Sunday, March 27, 2011

Pete Boettke on the Legacy of Lord Keynes

Pete Boettke has recently written a post on the failed policies and intellectual legacy of Lord Keynes. I did not like it. The Austrians are probably the least charitable readers of "the economics of Lord Keynes" --- and this is different from "Keynesian economics." In fact, Austrians often fail to explictly note this difference!

What is so remarkable about Keynes is that he anticipated much of the criticism that has been directed at his "general" theory, and, in my opinion, that he was very effective at refuting much of the prevailing orthodoxy. To give one example, Mr. Boettke writes that: "But what of Knight's judgment that "what is new isn't true, and what is true isn't new?" --- In fact, in the preface to The General Theory, Keynes actually writes that many orthodox economists will say just that ---- "Those, who are strongly wedded to what I shall call 'the classical theory', will fluctuate, I expect, between a belief that I am quite wrong and a belief that I am saying nothing new." Lord Keynes took the words right out of Frank Knight's mouth!

Moreover, Mr. Boettke also makes a mistake by writing as though economic policy is the only "revolutionary" message in Keynes' General Theory. Those who have followed Keynes' work very closely are quick to point out that these policies are not even understood by Keynesians themselves because these economists have failed to grasp the true message of the General Theory: uncertainty, liquidity preference, and effective demand.

And the last thing young Austrians should do, if they really want to understand what Keynes said, is read Henry Hazlitt or Robert Higgs. There is much more to Keynes than what we today call public works and deficit spending. The good interpreters of Keynes's message have been: Paul Davidson (and nearly every Post Keynesian who has followed him), Hyman Minsky, Alan Meltzer, Victoria Chick, Greg Hill, Fiona Maclachlan, among others.

Before Austrians make any progress on this front, they first have to understand what the economics of Lord Keynes is all about. And they should know this by now. People like Steve Horwitz, Roger Koppl, William Butos, and David Prychitko have all debated with some of the best followers of Keynes, and yet they have failed to recognize the limitations Keynes' message imposes on the continued validity (and relevance!) of Austrian economics.

In fact, these same followers of Keynes have been equally critical of "Keynesian economics." Paul Davidson, for example, in commenting on the neoclassical Keynesian synthesis, wrote that this literature "robbed Keynes's message of its theoretical bite."

Mr. Boettke is writing here more as the libertarian and not the economist. Austrians have a great deal to learn from Keynes regarding pure economic theory. Chapters 13 and 14 of The General Theory present an accurate picture of the Austrian theory of the loanable funds model, followed by a devastating critique of its main assumptions. Chapters 12 and 17, moreover, are probably the two best chapters any young economist can read (supplemented, of course, by the writings and commentary of Paul Davidson and G. L. S. Shackle).

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