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John Maynard Keynes in Modern Macroeconomics Education

January 14th, 2011 Comments off

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It is of interesting note that Paul Krugman and Paul Samuelson, in their dismissal of John Kenneth Galbraith’s The New Industrial State, mentioned that Galbraith was a talented writer (Duhs, 2009, p123). Perhaps it would not be too far-fetched to suggest that such a comment was motivated by the fact that both Krugman and Samuelson were Keynesians. John Maynard Keynes was not known for being an easy read, with scholars and economists alike criticizing The General Theory of Employment, Interest and Money for its complex writing despite its largely practical nature. Keynes, whose fame peaked with the publication of The General Theory heralded some sort of revolution in the economics of the late 1930s. The General Theory created a change in the way governments handled the recessions of a post-Depression era. Once economies were lifted out of depressions, Keynesian policies gradually disappeared and in the 1970s were mostly displaced by Milton Friedman’s monetarism (Stewart, 1993). Keynes may have lost his popularity towards the end of the 20th century, but he returned to attention recently in light of the global financial crisis. Seeing as long after his death Keynes remains a big name in economics, it is only natural then to expect his teachings introduced in a standard macroeconomic course. Hence this essay will examine the content of textbook macroeconomics and how much of it agrees with the economics of Keynes, primarily through the analysis of introductory macroeconomics textbooks.

Looking at the history of Macroeconomics textbooks, we can see that Keynesian economics began to saturate economics textbooks since as early as the 1940s. A study of Paul Samuelson’s Economics shows that Keynesian economics was gradually assimilated into mainstream economics syllabus, starting with its first edition which was loosely structured around Keynes’s concepts. Samuelson’s text was the principle introductory economics textbook of the USA and today it is built around ideas from The General Theory alongside other relatively recent economic concepts such as the Phillip’s Curve. Pearce and Hoover (2005, p186) additionally notes that today’s macroeconomics textbooks are mostly Keynesian. However, it is worth mentioning that most textbook Keynesian economics are not necessarily teachings of Keynes but rather other economist’s interpretations or understanding of Keynes. There exists a difference between (as Alex Leojohnhufvud famously put it) “Keynesian Economics and the Economics of Keynes” (Garrison, 1994). Colander observes that textbook Keynesian policies were not exactly Keynes but rather Abba Lerner’s interpretation of Keynes while Caporaso and Levine (1992, p101) notes that economists such as textbook writer Samuelson placed Keynesian ideas into a neoclassically inspired framework. The latter supports the notion put forward by Littleboy that textbook writers merely picked up bits of Keynes that fit into its neoclassical vision.

Things take a fascinating turn when the discord between Keynes’s own teachings and textbook macroeconomics are made visible. A quick review of standard macroeconomics textbooks is sufficient to show that Keynes was not purely “watered down” or “bastardized” as claimed by some economists, but rather eliminated completely in certain crucial parts. The most obvious would be the lack of the political side of Keynes due to the textbook writer’s pursuit of the measurable and results-oriented components of Keynesian economics. Keynes did not trust the market system to perform satisfactorily on its own, and this forms a core section of Keynesian economics. Sharing a similar opinion with Karl Marx (who is completely absent from most modern macroeconomics textbooks), Keynes denied the ability of the market to keep a steady rate of employment and production. However, Marx went on to claim that the free market system is “violently unstable”, a thought that Keynes disagreed upon (Caporaso Levine, 1992, p101-2).

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John Maynard Keynes in Modern Macroeconomics Education (Part 2)

January 14th, 2011 Comments off

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According to Keynes, too often has Adam Smith’s “invisible hand” been let off with a slap on the wrist despite its ineffectiveness in keeping economies above water and this forms the basis as to why Keynes sees the need for some form of government intervention. Keynes’s pessimism regarding markets was never taken seriously by textbooks, with most writers attributing it to the turbulent period he lived in.

One particularly big predicament for Keynes was the development of the private corporation. A part which the standard macroeconomics textbook fails to give coverage on, the private corporation is to Keynes the cause of faults in the financial market. The distribution of shares as a method enabling individuals to hold wealth in a liquid form generated instability in the accumulation of wealth. Caporaso and Levine (1992, p110) observe that this makes long run commitment to a particular productive enterprise no longer compulsory and places a premium on short term capital gains. As Keynes (1936, p156) put it, those who profit from this are those who best forecast “what the average opinion expects the average opinion to be” a short time ahead of the general public. This in turn encourages speculative activities and in the end results in price instability. Keynes (1936, p159) likens these investors to gamblers, stating that “when the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done”. Keynes advocates share market transaction taxes in order to solve this problem. Simply put, the ultra-short term nature of financial market exchanges would be heavily dampened by a tax that is capable of raising transaction costs. This shifts investor perspectives away from the short run side of the spectrum and reigns in the pace of transactions. This reform along with Keynes’s proposal for an International Clearing Union was never mentioned in textbooks, possibly for their radical nature.

Taking things a little further, it is perhaps fair to say that Keynes would not agree to the content of today’s macroeconomics textbook even if they are based on derivations of his concept. Firstly, the way in which textbooks today present content can best be portrayed as being of mainly mathematical and diagrammatical manner. Today’s textbooks are neoclassical, combining Keynesian theory and classical theory. Macroeconomics textbooks take an engineering approach at seeing the world, resulting in society being projected as a highly mechanized structure to ruling technocrats. This is much in line with the Benthamite movement where society’s utility is given a value and governmental decisions are made to maximize collective utility. On the other hand, we have Keynes who was not just an economist, but was additionally a social reformer and a philosopher. He had a more earthly view of the world and concedes that uncertainty remains an integral part in everyday life. He took note of the way people discount what they don’t know from making future decisions, and how this posed a flaw in the decision-making process. Then there is also the concept of “animal spirits” where Keynes believed people are often governed by their whims and fancies rather than cost-benefit calculation. This is perhaps consistent with his personal life in which he was known to enjoy artwork, have affairs with men, and finally marry a famous ballerina. This quirky side of Keynes contrasts sharply from the rigid economics of textbooks.

In the end, Keynes’s writings and beliefs were to guide people towards what he thought would be an ideal state of society. Before The General Theory, he wrote Economic Possibilities for our Grandchildren in 1930 which dealt with the potential of future living conditions and society.

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John Maynard Keynes in Modern Macroeconomics Education (Part 3)

January 14th, 2011 Comments off

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Ohanian (2008, p10-11) notes that Keynes’s 100 year prediction was highly accurate despite the lack of empirical record and insufficient theory at the time he wrote the essay. Keynes wanted a society where production was no longer a problem and there was equal choice for everyone. To put it simply, all wants can be satisfied due to increasing productivity from constant technological progress. Keynes even forecasted that eventually society will reach a point where too much leisure becomes a problem. Ohanian states that Keynes’s forecast of dramatically decreasing work hours in the future was near to that predicted by a modern growth model, and this was a stunning achievement for his time period. However, his prediction of the future state of leisure is still very far off the mark and for the time being does not seem very likely.

Keynes was no doubt a brilliant contributor to economics, and one that was far ahead of his time. The oversimplification and exclusion of much of his work in textbooks could be seen as insulting by some scholars, but perhaps it is of necessity to the technocratic age that we live in. In an era where the focus on results and technology dominate the analytical process, it is most probably best if the neoclassical vision of textbooks remained for the time being. In conclusion, it can be said that the content of macroeconomics textbooks does leave a lot to be desired particularly when it comes to Keynes and in general, the political economy. By reducing macroeconomics to mainly calculations and forecasts to maximize wellbeing, the more thoughtful and challenging side of economics has been left out. If prior to Keynes textbooks were planned around Adam Smith’s teachings, it would be very interesting to know which economist would be the next to mark a revolution in macroeconomics education.

(approximately 1480 words)

References

Duhs, A. 2009. “Course Notes”, Political Economy and Comparative Systems, The University of Queensland, Queensland, Australia.

Garrison, R. W. 1994. “Keynes was a Keynesian”, The Review of Austrian Economics, Vol. 9 No.1, pp. 165-171.

Littleboy, B, Taylor, J. 2006. “Macroeconomics 3rd Edition”, John Wiley Sons Australia, Queensland.

Littleboy, B. 2009. “Commentary on Keynes”, The University of Queensland.

Ohanian, L. E. 2008. “Back to the Future with Keynes”, Federal Reserve Bank of

Minneapolis Quarterly Review, Vol. 32, No. 1, pp. 10–16.

Pearce, K. A, Hoover, K. D. 2005. “After The Revolution: Paul Samuelson and the Textbook

Keynesian Model”, History of Political Economy, Vol. 27, pp. 183-216.

Stewart, M. 1993. “Keynes in the 1990s”. Penguin Books, Middlesex, England.

Taylor, H. 1936. “Mr. Keynes’s General Theory”, New Republic 86 (April 29): 349

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A Comparison of Socioeconomic and Institutional Methods of Explaining the Rise of Capitalist Democracy in England (Moore vs. North & Weingast)

July 18th, 2010 Comments off

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The arguments of Barrington Moore’s Social Origins of Dictatorship and Democracy and of North and Weingast’s Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England on the genesis of capitalist democracy in England mostly supplement each other by examining different variables and processes that relate to England’s evolution. Both works stipulate that England’s capitalist democracy entailed social elements that sought a free economy and did so by political means. Calling said elements the “commercial class,” Moore explains how this class emerged, came to power, and saw its policies implemented. North and Weingast, however, explain how political institutions evolved to allow a free market economy and how the commercial class’ interests translated into a fair, balanced, and checked English government. In a sense, Moore explains how initial conditions established the commercial impulse that would eventually drive free market democracy and how the impulse came to manifest itself politically and legally. North and Weingast, arguing on the precondition of the existence of the commercial class, explain how the evolution of political institutions, driven by economic motives, created a balanced, accountable government that led to a politically and economically free society. Thus the two arguments overlap in how the commercial impulse arrived at the doors of government, but supplement each other as one explains the cause chiefly using socioeconomic variables as the other explains the effects chiefly using institutional variables.

In attempts to explain the rise of capitalism in England, Moore uses socioeconomic conditions, the rise of the commercial impulse and availability of resources, whereas North and Weingast use institutional changes in government, the regularization of public finance. Thus the two arguments don’t necessarily contradict each other; rather, they examine different possible causes of the same phenomenon. Moore argues that market influences, the possibility of enclosing land, difficulty in finding cheap commodities, and the devolution of the connection between landownership and legal power all led to the emergence of the commercial impulse. The booming land, wool, and grain markets along with high food prices and a labor shortage, Moore argues, developed a need to make profit in English agrarian society. Moreover, the high price of resources and widespread availability markets inspired a once agrarian class of people to produce for economic gains rather than for sustenance. In addition, because “the land and tenurial relations based on it had largely ceased to be the cement binding together lord and man,” (Moore, 5) land thereafter came to be viewed as a source of revenue rather than one of political or legal power. Moore points to the burgeoning land market and rise of enclosures as evidence reaffirming his claim that public perception concerning land ownership shifted to one of capitalism. Furthermore, he asserts that the commercial impulse along with the aforementioned variables of resources were the chief causes behind the growth of a capitalist economy. Thus, Moore examines resource endowments and evolution of agricultural profitability to explain the growth and success of capitalist commercialism. On this point he and North and Weingast disagree.

To North and Weingast, the success of commercial capitalism was a result of government’s establishment of a “relevant set of rights…[and] a credible commitment to them,”(North and Weingast, 803) derived from their assertion that “the development of free markets must be accompanied by some credible restrictions on the state’s ability to manipulate economic rules to the advantage of itself and its constituents”(North and Weingast, 808). They argue that with restrictions on the Crown’s ability to practice arbitrary power in the pursuit of public finance and renege on loans, English government earned financial credibility and was therefore able to finance expenditures. This shift to free flowing credit to government trickled down to the public economy beginning when “the Bank of England began private operations…[along with] numerous other banks”(North and Weingast, 825). Thus North and Weingast argue that government credibility led to free flowing credit in the public economy. As a result of this influx of available credit, they argue, private enterprises were able to create new and grow existing businesses. Although the two arguments diverge when explaining the general reasons for capitalism’s success, Moore’s argument is mainly aimed at explaining why capitalism emerged in the first place whereas that of North and Weingast explains why capitalism boomed once it became embedded in the water supply. The two arguments have a more supplementary and overlapping relation when explaining why capitalist interests percolated government and succeeding in translating their philosophy into law.

While explaining how capitalist democracy came about in England, Moore examines how social changes affected policy and the composition of Parliament while North and Weingast examine how changes in financial policy and the new composition of Parliament affected English government. Thus, North and Weingast begin where Moore ends: at changes in financial and monetary policy and a new composition of Parliament. In Moore and North and Weingast’s arguments, these changes in government are viewed as an effect and cause, respectively. Moore argues that the disenfranchisement and resulting dissolution of the peasantry, royal infringement upon free market, and the transformation of Parliament from an exclusive body of hereditary nobles to a “committee of landlords” (Moore, 21) led to a Parliamentary opposition to the Crown that resulted in a government that promoted capitalist democracy. As land became increasingly necessary for successful agrarian capitalism, the practice of enclosing peasant-owned or common land became regular. This practice not only allowed resourceful peasants, or yeomen, to participate in commercial capitalism, but also led to rapidly decreasing peasant population that would have opposed modernization. Moore argues that the Crown strove to protect the peasantry from enclosures to ameliorate public discord by using prerogative mandates to reallocate the jurisdiction of property rights disputes from common law courts to the Star Chamber.

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A Comparison of Socioeconomic and Institutional Methods of Explaining the Rise of Capitalist Democracy in England (Moore vs. North & Weingast) (Part 2)

July 18th, 2010 Comments off

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However, Moore argues, because of the economic implications of enclosures and apparently self-serving practices of the Crown, commercial interests developed in opposition to the Crown. Moore further argues that “the wealthier townsmen turned against royal monopolies…as barriers to their own interests”(Moore, 13). As such, Moore asserts that the unilateral and regulatory nature of the Crown came to represent the final frontier before free market capitalism to an increasingly cohesive commercial class. This opposition came to the forefront of politics as Parliament came to represent the interests of the commercial class. In sum, Moore argues that economic motives drove Parliament to go against the Crown and was able to see its interests come to fruition due to the gradual disappearance of the peasantry and a lack of effective military, bureaucratic, and administrative bodies. Moreover, as Parliament began passing its reforms measures to ensure a free market, the Crown was now subject to a primitive form of impeachment, namely, beheading. On this point the two arguments agree completely. Moore argues that “the Star Chamber…[was] the general symbol of arbitrary royal power”(Moore, 17). Moreover, Moore argues that beside the Star Chamber, there was no major institutional reform because “a flexible institution which constituted both an arena into which new social elements could be drawn as their demands arose and an institutional mechanism for settling peacefully conflicts of interest among these groups”(Moore, 21) already existed. North and Weingast, however, assert that the evolution of English Parliament, monarchy, and court system comprised a near revolution.

The same changes in political institutions are described in both arguments, but North and Weingast treat these changes as much more significant to the development of free market democracy. Identifying that the “execution of public laws and expenditures was not subject to a public budgetary process,” (North and Weingast, 809) North and Weingast why they believe institutional change was sought after. Moreover, the fiscal irresponsibility of the Crown led to a coalition of the commercial class “seeking to preserve personal liberties, rights, and wealth”(North and Weingast). Thus the major impetus to reform was a budgetary one, but the nature of the reforms led to a system of government based upon checks and balances. North and Weingast identify several parliamentary measures taken to reform the budgetary process but in turn created a stable balance between Parliament and the Crown: the passage of the Statute of Monopolies and Triennial Acts, the abolishment of the Star Chamber, the reduction of legal legitimacy of royal prerogatives, and the modifications to land tenure laws. As a result of these changes in infrastructure, North and Weingast argue, the Crown’s ability to practice arbitrary was stripped. An important form of royal arbitrary power, they argue, was the disenfranchisement of political opposition in the form of gerrymandering, calling for detainment of political opponents and excessive bail thereof, and suspension of the writ of habeas corpus. Without such practices, one would face little to no threat of disenfranchisement and thus would be able to exercise political freedom. Thus North and Weingast argue that economically driven reforms to the budgetary process allowed for a balance of government and legitimacy of exercising political freedom. The two arguments overlap in explaining how parliament came to represent commercial interests. Moore, however, explains how the dissolution of the peasant class and rise of the commercial class established a strong, cohesive coalition that politically opposed the monarchy without going into detail as to how the commercial class went about accomplishing its goals. North and Weingast, on the other hand, focus on how the commercial class reformed English political institutions to establish separation of powers, a system of checks and balances, and a relatively laissez-faire government. In sum, Moore explains how socioeconomic trends translated into political trends as North and Weingast explain how political trends translated into legal and institutional trends.

Both arguments attempt to explain how capitalism and democracy emerged in England, and why they arose simultaneously. They both explain why the commercial class succeeded in bringing about a burgeoning capitalist economy, though they do so using distinct variables: Moore looks at socioeconomic trends, specifically the fall of the peasantry and the profitability of agriculture in England to explain the economic victory of capitalist forces, while only briefly examining institutional variables, the changing composition of Parliament, and the abolition of the Star Chamber to supplement his argument.

North and Weingast almost strictly use institutional variables in their assertion, namely the reform of the budgetary process to ensure the regularization of public finance which eventually trickled down into the public economy. Further, both arguments set out to explain how the commercial class arrived at the door of government and allowed for a democracy. Both make points backing up the assertion that commercial interests came to oppose the monarchy, though for different reasons. Moore depicts the opposition to an antidemocratic more as an apolitical opposition that gradually percolated Parliament and thus became political. North and Weingast lack any significant social commentary on this matter, instead relying on how Parliament’s desire to reform the budgetary process developed a balanced and democratic government to prove their point. In explaining both the rise of capitalism and that of democracy, Moore focuses on the cause and the phenomenon using socioeconomic variables whereas North and Weingast focus on the phenomenon and its effects by examining the evolution of English political institutions.

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