Commentary on Political Economy

Monday 22 August 2011

'Mr.Keynes And The Classics' - Note On Milton Friedman's Interpretation of Keynes

  1. June 6 2:24am | Permalink

"Mr. Keynes and the Classics" could be the title for my most recent reflections that can be linked to Gavyn Davies's expression, "out of ammo". What does it mean, let us ask, to be "out of ammo"? Who is out of ammunition, and what precisely is that "ammunition"? Obviously, for there to be "ammunition", somebody must be "shooting" or "targeting" something - and obviously the referent here are "the monetary authorities", the "target" they are aiming at is "growth" or "output utilisation" and the "ammunition" is the "liquidity" or broad money that they can "inject" into the economy. Those who believe that such liquidity injections have or can have a lasting effect (more than a so-called "first round" effect) on the economy through the "monetary transmission mechanism" must believe in the "non-neutrality" of money whether in the short or the long term.

I think Milton Friedman was right to insist that Keynes's emphasis on "liquidity preference" meant that he believed that most of his "revolution" in the 'General Theory' had to do with "the liquidity trap" - the infinitely elastic demand for money even when interest rates are at "the zero bound". What this means is that ultimately, despite what much Keynes "hagiography" has to say, the Bloomsbury socialite remained firmly in the theoretical camp of "the Classics" - hence, John Hicks was right to title his famous essay that way. True, "in the long run we're all dead", but the long run is what "conditions" the capitalist economy - and Keynes never intended to overturn the neoclassical approach to economics despite the fact that he adopted Marshallian methodology instead of the Walrasian (Friedman again). After all, was it not Keynes who wrote with regard to Marshall (his predecessor in Cambridge) that when Jevons discovered marginal utility he leaped up and down with joy like someone who sees steam lift a pot lid (or words to that effect), whereas Marshall watched carefully and set out to build a steam engine??

But remember that for a scientist like Marshall “natura non facit saltum”. The coherence and generality of a theoretical system had to be anchored to its practical relevance. The “gravitational centre” of the system (Schumpeter’s “Gravitationszentrum”) remained always, even for Keynes, “the long run equilibrium”. The “crazy variables”, those “stubborn facts” that could be “reconciled” with neoclassical theory (except in its  “synthesis”) – the liquidity trap and the rigidity of money wages – were still “extreme assumptions”  within the neoclassical framework!  However treacherous it might be for Keynes, money is still “a bridge” between present and future – meaning that “in the final end” it is the marginal efficiency of capital that determines investment – were it not for those stubborn facts of capitalist reality. It is simply not true – it is entirely false! – to state and argue (as did Minsky among many others) that for Keynes “money” was more than a “veil” and that he saw it (like Marx) as “central and essential” to the theory of the capitalist economy. Not at all! Keynes was light years removed from Marx! Keynes’s own “flirting” with the insane ideas of Silvio Gesell about the “moneyless” economy (revived lately in Michael Woodford’s Wicksell-inspired ‘Interest and Prices’) show conclusively that he always and everywhere conceived bourgeois economic “science” as the only possible “science” of the economy – and a fortiori the capitalist economy as “the only possible” economy!

Jevons and Walras belong together. Marshall and Keynes preferred the short run: but all four were in the neoclassical camp - no matter what Minsky and others had to say about it! So where was "the Keynesian Revolution"? Simple. It was in the role of the State in the capitalist economy. The whole "classical" notion of Political Economy (Ricardian or neoclassical) consisted precisely in this "homologation" or "equiparation" of the s e p a r a t e spheres of Politics (the State) and Economics (the market). The one was not supposed to interfere or intervene in the latter - the "self-regulating" market. But Keynes, who knew that Marshall's pragmatism had led him to write an "economics of industry", had the good fortune to witness what could happen if Politics truly began to tamper with Economics in the guise of "Rooseveltian Resolve" - the New Deal. The 'General Theory' without the New Deal is unthinkable.

What's that I hear? We have "run out of ammo"? Not if Roosevelt had anything to do with it!! And I hear that Ben Bernanke is a great admirer (like me) of FDR. Let's see what happens...

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