Monday, May 25, 2015

Keynes "hadn't got round to it"

...all the difficulties and rigidities which go into modern Keynesian income analysis have been shunted aside. It is not my contention that these problems don’t exist, nor that they are of no significance in the long run... Robert M. Solow, "A Contribution to the Theory of Economic Growth," 1956.
...the shunting aside opened up the opportunity for real-business-cycle theorists such as Finn Kydland and Prescott to use Solow’s steady-state model... for their explanation of short-run fluctuations. Harald Hagemann, "Solow's 1956 Contribution in the Context of the Harrod-Domar Model," 2009.
Far too much has been shunted aside.

The aim of Harrod's and Domar's models, according to Hageman, was "to extend Keynes's analysis into the long run by considering under what conditions a growing economy could realize full-capacity utilization and full employment." As for "the modern type of dynamic [that is, 'growth'] theory," according to Sir Roy Harrod, Keynes "hadn't got round to it":
Mr.  Nicholas Dimsdale:  Why is there so little in the General Theory on the direction of principal determinants of economic growth (which has, of course, been very much the concern of economic policy in the post-war period), and particularly did Keynes see this as a natural extension of handling the problems of unemployment? 
Sir Roy Harrod: I think the answer is no. I think of the timetable of it. Here was Keynes giving all his brains to the General Theory which is not, though it is what you call macroeconomics, dynamic. It is a general theory of how incomes and employment are determined at a given point of time. Then, poor man, he gets ill, the war breaks out, he writes this little booklet of which Austin Robinson has spoken just now, and he is entirely immersed in the war. You see, the use of growth as a regular economic concept had hardly come in before the war:  it has all blossomed among various writers since the war. I don’t see how Keynes can have been expected to have systematic ideas on growth; his systematic ideas related to full employment. The modern type of dynamic theory about what happens through time - he just hadn't got round to it. I am sure that he would have got round to and dealt with it very well; but the timetable of his life and death did not give him an opportunity.
In a 1965 New York Times retrospective on the Keynesian "revolution," John Kenneth Galbraith credited Leon Keyserling as a "tireless exponent of the [Keynesian] ideas. And he saw at an early stage the importance of enlarging them to embrace not only the prevention of depression but the maintenance of an adequate rate of economic expansion." In a subsequent interview, Keyserling was less bashful about the magnitude of his contribution.
Coming over to economic growth in particular, everybody talks about the influence of Keynesian economics. The Keynesian economics is really a static economics. It doesn't deal with economic growth at all. Furthermore, it was developed at a time of worldwide depression. Even Ken Galbraith, in an article in the New York Times a couple of years ago, when he was talking about the influence of Keynesian economics, mentioned me specifically as the one who had introduced the fundamental new factor of the dynamics of economic growth.
Keyserling was a member of President Truman's Council of Economic Advisers, became acting chairman in 1949.and chairman in 1950. His influence can be seen in the evolution of "economic growth" in successive volumes of the Economic Report of the President. In the January 1947 annual report, the term "growth" did not occur. In the midyear report, "economic growth" appeared once. The January 1948 volume contained 17 references directly to economic growth and featured a cheerleading section titled "Our Ability to Grow."

All of this alleged "extending" and "enlarging" of Keynes's analysis had little to do with Keynes's analysis -- other than shunting it aside -- and nothing to do with Keynes's own views about the long term problem, as outlined in his 1943 Treasury memorandum, "The Long-Term Problem of Full Employment" and re-iterated in a 1945 letter to T.S. Eliot:
Not long ago I was at a Conference where the Australians urged that all the Powers in the world should sign an international compact in which each undertook to maintain full employment in their own country. I objected on the ground that this was promising to be 'not only good but clever'. Civis, like the Australians, takes exactly the opposite line. He thinks that we can reach the goal by promising to be 'not so much clever as good '. 
It may turn out, I suppose, that vested interests and personal selfishness may stand in the way. But the main task is producing first the intellectual conviction and then intellectually to devise the means. Insufficiency of cleverness, not of goodness, is the main trouble. And even resistance to change as such may have many motives besides selfishness. 
That is the first, ought-to-be-obvious, not-very-fundamental point. Next the full employment policy by means of investment is only one particular application of an intellectual theorem. You can produce the result just as well by consuming more or working less. Personally I regard the investment policy as first aid . In U.S. it almost certainly will not do the trick. Less work is the ultimate solution (a 35 hour week in U.S. would do the trick now). How you mix up the three ingredients of a cure is a matter of taste and experience, i.e. of morals and knowledge.
It would be anachronistic to fault growth theorist for ignoring Keynes views on the long term problem of full employment. Presumably, Keynes's memorandum and his letter to T.S. Eliot were not available to early "dynamic" theorists. They were published in 1980 in volume 27 of Keynes's Collected Writings. One might wonder, though, why modern growth theorists have subsequently shown no interest whatsoever in re-evaluating their theories in light of those documents.

More remarkable is the complete lack of connection between growth theory and growth as a policy slogan. No, this is not the difference between map and territory. The theoretical models are maps of an abstract territory in which some kinds of features have the same names as the kinds of features on the actual territory -- "labor", "income", "output," "capacity utilization" -- but those labels remain undefined in any way that would correspond to the real features with the same name.

At the other end of the theory/sloganeering spectrum -- in the targeting of increases in GNP/GDP -- the features are also not defined in a way that would enable a consistent and durable system of measurement. Simon Kuznets's 1947 essay on "Measurement of Economic Growth" outlined many of the biases and obstacles in the way of defining and measuring growth." In a subsequent review of the Commerce Department\s National Income and Product Accounts, Kuznets argued that problems of duplication and of ignoring non-market production had not been overcome. In its reply to Kuznets, the department's economists pointed out it would not have been feasible to meet several of his standards. They had a point. But non-feasibility of the alternative does not in itself affirm the adequacy of the status quo.

In conclusion, Keynes's analysis was not "extended" by modern dynamic growth theory nor was it "enlarged" by Leon Keyserling's siphoning off and his sloganeering growthmanship. The analysis was -- in Solow's apt phrase -- shunted aside for a tautological model, just as the policy goal of full employment was shunted aside for the indistinct slogan of "growth."

Who needs a Keynesian policy goal of full employment anyway when the neoclassical model can simply assume full employment?

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