Saturday, September 13, 2014

Matias Vernengo — How Keynesianism became a dirty word: not Hayek, the New Deal is the real cause

Noah Smith, now writing regularly for Bloomberg, had a piece on this subject. There are a few good points on how New Keynesians are really followers of Friedman, something Mankiw admitted long ago, and how everybody including conservative economists (meaning GOP economists like John Taylor and Ben Bernanke) are New Keynesians (these would be the potty trained GOP economists, not your supply-side fringe economists like Arthur Laffer). Note that this is essentially correct as pointed out here before, since New Keynesians accept fully Friedman's notion of a natural rate of unemployment, while Keynes explicitly said he wanted to reject the twin concept of a natural rate of interest. 
Noah also suggests that Keynes only wanted stabilization policies, and no redistributive policies, which is more open to debate. Keynes was certainly a moderate reformer trying to save capitalism from itself, and was no fan of the Soviet experiment. On the other hand, he was an Asquith liberal, meaning concerned with the expansion of the welfare system, and knew that laissez-faire, if it had advantages in the past, was essentially dead… 
On the main topic of his piece, however, Noah is simply wrong. He argues that the reason why:
"people think Keynesianism is socialism-lite [is] the fault of Keynes’s main intellectual opponent, Friedrich Hayek." First, while it's true that Keynes and Hayek had a few debates in the 1930s (but the key Keynesian author in these debates was actually Sraffa, not Keynes), prompted by Lionel Robbins plan to make the London School of Economics (LSE) an alternative to Cambridge, it is preposterous to say that Hayek was the main intellectual opponent of Keynes. In the GT, it was his own teacher Pigou, and the Marshallian tradition in Cambridge that Keynes was battling. In his personal debates Robertson was certainly more relevant than almost any other conventional (Marshallian) economist. Hayek was irrelevant.…
Matias traces the history. Good read.

Naked Keynesianism
How Keynesianism became a dirty word: not Hayek, the New Deal is the real cause
Matias Vernengo | Associate Professor of Economics, University of Utah

3 comments:

Bob Roddis said...

That is certainly consistent with my assertion that Keynesians have never engaged basic Austrian concepts or analysis.

Anonymous said...

I think Matias and Noah are talking past wach other. Smith is not talking about what economists in the 30's and 40's came to belive about Keynes. He's talking about why so many people in 2009-2014 had such a bad view of Keynes. And it's true that the Hayekian strand in economic thought has grown to be much more prominent than it was back in the day when Hayek himself was having a few relatively insignificant debates.

Matt Franko said...

"New Keynesian economics says that monetary policy -- and even fiscal policy -- is all about stabilization. It’s about smoothing out the fluctuations in the economy, reducing risk for everyone concerned. When the economy is doing well, raise interest rates to slow things down; when it’s doing badly, lower interest rates to give it a boost."

Well looks like we are about to embark on a multi-year process that should determine whether this theory is true or not... I say "not" they have it backwards...