Keynes and Microeconomics

Martin’s recent post and the sudden renewed interest in Keynesianism have reminded me about the debate on the interpretation of Keynes. When people refer to Keynesianism they generally mean the kind of economics familiar to all undergrads with 45º diagrams relating aggregate supply and aggregate demand, and government intervention. This “Popular Keynesianism” was discredited with the stagflation of the 1970s, with much of the criticisms coming from Monetarists, and later Neoclassical economists who argued that Keynes’ theories lacked any foundation in behavioural choice. They argued that he provided no proper explanation for the mechanism through which the economy could become stuck out of equilibrium, or be brought back to it through expansionary fiscal policy. As Shackle (1967) puts it:

“At each curtain rise the General Theory shows us, not the dramatic moment of inevitable action, but a tableau of posed figures. It is only after the curtain has descended again that we hear the clatter of violent scene-shifting”

However, many of his contemporaries such as Joan Robinson believed that what became known as Keynesianism was a complete misrepresentation of his ideas. In his JEL article (1976), Alan Coddington describes some of the alternative interpretations. Post Keynesians have argued that the General Theory did have a micro basis in the concept of effective demand, and that the Neoclassical attack on Keynes was misguided. Workers who lose their jobs have notional demand for goods and services, but cannot express this as their labour cannot buy goods (only money can buy goods). When this happens fiscal intervention from the government will translate this notional demand into effective demand. More recently, Neo Keynesians have attempted to use sticky wages and prices to justify the type of government intervention advocated by Keynes.

Coddington quotes Robinson as saying “there were moments when we had some trouble in getting Maynard to see what the point of his revolution really was”, so perhaps the confusion surrounding what Keynes really meant is not surprising. This seems like a good opportunity to revisit these different perspectives given the present interest in Keynes, and the recent rise in behavioural economics.