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.