Charles Rowley on the State of Macroeconomics

|Peter Boettke|

Charles Rowley has never shied away from speaking truth to power. This is a very admirable trait.  In a series of posts this week he demonstrates that principled stance as an economist again and is discussing the state of modern macroeconomics.  In his latest post he tells his readers:

"the Keynesian model never worked; and never will work. It has been resuscitated by opportunistic  economists, not because they believe in its merits as an agent of macroeconomic rehabilitation, but because they recognize its political  value as a weapon for moving economies from laissez-faire capitalism, or (hopefully) beyond that to fully-fledged socialism."

Comments

[Brad DeLong]

Lying about what I believe is not "a principled stance" Peter. And it is not speaking truth--to power, or to anybody else.

You need to rethink what you are doing.

Brad DeLong

[Richard Ebeling]

Let us be frank, shall we?

Keynes had a perverse conception of the market economy and its workings.

Take the following passage from one of his articles in the mid-1920s:

"The truth is that we stand midway between two theories of economic society. The one theory maintains that wages should be fixed by reference to what is 'fair' and 'reasonable' as between classes.

"The other theory – the theory of the economic juggernaut – is that wages should be settled by economic pressure, otherwise called 'hard facts,' and that our vast machine should crash along, with regard only to its equilibrium as a whole, and without attention to the changed consequences of the journey to individual groups."

So, supply and demand determining wages is an "economic jaggernaut," totally lacking in "fairness" and "reasonableness." And somehow the market "crashes along" because it is only operates in terms of "equilibrium as a whole."

So instead of resources -- including labor -- having their market value determined by their opportunity cost in alternative uses ("equilibrium as a whole"), wages and prices should be set by special interest pressure groups (trade unions) on a piece-meal basis with little regard to order and balance in the interdependent market as a whole.

Would any of us give much of a passing grade to any student who argued like this on an economic exam?

It was Dennis Robertson who observed that Keynes seemed to find it difficult to think beyond two margins at once, and therefore failed to understand the full influence of relative prices on people's choices.

Schumpeter, Hayek, Henry Simons and other pointed out the dangers from Keynes' focus on the narrow short run expediencies and policy considerations of the moment.

Keynes' sloppy thinking and economic confusions were pointed out at the time by many others such as Frank Knight, Jacob Viner, and Arthur Pigou.

Read through the two volumes of Arthur W. Marget's "The Theory of Prices," and see -- in great detail -- the very serious theoretical and logical problems with both "A Treatise on Money" and "The General Theory," by surely one of the most learned and widely read experts on monetary theory of the interwar period.

As James Buchanan and Richard Wagner argued in "Democracy in Deficit" (1977), "The General Theory" was written by an arrogant elitist who offered a theoretical rationale for not bucking trade union and government interventionist-imposed wage and price rigidities, who also gave special interest groups and politicians the excuse and justification for government deficit spending.

I will just conclude with Schumpeter's words at the end of his review of "The General Theory":

"Let him who accepts the message there expounded rewrite the history of the French ancien regime in some such terms as these: Louis XV was a most enlightened monarch. Feeling the necessity of stimulating expenditure he secured the services of such expert spenders as Madame de Pompadour and Madame de Barry. They went to work with unsurpassable efficiency. Full employment, a maximum of resulting output, and general well-being ought to have been the consequence. It is true that instead we find misery, shame and, at the end of it all, a stream of blood. But that was a chance coincidence."

Rowley has it right.

Richard Ebeling

[Charles K. Rowley]

Brad DeLong has posted a similar comment on my blog. I have responded politely to remind him that no individual was mentioned by name in my column (macroeconomics 3), so why would he ever think that I had him in mind? I leave the reader to try to supply an answer to that question.

[Steve Horwitz]

Having been called an "ethics-free Republican hack" by DeLong for opposing the stimulus package, I hereby give him the Chutzpah Post of the Year Award for complaining about Charles' characterization of Keynesians and for invoking any concept of ethical principles in a discussion of blogging. His record is clear that he wouldn't know an ethical principle if he tripped over it.

[Jimmy]

"Brad DeLong has posted a similar comment on my blog. I have responded politely to remind him that no individual was mentioned by name in my column (macroeconomics 3), so why would he ever think that I had him in mind? I leave the reader to try to supply an answer to that question. "
Because it was obvious.

[Ugg Boots]

Boy! What have I done? What luck!