Keynes the Heretic

J.M. Keynes' admiring biographer, Robert Skidelsky, writes in Return of the Master:

In my biography of Keynes I called him an 'unusual economist.' I would now go further. Deep down, he was not an economist at all. Of course, he could 'do' economics-- and with the best. He put on the mask of an economist to gain authority, just as he put on dark suits and homburgs for life in the City. But he did not believe in the system of ideas by which economists lived, and still live; he did not worship at the temple; he was a heretic who learned how to play the game. In former times he would have been forced to recant, perhaps burnt at the stake. As it was, the freedoms of the exigencies of his times enabled him to force himself on his church. Only a person of colossal self-confidence, outstanding intellect and passionate concern for his countrymen and humankind could have set himself the task of rewriting a large chunk of the Western intellectual tradition. Yet this is what Keynes set out to do. One can only marvel that he got as far as he did. He mesmerized and fascinated his contemporaries; for thirty years after his death they lived in his intellectual and moral afterglow. But to the technicians who inherited his mantle his ideas seemed strangely alien to the main themes of their subject. They tried to assimilate them, but found it difficult and made a mess of it; and the next generation gave them up altogether. Orthodoxy won out; the economic temple was shaken, but still stood.

I find this very astute, though my attitude towards it a bit different. I might substitute "blinding egoism" for "colossal self-confidence," and it was a crisis of self-confidence, rather than the "freedom" of his times, which gave Keynes his opening. "Burnt at the stake" is gratuitous hyperbole: orthodoxies rarely do such things to heretics; I am almost tempted to say that genuine orthodoxies never do; certainly orthodox economists never have. It is far more typical for heretics to burn orthodox at the stake. This claim will be opaque to the typical modern person as regards the history of religion, but it is obvious enough in economics, where all the ideologically motivated murder has been the work of disciples of heretics like Marx, and never of Hayekian free-marketeers. But the word "heretic" is right on. "Heresiarch" would be even better, though perhaps general audiences would not understand it.

Let me draw attention to the fact that there is such a thing as "Keynesian economics," but one never (or hardly ever) speaks of "Marshallian economics" after Alfred Marshall, "Friedmanian economics" after Milton Friedman, "Arrovian economics" after Kenneth Arrow, "Fisherian economics" after Irving Fisher, or even "Smithian economics" after Adam Smith; Frank Knight, David Ricardo, J.S. Mill, Gary Becker, Francis Edgeworth, William Stanley Jevons, John von Neumann, Vilfredo Pareto, and Robert Lucas are others who I think shrewd insiders would probably rank as equal in brilliance with Keynes. (Actually it's subtler than that; some really informed people would probably rank them much superior, while many economists would give Keynes a small edge in deference to convention, but anyway. There is one other "economist," if he deserves the name, that has a school named after him: Karl Marx. But Karl Marx was so thoroughly wrong, and by now everyone knows it, that economists just ignore him. Keynes still has influence.)

Is it just that Keynes is more famous? I don't think so. It's that the most important contributions of Smith, Marshall, Fisher, Knight, Ricardo, Edgeworth, etc. are just mainstream economics. Their ideas were often very original. But one may say they fit into the existing framework of economic thought, and their ideas are now thought without reference to their originators. I think the heart of the matter is this: their ideas made sense, and that was what made them orthodox, for that is what an orthodoxy does, it makes sense. It may insist on certain mysteries (in economics the word "assumptions" is sometimes an allusion to these), but it does not force faulty logic on anyone. For that matter, it does not force its mysteries on anyone either. Frank Knight is an interesting case here, for he, too, was an irreverent and thorough skeptic about homo economicus, a radical who urged people (sarcastically?) to vote Communist, yet because of his humility and discipline he remained a representative of orthodoxy, the teacher of Milton Friedman, George Stigler, James Buchanan and Paul Samuelson.

Skidelsky said that Keynes' successors "tried to assimilate [his ideas], but found it difficult and made a mess of it." Not exactly. Keynes' ideas themselves were a mess. Hicks, Samuelson, and others made an order of them, to some extent; they codified and clarified and formulated and explained; but in the end this intellectual edifice dissolved. It was the proverbial house built on sand, or as economists sometimes say, a theory built without microfoundations. "New Keynesians" like Greg Mankiw salvaged what was worth salvaging; reactionary Keynesians today like Paul Krugman, Joseph Stiglitz, or George Akerlof are merely using Keynes' still-great name as cover for arrogant and politically-motivated revisionisms that would not stand up to critical scrutiny without it. The economics profession, I aver, simply responded to Keynes in the wrong way. It treated him as an oracle when it should have treated him as a provocateur.

I plan to back these claims up with a series of quotes from the General Theory (but I might not follow through, since there is always other business). But here's one to start with (from p. 164 of my edition):

For my own part I am now somewhat sceptical of the success of a merely monetary policy directed towards influencing the rate of interest. I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views and on the basis of the general social advantage, taking an ever greater responsibility for directly organizing investment; since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital, calculated on the principles I have described above, will be too great to be offset by any practicable changes in the rate of interest.

So essentially, Keynes seems to be advocating state control of the commanding heights of the economy. The government, not the private sector, should build factories. Why? Because the volatility of financial markets makes them unsuitable for allocating capital to its most productive uses. An economist as brilliant as Keynes is reputed to be would know better than to write this. Many countries have tried policies a bit like this since, especially in the Communist bloc and the Third World. The results are uniformly wretched: the capital is wasted, the products are lousy. Hayek, Mises, or I suppose Frank Knight could have guessed this in advance. They knew that the state is certainly not in a position to determine the best uses to which capital can be put; it lacks the data, which is fundamentally the subjective experience of consumers, and is revealed by the response of budget-constrained consumers to the price mechanism, and no other way; and anyway, it lacks the incentives to manage capital well. Meanwhile, Keynes much exaggerated the inefficiency of private financial markets. Indeed, I would be surprised if any important economist today would endorse this passage.

Comments

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let's join our hands together to stop this kind of wrong doings. It may risk lives in the future if we just let them continue.