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A history of Post Keynesian economics since 1936: a review article.

Introduction

J. E. King has written an excellent, and for the most part, unbiased history of Post-Keynesian economics. The book can be roughly divided into two parts. Chapters 1-7, "... is the story of how Post-Keynesian economics emerged, extended its scope beyond the issues that Keynes had concentrated upon, posed a challenge to orthodox macroeconomics but ultimately failed to supplant it" [King, p. 1].

Chapters 8-12 constitute the second part of the book. These chapters examine the following questions. First, did the body of knowledge assembled by the Post-Keynesian economists constitute a school of thought? Second, if so, did this school have a methodological approach to economic problems? Finally, did this school make "scientific progress" as defined by Popper, Kuhn, or Lakatos?

Initial Reviewers of the General Theory

At least three groups reviewed the General Theory. The first group of reviewers looked at Keynes's work through the lens of general equilibrium theory setting the stage for the emergence of the neoclassicial synthesis. The second group of reviewers looked at Keynes's work through the lens of disequilibrium theory, setting the stage for the emergence of the British strand of Post-Keynesian economics. The difficulty with these two sets of reviewers, which King does not recognize, is that they bring to the review of the General Theory a theoretical methodology that is totally alien to that employed by Keynes.

Keynes's fundamental message regarding the fact that involuntary unemployment can exist in equilibrium was embodied in the simple yet elegant short-run static partial equilibrium model of a closed economic system. Consumers decide how to divide their stream of income into two parts; spending on consumption goods and saving. Simultaneously, and yet independently of consumers, producers decide how to divide the stream of output into two parts; consumption goods and investment goods. Three outcomes are possible. The amount of income measured in terms of dollars allocated for spending on consumption goods can be greater than, equal to, or less than the dollar value of the consumption goods produced by the producers. If the dollar values are equal (meaning ex ante saving and ex ante investment are equal), then the economic system is in equilibrium. This consistency of decisions, however, does not imply that the economic system is operating at full employment. Full employment is but one of an infinite number of possible equilibria. In fact, not only was less than full employment possible but could represent the norm in a market capitalist economy, particularly if the worldwide depression of the inter-war period persisted [Cate and Johnson, 1997; Johnson and Cate, 2002; Johnson et al., 2004].

Moreover, King fails to refer to the third group of reviewers, the political leaders who controlled the levers of governmental power-parliament, the Bank of England, and The Treasury. These individuals were seeking a solution to the economic problems that confronted Britain. Effective macroeconomic theory and policy must be accessible by and useful to these political leaders. The General Theory found a receptive audience with this group of political leaders because Keynes's macroeconomic model provided them with a theoretical alternative and a new set of justifications for policies that could ease, if not resolve, some of Britain's economic problems. For this group, Keynes's book had a message that made economic and political sense. Whether the message received by the political leadership was the same one that Keynes sent is beyond the scope of the paper.

A review of the General Theory makes clear the fact that Keynes had two primary goals: one theoretical and one political. The first was to explode the myth perpetuated by the neoclassical orthodoxy that the perfectly competitive, self-adjusting, market-clearing model via Say's Law tends toward full employment. Keynes' second goal was to provide understanding and guidance in trying to improve the average level of performance of the British economy as he saw its reality during the 1920s and 1930s [Cate and Johnson, 1997, 1998].

Moreover, the third group of reviewers understood that "general" in the title, the General Theory, had absolutely nothing to with general equilibrium theory. Keynes employed the, ceteris paribus, assumption throughout. General referred to his first goal of overthrowing the neoclassical orthodoxy of his day [Cate and Johnson, 1997, 1998; Johnson et al., 2004].

Keynes clearly believed the General Theory [Keynes, 1936] might create a revolution in economics. For example, he wrote to G. B. Shaw:
   To understand my state of mind, however, you have to know that I
   believe myself to be writing a book on economic theory which will
   largely revolutionize--not, I suppose, at once but in the course of
   the next ten years the way--the world thinks about economic
   problems. [Keynes, 1982, p. 42].


The first unique feature of Keynes's concept of equilibrium was that it reflected a purposive function (P-F), the ultimate purpose or goal pursued by practitioners of normal science [Johnson, 1980, 1983] that differed in its maximand and normative content from both classical and neoclassical economics. The classical (P-F) was concerned with whether a perfectly competitive market-capitalist economy was capable of maximizing total social welfare, measured in material terms (vendable commodities), over time. As used by classical economists, equilibrium implied that total social welfare was maximized if an ethically acceptable distribution of income existed. Hence, classical equilibrium reflected their primary concern with the issues of economic growth and distribution [Johnson, 1980, 1983, 1988, 1993a, 1993b; Johnson et al., 1989].

The neoclassical P-F was concerned with how, in a perfectly competitive market-capitalist economy, individual welfare, defined subjectively in terms of utility, would be maximized at any point in time. For neoclassical economists, equilibrium implied individual welfare would be maximized given any distribution of income. As such, neoclassical equilibrium reflected their primary concern with the issue of allocative efficiency [Johnson, 1980, 1983; Johnson and Ley, 1990].

Keynes's P-F was concerned with whether an imperfectly competitive market-capitalist economy was capable of maximizing total social welfare, measured in terms of goods and services, in the short-run. However, Keynes's equilibrium was ethically neutral in that it did not imply that total social welfare would be maximized given any distribution of income [Cate and Johnson, 1997; Johnson et al., 2004]. The key issue for Keynes in evaluating this question was economic stability, as measured by involuntary unemployment, and impacted by the distribution of income. As such, Keynes's concept of equilibrium reflected his overriding concern with involuntary unemployment [Cate and Johnson, 1997; Johnson, 1980, 1983; Johnson and Cate, 2002; Johnson et al., 2004].

The second unique feature of Keynes's equilibrium was that Keynes's equilibrium was reflective a different direction of causation than that of the neoclassical orthodoxy, creating the possibility of involuntary unemployment in equilibrium. In the neoclassical model, unemployment was either voluntary, frictional (seasonal), or a short-run disequilibrium phenomenon, which would be eliminated when the economy adjusted to equilibrium [Lindert, 1976, Ch. 2]. This conclusion resulted from the direction of causation in the neoclassical model. The neoclassical direction of causation was from the labor market, which determined the equilibrium level of employment, to the real goods market, where, in conjunction with aggregate supply, the equilibrium level of national income was determined [Johnson and Cate, 2002; Johnson et al., 2004].

The neoclassical direction of causation resulted in the failure of the orthodox definition of equilibrium in the labor market to distinguish between the "willingness to work" and the "ability to work." Therefore, as Keynes noted [Keynes, 1936, p. 51, the problem of involuntary unemployment in equilibrium was simply defined away.

With Keynes's concept of equilibrium, the direction of causation runs in the opposite direction to that found in the neoclassical model. The composition of national income determines the level of aggregate demand and the equilibrium level of national income in the real goods market. The equilibrium level of national income then determines the equilibrium level of employment, via derived demand, in the labor market. With the new direction of causation introduced in the General Theory, involuntary unemployment in equilibrium is possible, with or without price and/or wage rigidities. As such, the reversal of the neoclassical direction of causation by Keynes became critical to his argument that the economic system may not operate at full employment in equilibrium.

Keynes's P-F led to the emergence of a new paradigm, which ultimately resulted in macroeconomics being treated as a separate branch of economics I Johnson and Cate, 2002; Johnson et al., 2004; Stanfield, 1974]. The paradigmatic shift that occurred altered the fundamental transmission mechanism for achieving equilibrium from a paradigm in which the market-capitalist economy was viewed in terms of price adjustments, to a paradigm in which price adjustments alone were nearly powerless to bring about, or alter the existing equilibrium.

The paradigmatic shift caused by the General Theory was so dramatic it was quickly labeled the "Keynesian Revolution" [Klein, 1949]. For the majority of economists, Keynes's economics became the macroeconomic orthodoxy for much of the next four decades. In fact, at least two writers have compared Keynes's General Theory to Einstein's theory of relativity in terms of its revolutionary impact.

For example, Skidelsky notes,
   Keynes's identification with Einstein is also too clear to miss.
   Keynes was writing a 'General Theory' of employment, in which he
   called classical economics a 'special case' and classical
   economists 'Euclidean geometers' in a non-Euclidean world.
   [Skidelsky, 1992, p. 487].


More recently Togati has argued,
   Just like Einstein, Keynes searches for a new image of the world to
   oppose that of orthodox economic theory and suggests that a
   revolutionary theory is not one that rejects old concepts but one
   that redefines them. [Togati, 2001, p. 121].


The Emergence of Post-Keynesian Economics

If Post-Keynesian economics were confined to the U.K. strand, then a case could be made that a school of thought may emerge. However, Post-Keynesian economics has multiple origins. Another strand of Post-Keynesian economics, what may be called the 'leftist' strand, is based on models developed by Kalecki. King compares and contrasts these models to the models found in the General Theory.

Then there is the U.S. strand of Post-Keynesian economics that is based on the work of Sidney Weintraub, Hyman Minsky, and Paul Davidson. King outlines these individuals' attack on the neoclassical synthesis and summarizes their individual theoretical contributions, especially Minsky's financial instability theory and Davidson's reconstruction of Keynes's monetary theory. Like the leftist strand, the U.S. strand of Post-Keynesian economics developed, for the most part, independently of the events in the U.K.

Finally, there are the strands of Post-Keynesian economics that emerged in Australia, Austria, Canada, France, and Italy. At least three factors influenced the development of these strands of Post-Keynesian economics: the local institutional conditions, the work of Sraffa, and the work of the U. K. Post-Keynesian economists. King reviews each of these factors, and while nothing really new is added to the story about the emergence of Post-Keynesian economics throughout the world, King must be commended for the succinct summary of these events. He has captured not only the essence but also the excitement that surrounded these events.

Introducing New Issues and Confrontation

Concurrent with the emergence of the various strands of Post-Keynesian economics was the exploration of issues not explicitly discussed by Keynes. Chapters 3 and 4 explore two of these new issues: economic growth and income distribution. The Cambridge Controversy and the publication, Sraffa's The Production of Commodities by Commodities in 1960, set the stage for the decade long confrontation between Post-Keynesian economics and the neoclassical synthesis.

However, it should made clear, which King does not, that the analytical framework contained in the General Theory to deal with involuntary unemployment was rapidly extended to deal with cyclical inflation and the issue of economic growth. Harrod [1939, 1948, 1960] and Domar [1946, 1947, 1948, 1952] initiated an entire body of literature on Keynesian growth models and should be credited with founding modern growth theory [Besomi, 1997, p. 231]. Moreover, Hansen, initially skeptical of the Keynesian analysis, turned into a whole-hearted supporter [Haber, 1997], developing the theory of secular stagnation [Hansen, 1938, 1939], a straight forward extension of Keynes's short-run static analysis of the deficiency of aggregate demand.

According to Samuelson [1976], Hansen also provided the original insight to the whole class of Keynesian type multiplier-accelerator growth models, which are generally associated with the work of Samuelson and Solow [Samuelson, 1939a, 1939b; Solow, 1956]. This, despite the fact that the accelerator principle had been articulated first by Kahn [1931] and later by Harrod [1936], though the latter was concerned with the trade cycle and not the long-run problems of economic growth at the time. In addition, many economists, such as Lerner [1936], began to explore the possibilities that seemed to be implied in the General Theory for achieving economic stability through the use of monetary and counter-cyclical fiscal policy. Finally, Keynes, in the General Theory, in Chapters 8-10 on the marginal propensity to consume discusses the fact that the MPC's of lower income groups have higher than the MPC's of upper income groups, hence, the redistribution of income would effect aggregate demand, output, and employment [Keynes, 1936].

The initial confrontation between Post-Keynesian economics and the neoclassical synthesis was the exchange of papers over growth theory and, in particular, a definition of capital. King provides a brief summary of the principal points of this controversy and refers the reader to Harcourt's masterful commentary and notes two of the results of the Post-Keynesian victory. First, economists who supported the neoclassical synthesis simply went about their business and ignored the fact that they had lost the debate. King points to the revival of growth theory the New Growth Theory and the central place of this theory in Mankiw's introductory textbook. Second, as subsequent events show the Post-Keynesian school's victory was Pyrrhic--the battle was won but the war was lost. King provides four reasons for the failure of the Post-Keynesian to become the dominant force in macroeconomic theory and policy. First, the Post-Keynesians did not have a Principle of Economics textbook that could compete against Samuelson's textbook. Second, the Post-Keynesians did not control the editorial boards of any of the leading mainstream economics journals. Third, the Post-Keynesians did not control the key administrative positions--the Department Chair or the Promotion and Tenure committees--of any of the leading economics departments. Fourth, the Post-Keynesians did not control the key administrative position--Program Chair of any of the leading economics associations. As a result the Post-Keynesians were unable to reach the minds and hearts of the next generation of economists, nor were they able to reach the minds and hearts of the current generation of economists.

School of Thought, Methodology, and Scientific Progress

King notes that "[if] it is to succeed, a school thus requires a founder-leader: an institutional affiliation, a journal and a manifesto, that is, a document in the nature of a professional proclamation of its basic mode of perceiving and relating to the world" [King, p. 3]. As indicated above, Post-Keynesian economics did not have a founder-leader, rather there are various strands of Post-Keynesian economics, all of which are united in their opposition to the neoclassical synthesis. A rigorous application of the criteria being a school, one must conclude that a school of Post-Keynesian economics did not exist.

In addition to their united opposition to the neoclassical synthesis, two additional themes attracted a large following from Post-Keynesian economists. The first theme is their interest in Keynes's theory of money. With the rise of monetarism and the subsequent debate over the causes and cures of inflation, Post-Keynesian economists used Keynes's theory of money as a primary weapon in this debate. Unfortunately, their choice of incomes policy as the principal means for curing inflation did not meet the needs of the political leadership. While the policy may have been accessible to the political leadership, these individuals did not find incomes policy useful. This was the case because the policy relied on the government becoming more involved in the operation of the economy at a time when the political parties in power wanted to reduce the government's presence.

The second theme is related to "... the (re) discovery of Keynes's philosophical writings ..." [King, p. 8]. This rediscovery led to a debate among the Post-Keynesian economists on method, methodology, and meta-methodology. In his review, King summarizes the principal differences between Post-Keynesian economics and the neoclassical synthesis. The neoclassical synthesis approach argues that economics is a natural science, that economics must resort to formalism because theoretical speculation and empirical research have value in and of themselves, that uncertainty could be reduced to risk, and that economics should rely on an ergodic and equilibrium approach to problem solving. The Post-Keynesians believe that economics is a moral science, that economics need not resort to formalism because policy is the object of the intellectual exercise, that uncertainty could not be reduced to risk, and that economic analysis should rely a non-ergoic, path dependency, disequilibrium approach to problem solving.

Unlike the neoclassical synthesis that adhered to a Cartesian-Euclidian and atomistic individualist methodology, the Post-Keynesian economics embraced an organicist and a Babylonian or critical realist methodology.
   Thus for Babylonians there were no basic axioms but rather several
   strands of argument that reinforced each other, and not a single
   correct method for conducting research, but rather a variety of
   methods, each appropriate to particular circumstances. Babylonian
   methodology favoured 'open-system thinking' ... Scientists could
   only aspire to limited knowledge; they could hope to establish
   regularities, but not laws. What they knew was derived from
   rational beliefs, themselves conditioned by an awareness that
   uncertainty could not be reduced to certainty-equivalents by means
   of objective frequency distribution. [King, pp. 196-7].


The critical realist methodology, based on Roy Bhaskar's writings and advocated by Tony Lawson, is quite different.
   The critical realist ontology--as the term 'realist'
   suggests--asserts that the real world exists independently of human
   consciousness. This reality is characterized by structures and by
   causal mechanisms. The structures govern the relations between the
   various parts of reality, and the causal mechanisms provide the
   means by which changes in one or more of these parts affect the
   others. Critical realist epistemology asserts that these 'deep' or
   'underlying' structures and mechanisms are seldom (if ever)
   directly observable, but their existence can be inferred from the
   'superficial' appearances of the observed phenomena. Science is the
   process whereby such inferences are made. [King, p. 198].


In addition to his advocacy of the critical realist methodology, Lawson also stated that "... the relations between individual parts of the economic system were very often organic rather than atomistic.." and that reality was mutable and "... therefore not governed by inexorable laws of nature or society but is instead subject to transformation by human action" [King, pp. 198-9].

This section of King's book is excellent because the principal differences between the Post-Keynesian economics and the neoclassical synthesis are succinctly set forth. Furthermore, the review of the debate on method, methodology, and meta-methodology reveals the efforts of the part of the Post-Keynesian economists to organize themselves in a positive manner: here are the defining principles in which we believe, and this is how we go about our business in the moral science of economics.

The book ends with a discussion of the criteria for scientific progress as developed by Popper, Kuhn, and Lakatos. King concludes that Post-Keynesian economics has not made much scientific progress no matter which set of criteria are used. As to the future of Post-Keynesian economics, King does not see it dying out, although, he does not rule out this alternative. He does not see Post-Keynesian economics being absorbed by mainstream economics simply because of the profound differences noted above.

So what is the future of Post-Keynesian economics? "On balance, continued survival as an embattled minority appears to me to be the medium-term fate of Post-Keynesian economics." [King, p. 260]. Although "[with] the final abandonment of Walrasian general equilibrium theory ..." [King, p. 220] as a unifying theoretical construct, a window of opportunity may have opened for Post-Keynesian economics. The Old Managerial Economics and Corporate Finance are information rich worlds. In these worlds information is distributed symmetrically, is of high quality (events are subject to risk but not uncertainty), and can be acquired at no cost by any individual. These worlds are slowly being replaced by the new worlds of the New Managerial Economics and Behavioral Finance. In these worlds, information is distributed asymmetrically, is of low quality (events are subject to both risk and uncertainty), and is costly to acquire. These worlds are dominated by transaction cost theory, principal-agent theory, and cognitive psychology. The idea of an information poor environment is a central tenet of Post-Keynesian economics and offers some Post-Keynesian economists who seek absorption into mainstream economics an opportunity to publish in these emerging markets.

Conclusion

Despite the fact that J. E. King has written an important history of Post-Keynesian economics, he his has failed to point out that the Post-Keynesians have ignored the key theoretical elements in the General Theory. These key theoretical elements included: (1) Keynes's concept of equilibrium; (2) his theory of probability, expectations, and uncertainty; (3) his critique of the loanable funds theory of interest rate determination; (4) his theory of money, liquidity preference, and interest rate determination; and (5) his explanation of the role and impact of imperfect competition and market power as they relate to price and wage rigidity.

These key elements were generalized into a coherent message regarding economic instability in general and involuntary unemployment in particular [Cate and Johnson, 1997, 1998; Johnson and Cate, 2000, 2002; Johnson et al., 2001, 2004]. As such, the term "Post-Keynesian" is really meaningless, except in the trivial historical sense, since the Post-Keynesians work had nothing to do with the key theoretical elements, hence analytical framework the General Theory.

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Review Article by

L. E. JOHNSON * AND THOMAS CATE **

* Bemidji State University and ** Northern Kentucky University--U.S.A. The authors wish to thank the referees for their helpful suggestions, although, the authors alone are responsible for the contents of the paper.
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