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Tuesday, May 07, 2013

I miss-read Keynes

From time to time, I have contrasted the macroeconomic views of Keynes and Krugman.  Krugman just convinced me that I was confused.  I'd apologize to him, but my mistake was over-estimating how much of an advance on Keynes he has made.

I have noted that Keynes discussed the liquidity trap only twice in the General Theory and *not* in the body of chapter 19 "Changes in Money Wages" or in chapter 21 "The Theory of Prices".  However Krugman correctly notes that Keynes wrote that, in the 19th century, monetary policy was sufficient to maintain more or less full employment.

During the nineteenth century, ... a reasonably satisfactory average level of employment ... compatible with a rate of interest high enough to be psychologically acceptable to wealth-owners. … Sometimes the wage-unit, but more often the monetary standard or the monetary system (in particular through the development of bank-money), would be adjusted so as to ensure that the quantity of money in terms of wage-units was sufficient to satisfy normal liquidity-preference at rates of interest which were seldom much below the standard rates indicated above … The average level of employment was, of course, substantially below full employment, but not so intolerably below it as to provoke revolutionary changes.

Heh indeed.  As further noted by Krugman, Keynes guessed that fiscal policy would often be needed post World War II, but he also explained how to tell when fiscal policy is needed.  Krugman is following Keynes more closely than I realised.

This reduces the my very low count of definite empirically supported but originally conceptual (not computational)  improvements on Keynes's theory of business cycles to one (Joan Robinson & Gardiner Means on sticky prices) with a couple of maybes (Hicks for distilling the General Theory down to IS-LM and Bernanke Gertler et al on balance sheet effects).  The fact that a significant fraction of economists with something clearly useful to add are named "Gardiner" does not thrill me (at least it wasn't Means's sometimes co-author Adolf Berle).

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