The Keynesian Attraction
Keynesians have been a smug bunch from their earliest days. Here’s how Keynes once replied to Hayek:
Thus those who are sufficiently steeped in the old point of view simply cannot bring themselves to believe that I am asking them to step into a new pair of trousers, and will insist on regarding it as nothing but an embroidered version of the old pair which they have been wearing for years.
But what is the source of Keynesians’ self-confidence? Every Keynesian I’ve ever known has a stock answer: The empirics are on our side. But when probed, they rarely deliver any details about these empirics. It’s been three decades since Keynesians could merely point at the Phillips Curve and say, “See? See?!” And in terms of merely “fitting the data points,” Prescott infamously showed that a simple RBC model works rather well.
At this point, it’s tempting to dismiss Keynesianism as a dogmatic cult. But in fact, there are key issues where their self-confidence is well-deserved. The only problem: They’re too scared to admit why. So let me answer for them: The source of Keynesian confidence is not “empirics,” but introspection.
When Keynesians study the Great Depression, for example, they don’t pore over “the data” to determine whether or not mass unemployment was voluntary. They introspect – and correctly conclude that tens of millions of workers didn’t decide to take a ten-year vacation in 1929. They reject the assumption of perfect wage flexibility on the same basis: Not by staring at “the data,” but by introspecting on the question, “How would human beings react if employers cut their nominal wages by 5%?”
Of course, few economists will proclaim that introspection drives their attraction to Keynesianism. But arguments from introspection repeatedly surface whenever Keynesians confront the infidel. See Modigliani fume, “Was the Great Depression nothing but an outbreak of laziness?” or Krugman fret, “[W]as the Great Depression really the Great Vacation?” And frankly, the most intellectually persuasive course for Keynesians to take is to come out of the closet and openly embrace arguments from introspection.
The countless economists who belittle introspection are wrong. Introspection, though fallible, is genuinely informative. We use it all the time to our great profit. And Keynesians should celebrate this truth, because some of their key premises pass the test of introspection with flying colors. Much unemployment is involuntary – there’s no denying it. And workers genuinely resent – and employers therefore genuinely fear – nominal wage cuts.
Of course, once Keynesians admit their real reasons, they do have a little problem: Some of their positions fail the introspective test! Foremost examples:
1. Keynesians’ preference for fiscal over monetary stimulus contradicts introspection about the interest-sensitivity of money demand.
2. The Keynesian claim that wage cuts reduce Aggregate Demand seems introspectively plausible at first, but only if you neglect everyone but workers who already have jobs.
3. Above all, once you take introspection about nominal rigidity seriously, the obvious response is to swear eternal hostility against every government effort to boost labor costs. Wages on the free market don’t rise and fall like the stock market, but labor market regulation merely amplifies this defect. Consistent Keynesians should be championing radical labor market deregulation – not signing petitions to raise the minimum wage.
Oct 1 2010 at 2:55am
I just want to link here to a short exerpt from McCloskey’s Rhetoric of Economics, where she defines the different ways Economists try to persuade. I find it enjoyable: Here
Oct 1 2010 at 5:10am
No, that’s New Keynesians, who fret about wage rigidity. Vanilla Keynesians are the ones with endogenous money and effective demand.
I note that #3 also suffers from the second-best problem: it isn’t true that, given some defects, further regulation necessarily amplifies those defects.
D. F. Linton
Oct 1 2010 at 7:01am
Dangerously close to a priori Catallactics. All you really have to do is admit that macro propositions can never be proved or disproved by any set of historical events and you are pretty much there. Be careful, lest you must recant.
Of course, you could just say you are joining Arnold in his rebranding of Austrian Econ as Recalculation economics.
Oct 1 2010 at 7:46am
You’re right, Prof. Caplan, but as D.F. Linton just pointed out, what you call “introspection,” Mises called “aprioristic reasoning.”
The real reason Keynesians can never do this is because introspection blasts a gaping hole in ideas like “national income.” (Mises wrote something to the effect of, “What is the meaning of the sum of all monetary exchanges in a community?” Think about it – I pay you $5 for a cup of coffee, you pay me $500 for a laptop, our two-person national income is $505 dollars this year?)
Oct 1 2010 at 7:50am
Keynesianism is folk economics given the veneer of respectability with bogus math.
Oct 1 2010 at 12:16pm
I think Keynesians’ self-confidence springs from the fact that the illusion of control is on their side. And they are right, it is. But it is still an illusion…
Throughout history, human societies the world over have had different versions of the rain dance. I think Keynsian policy is just the contemporary version of that, on a national level.
Oct 1 2010 at 1:40pm
Hayek was equally pointed about Keynes.
He said Keynes was wearing nothing but the absurd clown clothes of dead crank economists.
He said Keynes essentially knew no economics — the only thing he knew was a bit of Marshall.
He said Keynes was an outrageous bully whose favorite targets for attack were the weak and young.
He said Keynes’ was a man without principles, who would change his economics on a dime to advance whatever political whim of the moment Keynes then had a taste for.
He said Keynes’ whole economics rested on the absurd fantasy that all good of all kinds were to be had an zero cost.
Note well — Hayek only told the truth about the man only after Keynes had been cold in the ground for decades.
Oct 1 2010 at 1:44pm
The only problem is the metaphor of “introspection”.
Universal knowledge of what it is to be human and go on together like other humans has nothing to do with “inspecting” ones interior life.
The metaphor reveals a pathology — one diagnosed most successfully by Ludwig Wittgenstein.
“The countless economists who belittle introspection are wrong. Introspection, though fallible, is genuinely informative.”
Oct 1 2010 at 9:26pm
If I had to rely on empirics, then I wouldn’t know anything about economics. Perhaps that’s why I don’t know anything about economics.
Oct 2 2010 at 9:24am
Every Keynesian should have to work at the new minimum wage for just a little while and find a room to rent, in most any city. Sounds easy, right? Not so fast. Where one could find a $250 room ten years ago, now costs at least $500 a month. Good luck finding a minimum wage employer who can afford to give a worker enough hours to pay that rent.
Irineu de Carvalho Filho
Oct 2 2010 at 9:29am
“Prescott infamously showed that a simple RBC model works rather well.”
No, it does not.
Oct 3 2010 at 1:52am
It’s been three decades since Keynesians could merely point at the Phillips Curve and say
Attacking the old neoclassical synthesis Keynesians is easy. Try answering Post Keynesians:
But when probed, they rarely deliver any details about these empirics.
The empirical evidence for the success of Keynesian stimulus is huge. While there are plenty of historical instances over the past 60 years, most recently we have had clear proof of the success of Keynesian stimulus in Australia, New Zealand, China, South Korea, Taiwan, Sweden, and Germany. To take just one example, Germany is proof of the success of both its domestic stimulus and global Keynesianism:
Oct 3 2010 at 10:01am
The smugness of prominent Keynesians without definitive evidence to back their claims only points to the difficulty of doing worthwhile macroeconomics. It suggests that the world will be ruled by the strong, the smug, and the silver-tongued even if a justifiable, demonstrable consensus were to be achieved in economics. After all, look at the support for protectionism despite the near unanimity of the literature on the general virtues of freer trade? [Exceptions for ideal, rare situations don’t overwhelm the case as even new trade theorists like Krugman admit.]
Oct 4 2010 at 3:39am
As for introspection try the following: I would rather take a low paid job or a pay cut than starve. I conjecture that almost all people are with me on this.
It is no less true that most unemployed, as I would be, are desparate for a job – or at least the income that goes with one (and they are not too fussed if the job is a government one that consists in forcing those in commerce waste time and money in lining up to ask permission to do the ‘anything that’s peaceful’ they happen to view as profitable).
Long term mass unemployment of millions for years at a time is not a market phenomenon. It takes a great deal of money to pay for it and only the state would choose, and chooses, to engage in it.
Oct 4 2010 at 10:21am
You’ve seen this?
See also my comment therein.
Oct 4 2010 at 1:55pm
I drives me crazy when Bryan Caplan pits his fine mind and cogent thinking against a straw man that he’s set up, instead of going up against the best arguments he can find.
No Keynesian, at least no Keynesian of any standing, perfers “fiscal over monetary stimulus.” Nobody who watched what happened when Volcker opened the spigot in ’83 (the economy — including unemployment — turned around within months, a point I watched Krugman make at length in his standard book-tour lecture a couple/few years ago) can have any question about the potency and immediacy of monetary policy. Everyone agrees that it’s the first trigger to pull (as long as the gun’s loaded). That’s why the Fed is constantly pulling it (in one direction or another).
I don’t have time to explain when Keynesians do think fiscal stimulus is valuable, and I really don’t need to because Bryan knows those circumstance perfectly well. It’s not really very complicated.
So Keynesians don’t have that preference, and their thinking is completely in keeping with both introspection and intuition: spend in the bad times, save in the good. No duh.
Anti-Keynesians, on the other hand, frequently try to argue that fiscal stimulus has no virtue whatsoever, in any situation.
Is that belief in keeping with Bryan’s introspection?
Knowledgeable Keynesians also know — along with clear-eyed economist of other schools (cf. Arnold Kling) — that the line between fiscal and monetary stimulus is often blurred to the point of invisibility.
Oct 7 2010 at 12:59am
I think MMT (Modern Monetary Theory) as a branch of Keynesian (post-keynesian?) economics, is overlooked but has a lot to offer.
Oct 12 2010 at 1:54pm
Something ironic about an article that attacks economics for lessons not learned, and then calls for more deregulation
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