A Critique of Keynesian Economics

257 Pages·1993·24.624 MB·English

by  Walter Allan (eds.)

A CRITIQUE OF KEYNESIAN ECONOMICS
A Critique of
Keynesian Econotnics
Edited by
Walter Allan
Pllblishing Director
lllstitllte 01 Economic Ajfairs. Londoll
M
in association with
St. Martin 's Press Palgrave Macmillan
Selection © Walter Allan 1993
Chapter I ©The Macmillan Press Ltd 1987. 1993
Introduction and Chapters 2-7 © The Institute of Economic Affairs 1986.
1986.1967.1977.1986.1978. 1993
Softcover reprint of the hardcover 1st edition 1993 978-0-333-56576-6
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First published in Great Britain 1993 by
THE MACMILLAN PRESS LTD
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and London
Companies and representatives
throughout the world
This book is published in association with The Institute of Economic Affairs.
A catalogue record for this book is available from the British Library.
ISBN 978-1-349-22483-8 ISBN 978-1-349-22481-4 (eBook)
DOI 10.1007/978-1-349-22481-4
First published in the United States of America 1993 by
Scholarly and Reference Division.
ST. MARTIN'S PRESS. INC. .
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ISBN 978-0-312-08554-4
Library of Congress Cataloging-in-Publication Data
A critique of Keynesian economics 1e dited by Walter Allan.
p. cm.
Includes bibliographical references (p. ) and index.
ISBN 978-0-312-08554-4
I. Keynesian economics. 2. Keynes, John Maynard, 1883-1946.
I. Allan. Walter. 1955-
HB99.7.C75 1993
330. I 5'6--dc20 92-18932
CIP
This book is dedicated to the memory of my late father, Wattie AHan, and
my uncle, Wul Allan, whose own upbringing was far removed from Harvey
Road, Cambridge. In the same year as The General Theory was published,
my grandfather died leaving my grandmother widowed with nine children.
AIthough sociologists would have described their conditions as below-the
poverty-line, they enjoyed a richness and quality of life, respect in the local
community and pride in their family.
My fondest memory takes me back to the halcyon days of 1967 when I
was taken to Wembley for the first time to watch Scotland beat England, the
world champions, who were subjected that day to the guile and craftsman
ship of Messrs Law and Baxter. My father also spent his summer vacation
that year working to pay for my new school uniform and sports gear as high
school beckoned.
Their presence at family gatherings is sorely missed.
Contents
Notes on the Contributors viii
Introduction xi
Walter Al/an
John Maynard Keynes (1883-1946)
Don Patinkin
2 The Keynesian Heritage in Economics 59
Leland B. Yeager
3 Keynes's Intellectual Legacy 73
Karl Brunner
4 Keynes and the Classics 81
Axel Leijonhujvud
5 Keynes versus the 'Keynesians' ... ? 115
Terence W. Hutchison
6 Expectations and the Economy 155
Patrick Minford
7 The Fallacy of the Mixed Economy 169
Stephen Littlechild
Selected Works of lohn Maynard Keynes 225
Bibliography 228
Subject Index 239
Name Index 244
Notes on the Contributors
Walter Altan is Publishing Director for the Institute of Economic Affairs
and has held senior editorial positions with Allen and Unwin and Macmillan
Publishers. He is the author of Concise 'A' Level Economics, Economics at
University and co-author of Competition and Choice in the Publishing
Industry.
Karl Brunner was the Fred H. Gowen Professor of Economics at the
Centre for Research in Govemment Policy and Business Graduate School
of Management, University of Rochester, New York; and Professor of
Economics at the University of Beme, Switzerland. He was the editor of
The Journal 0/ Monetary Economics and Co-Chairman of the Shadow Open
Market Committee. The chapter in this book appears by kind permission of
the executors of the Karl Brunner estate.
Terence W. Hutchison was Professor of Economics at the University of
Birmingham and is a member of the Advisory Council of the Institute of
Economic Affairs. In a distinguished academic career he has been Lecturer,
then Reader at the London School of Economics, Visiting Professor at
Columbia University, Visiting Fellow at University of Saavbrüchen, Visit
ing Professor at Yale University, Visiting Fellow at the Australian National
University, Canberra, Visiting Professor at Dalhousie University, Halifax,
Nova Scotia, Keio University, Tokyo, and the University of Western
Australia.
Axel Leijonhufvud is Professor and Chairman at the University of Califor
nia, Los Angeles. The chapter which appears in this book was first pub
lished by the Institute of Economic Affairs in 1969 and was an immediate
best-seIler with over 35,000 copies sold. In the previous year On Keynesian
Economics and the Economics 0/ Keynes was published and this completely
revolutionised the way in which macroeconomics was taught in
universities.
Stephen Littlechild is Director-General of the Electricity Supply and a
member of the Advisory Council of the Institute of Economic Affairs. He
began his career as an academic and was formerly Assistant Lecturer in
Industrial Economics at the University of Birmingham, Senior Research
Lecturer in Economics at the Graduate Centre for Management Studies,
viii
Notes on the Contributors ix
Professor of Applied Economics at the University of Aston and Professor of
Commerce at the University of Birmingham. He has been a consultant to
several organisations including the Ministry of Transport, the Treasury and
the World Bank.
Patrick Minford is Edward Gonner Professor of Applied Economics at the
University of Liverpool and a member of the Advisory Council of the
Institute of Economic Affairs. Formerly Visiting Hallsworth Research Fel
low at the University of Manchester, he has made an important contribution
to the ideas ofThatcherism and Britain's monetarist/supply side programme
of the 1980s. The new classical macroeconomics, rational expectations
theory has been pioneered by Professor Minford in the United Kingdom.
Don Patinkin is Emeritus Professor of Economics at the Hebrew Uni ver
sity of Jerusalem. He is a member of the Israel Academy of Sciences and
Humanities, a Corresponding Fellow of the British Academy, and a foreign
member of other national academies. His books include Money, Interest,
and Prices: An Integration 0/ Monetary and Value Theory (1956, 1965,
1989); The Israel Economy: The First Decade (1959); Keynes' Monetary
Thought: A Study o/Its Development (1976); co-editor, Keynes, Cambridge
and the General Theory: The Process 0/ Criticism and Discussion
Connected with the Development 0/ the General Theory (1977); and
Anticipations o/the General Theory? And Other Essays on Keynes (1982).
Leland B. Yeager is a graduate of Oberlin College and Columbia Uni ver
sity. Since 1985 he has been the Ludwig von Mises Distinguished Professor
of Economics at Auburn University, Alabama. He has held visiting profes
sorships at Southern Methodist University, the University of California at
Los Angeles, New York University and the George Mason University,
Fairfax, Virginia. Professor Yeager has written many books and articles on
monetary theory including International Monetary Relations and Experi
ence with Stopping Inflation.
Introduction
Walter Allan
The ideas of economists and political philosophers, both when they are
right and when they are wrong, are more powerful than is commonly
understood. Indeed the world is ruled by little else. Practical men, who
believe themselves to be quite exempt from any intellectual intluences,
are usually the slaves of some defunct economist.
(1. M. Keynes, The General Theory 0/ Employment. Interest
and Money, Macmillan, 1936, p. 383)
Of all the passages which have been taken from The General Theory, this
quotation is without doubt the most cited.
Sadly, two generations and more later, we have leamt to our cost that this
was probably one of the most profound statements Keynes ever made.
In the quarter of a century which followed the Second World War, this
was known as the age of High Keynesianism. Successive administrations,
both Labour and Conservative sought to address the economic problems of
the nation through the fine tuning of aggregate demand, which would be
able to maintain a high and stable level of employment.
The setting up of a new post-war international monetary order through
the Bretton Woods System had led to an unprecedented increase in the level
of economic growth in which Keynes had performed such an anchor rule.
Leading political figures in both the United States and the United King
dom latched on to the economics of Keynes. Keynesian economics became
fashionable in the Ivy League Universities of America and in the political
corridors of power in Washington during the 1960s which led President
Nixon to say 'We are all Keynesians now'. A decade earlier, the British
Prime Minister, Harold Macmillan, was telling us 'most of our people have
never had it so good'.
However, during the early 1970s, several structural weaknesses began to
emerge within the international economy. The fixed exchange rate system
which had been set up at Bretton Woods collapsed in 1971 and a new word
'stagflation' appeared in the economic vocabulary.
Prior to these events, it was generally assumed that there was an inverse
relationship, a trade-off, between changes in money wages and the rate of
unemployment. This was based on empirical evidence of the British economy
xi
Xli A Critique 0/ Keynesian Economics
between 1861 and 1957 by the late Professor A. W. Phillips of the London
School of Economics which became known as the Phillips curve.
Although Phillips' s study was first published in the journal Economica in
1957 and was based in terms of wage-rate increases and the level of
unemployment, economists have supported the view that the relationship is
also true between price increases and the unemployment rate, in which high
levels of employment would lead to cost push and demand puH inflation.
The 1970s witnessed rising inflation and rising unemployment which
Keynesian economists could not account for.
The outstanding critic of Keynesian economics is F. A. Hayek, the
Austrian scholar, whose writings prompt the reflection that the work of an
economist should not be judged by the notice taken of hirn by politicians of
his day.
Hayek' s opinion of Keynes is best summed up in an obscure book review
of Harrod's life of Keynes:
Perhaps the explanation of much that is puzzling about Keynes's mind
lies in the supreme confidence he had acquired in his power to play on
public opinion as a supreme master plays on his instrument. He loved to
pose in the role of a Cassandra whose warnings were not listened to. But
in fact his early success in swinging round public opinion about the peace
treaties had given hirn a probably even exaggerated belief in his powers.
I shaH never forget one occasion, I believe the last time that I met hirn,
when he startled me by an uncommonly frank expression of this view
when I asked hirn whether he was not concerned about what some of his
disciples were making of his theories. After a not very complimentary
remark about the persons concerned he proceeded to reassure me: those
ideas had been badly needed at the time he had launched them. But I need
not be alarmed: if they should ever become dangerous I could rely upon
hirn that he would again quickly swing round public opinion - indicating
by a quick movement of his hand how rapidly that would be done. But
three months later he was dead. (F. A. Hayek, Studies in Philosophy,
Po/ities and Economics, University of Chicago Press, 1967)
In the spring of 1989, the Institute of Economic Affairs commissioned a
survey amongst British economists to find out what their views were on
certain economic concepts and ideas. A commentary on the results of the
survey was published by the IEA one year later. I
Two disturbing features of the survey emerged. First, the average age of
British academics is around 50 and, second, the overwhelming majority
were still staunch supporters of Keynesian economics. Macroeconomics as