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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)

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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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Cash 4 Clunkers: Scam 4 Taxpayers

August 6th, 2009 No comments

If you’ve been following the news at all, you have probably heard your fair share of Obama PropagandaRama. One such item on the ObamAgenda is the Cash for Clunkers scheme, where the government puts up the funds for a $4500 credit toward the purchase of a new car if someone brings in a “clunker” to the dealership. The objective, so the Obamanauts say, is to put more fuel efficient cars on the road AND save the auto industry in America.

Bollocks. What a massive load of bollocks. If you think that paying someone to destroy wealth is beneficial to anyone except the payee (and anyone else sitting on the gravy train along the way), you need to seriously reevaluate whether you should be forming opinions on economic issues at all.

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