Speaking of Keynes -- Lets Talk About the One Person Who Made Keynes a Sensible Economist, Axel Leijonhufvud

|Peter Boettke|

I have repeatedly argued that the economics of John Maynard Keynes was nonsense.  That doesn't mean that Keynes didn't have good turns of phrases here and there.  It also doesn't mean that Keynes wasn't brilliant.  Obviously he had some great passages and there is little doubt that he was a brilliant man.  But he was not, I would argue, a very good economists because he was decidedly not a relative price economist. The aggregate economics that became embedded in the mind-set of economists, intellectuals and policy-makers since WWII still derails our professional discourse let alone the very idea of scientific progress in the field.

But over the years there were heroic efforts to resist the Keynesian divergence, to use Leland Yeager's phraseology.  Yeager's monetary disequilibrium theory is one example of a theory that explained macro disturbances and coordination problems but did not divorce economic reality from the choices of individuals that constitute that reality.  But perhaps the most consistent efforts to make economic sense out of the Keynesian nonsense was the work of Axel Leijonhufvud, most notably his On Keynesian Economics and the Economics of Keynes (1968) but also Information and Coordination (1981).  Leijonhufvud's Keynes deserves our respect and admiration for building a macroeconomic theory of economic coordination from the microeconomics of price theory.  Unfortunately, Leijonhufvud's Keynes is really Wicksell, and to a considerable extent actually Hayek and Hutt.

But we haven't talked much here at Coordination Problem about Leijonhufvud's reaction to the financial crisis.  We probably should.  Clearly the current situation since 2008 is one that fits with the core ideas in "The Wicksell Connection" and Leijonhufvud's idea of economic processes inside and outside of the corridor.  It is my contention that the policy steps taken since 2008 turned a market correction into an economy wide crisis because they pushed beyond the corridor and thus distorted the self-correcting mechanisms of the market economy in the short-run.  Early into the financial crisis Leijonhufvud wrote a paper asking which economists we should be following, and more recently he has written a paper discussing the nature of the economy.

Modern Austrian macroeconomics has been shaped by Yeager and Leijonhufvud as much as by Mises and Hayek.  As a matter of sociology of modern Austrian economics it might be useful to point out that Gerald O'Driscoll and Lawrence White wrote their PhDs under the direction of Axel Leijonhufvud and Roger Garrison wrote under Leland Yeager.  Horwitz, like myself, was educated in the early 1980s on a mixture of rational expectations macroeconomics (Lucas and Barro), coordination Keynesianism (Clower and Leijonhufvud), old monetarism (Yeager) and Austrian economics (Mises, Hayek, Garrison, O'Driscoll and White).

So what does the leading coordination Keynesian theorist teach us about an economy in crisis?

Comments

[Barkley Rosser]

I agree that Leijonhufvud is one of the most serious interpreters of Keynes there is. Good papers to link to, Pete.

[greg Ransom]

Just want to point out I've been linking to these AL papers as they appeared.

Frydman & Goldman's book should also be discussed.

[Patrick]

Pete,

Would you consider AL to be an Austrian economist, or would you only go as far as to say that he has made contributions valuable to modern Austrian economics?

[Steve Horwitz]

I would consider AL to be a fellow traveler in macro. Like Yeager and Hutt, he's not an Austrian, but I think one cannot do good macro without insights from all of them. My Routledge book is as much Yeager, Hutt and AL as it is Mises, Hayek, Garrison, Selgin, White, et. al..

[George Selgin]

Pete, I feel like one of those disgraced ministers in Stalin's Russia who ends up getting doctored out of the official photos! Still I seem to recall teaching a monetary economics class, attended by some young Austrian whippersnappers, not in the early but in the mid-80s, the reading list for which included heavy doses of Leijonhufvud (I believe I assigned all of Information and Coordination), Clower, and Yeager, among others.

But maybe you guys already "were educated" in all that stuff before you took the class and were just too darn polite to tell me!

[Peter Boettke]

Well George I count you as part of my generation not Roger, Jerry and Larry's. Moreover, yes we were required to read all those guys before you joined the staff in macro 2, and in my instance remember that Yeager actually taught at GMU before he moved to Auburn.

But no doubt you are a major player and I meant no oversight.

[George Selgin]

Achh,you really were being polite! I entirely forgot that Yeager was at GMU before me. No wonder everyone did so well in my class.

And no matter what you say, I still think of you and Steve and the others as bright young turks!

[Barkley Rosser]

Was Yeager a visitor at GMU? I thought he went straight to Auburn after leaving U.Va.

[Peter Boettke]

Yes, Barkley. He was originally set to join GMU, but said famously "I did not retire from Charlottesville to move to Fairfax and worry about 'parking strategms'".

He taught monetary economics, and began the class with the money speech from Atlas Shrugged. I believe (but might be wrong) is that Bill Woolsey took Yeager's class at that time.

[Jerry O'Driscoll]

Economics is a coordination problem, and Leijonhufvud made a major contribution to that literature. His economics and Austrian economics overlap.

Both Leijonhufvud's Wicksell and his Keynes often come off as Hayekian. Keynes of the Treatise was broadly in the same camp as Wicksell and Hayek. That was noted at the time by Hayek's student, Vera Smith, and later by Schumpeter.

Roman Frydman was a colleague at NYU, and I co-authored a paper with him (and Andy Schotter).

[Greg Ransom]

The first few chapters of Krydman & Goldberg is terrific.

[Adrián Ravier]

After showing his own understanding of the current American Crisis, Leijonhufvud (in an article titled "Keynes and the crisis", http://www.cepr.org/pubs/policyinsights/PolicyInsight23.pdf) explained that "[t]his, of course, does not make a Keynesian story. It is rather a variation on the Austrian overinvestment theme."

This shows two important aspects. 1) He is an open-mind keynesian economist; 2) He could never undertand correctly the ABCT (as Krugman, he has never seen the ABCT as a mal-investment theory).

By the way, Daniel Heyman was my professor of macroeconomics at the University of Buenos Aires. He was known as the most important professor at the hole university and he has also completed his dissertation under Leijonhufvud.

Taking a look to Leijonhufvud students we need to conclude that he is an excelent professor!