Unlearning the History of Thought II

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.

For example, in keeping with Robert Waldmann’s hypothesis that there are few macroeconomic insights not in TGT, Keynes gave a description of RET in chapter 13:

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.

P.S. John Kenneth Galbraith, in The Affluent Society, also stated Steve Keen’s important point that private debt must accelerate in order to increase demand:

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.


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  1. #1 by Min on July 21, 2012 - 5:07 pm

    I wonder if this is part of the dialectical nature of social science (see Clifford Geertz). Little is definitive, there are always rival schools, and old ideas are reborn, usually in altered form.

    • #2 by Unlearningecon on July 23, 2012 - 6:28 pm

      Are there any examples of similar things occurring in the other social sciences?

  2. #3 by Blue Aurora on July 22, 2012 - 4:37 am

    The interesting thing about Dr. Steve Keen and Dr. Michael Emmett Brady is that I think that they would agree on a number of things – econophysics, the use of mathematics in economics, the fact that Keynes and Phillips pointed out the Lucas critique before – but I don’t think they would get along. I’ve told Dr. Brady this before in previous correspondence. In any case, the Lucas Critique is really a footnote to Keynes’s criticisms of Koopmans and Tinbergen, and the econometricians. It goes back to parts of A Treatise on Probability, in fact. See Hugo A. Keuzenkampf’s book for more.


  3. #4 by Ron Ronson on July 22, 2012 - 2:45 pm

    “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.”

    Do you have a link that explains this in more detail? It would seem logical that (other things being equal) an interruption in the increase of debt would merely slow down the increase in demand for goods not reduce it .

    • #5 by Unlearningecon on July 23, 2012 - 11:58 am

      I don’t want to get too off topic but I’ll try to show you.

      This is the only time I use a household analogy in economics.

      If you think about your household income, you receive your income plus however much you borrow. So say your income is £10 and you borrow £5, your total income is £15. But to keep it constant you must continue to borrow £5 a year. To increase your income, you must borrow more than that each year. If you reduce the amount you borrow to £2, your income will fall to £2, even though you are still borrowing.

      In the mainstream framework this cancels out at a macro level. However, in the endogenous framework, the banking system is effectively the economy’s ‘bank’ and so it scales up – money paid back goes out of circulation and into the banking system.

      Here is a more substantive treatment of the issue.

  4. #6 by Ron Ronson on July 24, 2012 - 7:49 pm

    Thanks for that explanation.

    I can see that works for an individual. If I borrow £5 and spend it my spending has increased by £5 and if I want to maintain that spending I have to borrow £5 in each following year.

    But is that true for a whole economy ? If a bank creates the £5 by creating it out of thin air and I spend it then total money supply has increased by £5 and so has total expenditure. If expenditure has gone up then so has income and so next period and all future periods until I pay back the loan (and it is not re-lent) then expenditure will be permanently higher.

    • #7 by Unlearningecon on July 29, 2012 - 7:48 pm

      The point is that you can think of money paid back into the banking system as out of circulation. So if you imagine that, say, only the CB lent out money, you would see that paying it back to them would take it out of the economy.

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