics.pdf

Greg Mankiw -- king of the "idiot savants".

>>I have just had occasion to read much of Allan Meltzer's book "Keynes's Monetary Theory: A Different Interpretation" and some of Bradley Bateman's book "Keynes's Uncertain Revolution." If you read these and then Mankiw's NYT's article you will see that Mankiw has no idea of what Keynes actually said. He learned his "Keynes" from some (perhaps advanced) textbook and continues to think that the Keynesianism of the textbook is the real Keynes. First surprise: In the "General Theory" and to the end of his life, Keynes was not an advocate of countercyclical fiscal policy. He was a strong advocate of "socialization of investment" as a means of avoiding the speculative fevers of financial markets.He wanted quasi-public bodies to become the primary sources of investment. Is Mankiw for that?<<

This is also Hayek's judgment. "Brilliant" man, a rather poor economist, deeply ignorant of much of his field (e.g. Hayek insisted Keynes knew nothing of 19th century economics, beyond Marshall's _Principles_. And Hayek wasn't really joking when he said it.)

"But he was not a very good economic thinker --- his intellectual history was shoddy, his theory of human choice was divorced from his theory of the economy, and his policy advice was simultaneously populist and elitist."

Keynes, "The General Theory", chapter 24, pages 381-83:

"I have mentioned in passing that the new system might be more favourable to peace than the old has been. It is worth while to repeat and emphasise that aspect.

"War has several causes. Dictators and others such, to whom war offers, in expectation at least, a pleasurable excitement, find it easy to work on the natural bellicosity of their peoples. But, over and above this, facilitating their task of fanning the popular flame, are the economic causes of war, namely, the pressure of population and the competitive struggle for markets. It is the second factor, which probably played a predominant part in the nineteenth century, and might again, that is germane to this discussion.

"I have pointed out in the preceding chapter that, under the system of domestic laissez-faire and an international gold standard such as was orthodox in the latter half of the nineteenth century, there was no means open to a government whereby to mitigate economic distress at home except through the competitive struggle for markets. For all measures helpful to a state of chronic or intermittent under-employment were ruled out, except measures to improve the balance of trade on income account.

"Thus, whilst economists were accustomed to applaud the prevailing international system as furnishing the fruits of the international division of labour and harmonising at the same time the interests of different nations, there lay concealed a less benign influence; and those statesmen were moved by common sense and a correct apprehension of the true course of events, who believed that if a rich, old country were to neglect the struggle for markets its prosperity would droop and fail. But if nations can learn to provide themselves with full employment by their domestic policy (and, we must add, if they can also attain equilibrium in the trend of their population), there need be no important economic forces calculated to set the interest of one country against that of its neighbours. There would still be room for the international division of labour and for international lending in appropriate conditions. But there would no longer be a pressing motive why one country need force its wares on another or repulse the offerings of its neighbour, not because this was necessary to enable it to pay for what it wished to purchase, but with the express object of upsetting the equilibrium of payments so as to develop a balance of trade in its own favour. International trade would cease to be what it is, namely, a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases, which, if successful, will merely shift the problem of unemployment to the neighbour which is worsted in the struggle, but a willing and unimpeded exchange of goods and services in conditions of mutual advantage."

The only discussions I know of this and related passages in the GT (including in chapter 23)on Keynes's belief ineconomic causes of war and that his economics might help promote peace are:

- Hyman P Minsky, "John Maynard Keynes", Columbia University Press, 1975, page 159
- Donald Markwell, "John Maynard Keynes and International Relations: Economic Paths to War and Peace", Oxford University Press, 2006, pages 178-190

You might also be interested in discussion at http://hypocrisy.com/2008/11/23/tanya-white-reminds-us-of-economist-keynes-paths-to-peace/

Keynes, "The General Theory", chapter 24, pages 381-83:

"I have mentioned in passing that the new system might be more favourable to peace than the old has been. It is worth while to repeat and emphasise that aspect.

"War has several causes. Dictators and others such, to whom war offers, in expectation at least, a pleasurable excitement, find it easy to work on the natural bellicosity of their peoples. But, over and above this, facilitating their task of fanning the popular flame, are the economic causes of war, namely, the pressure of population and the competitive struggle for markets. It is the second factor, which probably played a predominant part in the nineteenth century, and might again, that is germane to this discussion.

"I have pointed out in the preceding chapter that, under the system of domestic laissez-faire and an international gold standard such as was orthodox in the latter half of the nineteenth century, there was no means open to a government whereby to mitigate economic distress at home except through the competitive struggle for markets. For all measures helpful to a state of chronic or intermittent under-employment were ruled out, except measures to improve the balance of trade on income account.

"Thus, whilst economists were accustomed to applaud the prevailing international system as furnishing the fruits of the international division of labour and harmonising at the same time the interests of different nations, there lay concealed a less benign influence; and those statesmen were moved by common sense and a correct apprehension of the true course of events, who believed that if a rich, old country were to neglect the struggle for markets its prosperity would droop and fail. But if nations can learn to provide themselves with full employment by their domestic policy (and, we must add, if they can also attain equilibrium in the trend of their population), there need be no important economic forces calculated to set the interest of one country against that of its neighbours. There would still be room for the international division of labour and for international lending in appropriate conditions. But there would no longer be a pressing motive why one country need force its wares on another or repulse the offerings of its neighbour, not because this was necessary to enable it to pay for what it wished to purchase, but with the express object of upsetting the equilibrium of payments so as to develop a balance of trade in its own favour. International trade would cease to be what it is, namely, a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases, which, if successful, will merely shift the problem of unemployment to the neighbour which is worsted in the struggle, but a willing and unimpeded exchange of goods and services in conditions of mutual advantage."

The only discussions I know of this and related passages in the GT (including in chapter 23) on Keynes's belief in economic causes of war and that his economics might help promote peace are:

- Hyman P Minsky, "John Maynard Keynes", Columbia University Press, 1975, page 159
- Donald Markwell, "John Maynard Keynes and International Relations: Economic Paths to War and Peace", Oxford University Press, 2006, pages 178-190

You might also be interested in discussion at http://hypocrisy.com/2008/11/23/tanya-white-reminds-us-of-economist-keynes-paths-to-peace/

Someone asked Mankiw what he knew about Austrian economics. He said he had read Hayek's "Road to Serdom" but nothing else because he assumed that all that was good in Austrian econ had been incorporated into mainstream econ. That's a dangerous and foolish assumption to make.

As for Keynes, remember that his book didn't come out until the late 30's. State attempts at manipulating the economy started in ernest with the creation of the Federal Reserve. Hoover initiated the massive Federal intervention. Roosevelt just amplified what Hoover had started. It seems to me that Keynes just picked up on how popular state intervention had become already and jumped in front of the crowd.

Thanks to Arthur James for the reference to Hyman Minsky on Keynes on war and peace. It’s only a couple of pars - remmber Minsky was writing in 1975 -

“Conflict among nations
Keynes also believed that ‘if nations can learn to provide themselves with full employment by their domestic policy … there need be no important economic forces calculated to set the interest of one country against that of its neighbours’ (GT, p. 382). Keynes viewed the tensions among the affluent nations of Europe and America as stemming from the felt needs to export in order to protect domestic employment, if not to raise domestic employment by ‘beggar my neighbour’ policies.

For the first twenty-five years after the Second World War, this view of Keynes was borne out by relations among the affluent capitalist countries. Aside from vestiges of past colonialism, such as the Vietnam involvement by first France and then the United States, there was an absence of war and even of serious tensions among the countries that were both capitalist and affluent. The ideological Cold War is not a question of economic conflict. The ability to sustain domestic markets by monetary and fiscal policies eliminated pressures for countries to ‘compete’ for controlled markets or advantageous positions in world trade.”

How relevant is this again today!

The reference to Markwell is also interesting. He gives a detailed account of how Keynes came to write in the General Theory about the effect of his economics on the chances of war and peace. Fascinating that Keynes was responding to a debate in New Statesman on “does capitalism cause war?”

As Arthur James mentioned, it is worth looking at http://hypocrisy.com/2008/11/23/tanya-white-reminds-us-of-economist-keynes-paths-to-peace/

I am not sure it is "foolish" to assume that if something is mainstream there must perhaps be some good reasons for it. Nobody can read everything so everybody needs some sort of selection principle to make choices. The assumption that if something is mainstream that might be a good place to start, although not watertight, is not foolish. The burden of proof is on those outside the mainstream, or isn´t it?

Excellent & very perceptive post by Peter Boettke.

The "return to Keynes" is madness, particularly when earlier this year a number of more mainstream economists (e.g. Phelps)were pointing out that we're witnessing a Hayekian business cycle.

What really is the value of Keynes in economics? More than anything else, JMK packaged fallacies into sophisticated presentations that still deceive and destroy.

As for Mankiw... when I was in Ukraine he came and lectured promoting his then-new text. His thesis: "you students should learn econ so you'll become well-informed voters." Silly enough advice anywhere, doubly so since everyone in attendance knew the recent election had been rigged. He spouts nonsense w/o thinking, simply because people will listen.

Has anyone a link or reference to Phelps about the Hayekian business cycle? That would interest me very much.

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