Saturday, October 02, 2010

Has Scott Sumner ever Read "The General Theory of Employment Interest and Money" ?

Scott Sumner on What Keynes wrote about Pigou

In the General Theory, John Maynard Keynes created a crude and inaccurate caricature of “classical economics.” He argued that people like Pigou had models that simply assumed full employment. In fact, economists like Pigou, Cassel, Hawtrey, Fisher, Hayek and others, believed that wages and prices were sticky in the short run. They believed that nominal shocks (decreases in the money supply or increases in money demand) would have real effects in the short run, but merely change the price level in the long run.

What Keynes wrote about Pigou in The General Theory of Employment Interest and Money Chapter 19 Changes in Money Wages appendix On Professor Pigou's Theory of Unemployment

the following important passage in which Professor Pigou sums up his point of view: “With perfectly free competition among workpeople and labour perfectly mobile, the nature of the relation (i.e. between the real wage-rates for which people stipulate and the demand function for labour) will be very simple. There will always be at work a strong tendency for wage-rates to be so related to demand that everybody is employed. Hence, in stable conditions everyone will actually be employed. The implication is that such unemployment as exists at any time is due wholly to the fact that changes in demand conditions are continually taking place and that frictional resistances prevent the appropriate wage adjustments from being made instantaneously.

He concludes (op. cit. p. 253) that unemployment is primarily due to a wage policy which fails to adjust itself sufficiently to changes in the real Demand function for labour

Thus Professor Pigou believes that in the long run unemployment can be cured by wage adjustments;[3] whereas I maintain that the real wage (subject only to a minimum set by the marginal disutility of employment) is not primarily determined by “wage adjustments” (though these may have repercussions) but by the other forces of the system, some of which (in particular the relation between the schedule of the marginal efficiency of capital and the rate of interest) Professor Pigou has failed, if I am right, to include in his formal scheme.

Keynes concluded the appendix with this paragraph

I have criticised at length Professor Pigou's theory of unemployment not because he seems to me to be more open to criticism than other economists of the classical school; but because his is the only attempt with which I am acquainted to write down the classical theory of unemployment precisely. Thus it has been incumbent on me to raise my objections to this theory in the most formidable presentment in which it has been advanced

According to Krugman, Pigou's model as described above is the "classical theory of unemployment"

Has Sumner actually read the General Theory ? Did he not notice the irony that Keynes criticized Pigou for being a New Keynesian when he read it ? Did he manage to forget that odd experience (amnesia happens) ?

Did he accuse Krugman of dishonesty based on a failure to click the link which Krugman provided to make it clear to anyone who bothered to check that "what Keynes called the 'classical theory' of employment"
is neither the new classical theory of unemployment nor the "classical case" presented in today's intermediate macroeconomics textbooks?

Or maybe his case rests entirely on the fact that Krugman wrote about "what Keynes called the "classical theory" of employment" when, in fact, Keynes called it the "classical theory of unemployment."

1 comment:

Kevin Donoghue said...

No, Scott Sumner has not read the GT. See his paper “The role of the gold standard in Keynesian monetary theory” (Economic Inquiry 1999). It’s full of gems like this:

“Keynes is regarded as one of the most severe critics of an international gold standard with rigid parities. Thus, it is odd that he would develop a monetary ineffectiveness proposition that has little or no applicability to a country operating under a fiat money regime. An essential part of my argument will be to show that Keynes viewed a pure fiat regime as being both highly unlikely and highly undesirable.”

He claims that “rather than being a "fixed-price" or "depression" model, the General Theory is best thought of as a "gold standard" model.” You would think, therefore, that his paper would tell us what sort of model he understands Keynes to be using. But if you’re looking for clarification of concepts like involuntary unemployment, the employment function or effective demand, look elsewhere. They don’t even get a mention.