I’ve previously spoken about how many great insights supposedly ‘discovered’ by economists – classical and modern – had really been known for a long time, but had been ignored or perverted before they were put in terms neoclassical economists approved of. The more I learn, the more it seems that this is the case with a vast amount of critical ‘insights’ on which macroeconomists pride themselves.
The fact is that 1970s ‘anti-Keynesian revolution’ was really just a restatement of things already stated by Keynes and Phillips – who were incidentally two of the main targets of the revolution, but both completely misinterpreted.
The psychological time-preferences of an individual require two distinct sets of decisions to carry them out completely. The first is concerned with that aspect of time-preference which I have called the propensity to consume, which, operating under the influence of the various motives set forth in Book III, determines for each individual how much he will reserve in some form of command over future consumption.
But this decision having been made, there is a further decision which awaits him, namely, in what form he will hold the command over future consumption which he has reserved, whether out of his current income or from previous savings.
Furthermore, the Lucas Critique itself – the idea that macroeconomic aggregates cannot be used as a guide to future policy because a change in policy will change behaviour and therefore relationships between variables – was also stated by Keynes:
There is first of all the central question of methodology—the logic of applying the method of multiple correlation to unanalysed economic material, which we know to be non-homogeneous through time. If we are dealing with the action of numerically measurable, independent forces, adequately analyzed so that we were dealing with independent atomic factors and between them completely comprehensive, acting with fluctuating relative strength on material constant and homogeneous through time, we might be able to use the method of multiple correlation with some confidence for disentangling the laws of their action…in fact we know that every one of these conditions is far from being satisfied by the economic material under investigation.
Even more ironically, it was stated by the primary target of Lucas’ criticisms, the much misunderstood Edmund Phillips:
In my view it cannot be too strongly stated that in attempting to control economic fluctuations we do not have two separate problems of estimating the system and controlling it, we have a single problem of jointly controlling and learning about the system, that is, a problem of learning control or adaptive control.
One might argue that Lucas deserves credit for formalising this point, but in reality I think Phillip’s one sentence formulation is better – it emphasises continual change and vigilance in recognising the feedback loop between policy and the real world. In contrast, it seems the Lucas Critique has become little more than a tool with which to cling to outdated methodology despite empirical falsification.
This is why I am frustrated when people like Krugman say that they “don’t care” what Keynes or others “really meant,” and people like Scott Sumner and Robert Lucas pay barely any attention at all to the history of thought. Ignoring the history of thought just means you are condemned to rediscover the same insights over and over – often, it seems, in a far less enlightened way than they were originally stated.
As we expand debt in the process of want creation, we come necessarily to depend on this expansion. An interruption in the increase in debt means an actual reduction in demand for goods.
In fairness to Keen, I wouldn’t paint him with the same brush as the above – he readily acknowledges that this insight was noted by Schumpeter and Minsky before him.