We are all Keynesians now. Really?

Economists are often caricaturized, as if a single photo could describe a film. I have talked about Adam Smith and someday I’ll talk about Walras and Phillips “Dundee” (believe it or not, he was a crocodile hunter in his youth). 
Today, though, I’d like to make a few comments about Keynes.

We are not all Keynesians now. Keynes has influenced economics deeply, but not through his original contribution. The travesty version of Keynes (IS-LM) was a benchmark for quite a while and still lives on undergraduate textbooks, although “cutting-edge” economics has long ago dismissed this flawed interpretation of the General Theory.

I’m not sure why, but as I was an early undergrad learning IS-LM I read Hicks’s paper admitting he was wrong about it (published at the Journal of Post-Keynesian Economics in 1980). I like to think I always struggled with IS-LM because I knew it was wrong from the outset, although it was probably just because I’m not the brightest bulb in the chandelier. Be it as it may, I got Hicks's point that Walras’ Law wouldn’t apply in his analyses and, therefore, it was not correct to use the traditional argument that n markets in equilibrium imply n+1 markets in equilibrium. In that sense, the Labor Market which was such an important feature on the General Theory was erroneously assumed to be constantly in equilibrium. Nevertheless, that could only be true for the intersection point of IS and LM curves, and since equilibrium theory never worried about the time element and dynamics plays no role (don’t be misguided about the D in DSGE, it’s subject to the same criticism although I won’t address this issue now) there was no actual investigation about what happens in disequilibrium and it was just assumed that in the long run we are all dead, pardon me, we are all in equilibrium. Further, uncertainty and psychological features that were paramount to Keynes’s analysis vanished in Hicks’s IS-LM model, which he later on admitted was “a product of my Walrasianism”.

What really amazes me and my motivation to write this post is that most of the profession seems not to be aware of Hicks’s rendition, perhaps because it was written in a non-orthodox journal. As Keen puts it, it “was generally ignored by economists who – if they were aware of it at all – would have been more inclined to put his views down to approaching senility to any blinding logical revelation”. The almighty Lucas, for instance, in 2003 (over 20 years after Hicks plead guilty) said:

“My credentials? Was I a Keynesian myself? Absolutely […] I remember when Leijonhufvud’s book came out and I asked my colleague Gary Becker if he thought Hicks had got the General Theory right with his IS-LM diagram. Gary said, ‘Well, I don’t know, but I hope he did, because if it wasn’t for Hicks I never would have made any sense out of that damn book’. That’s kind of the way I feel, too, so I’m hoping Hicks got it right”.

I don’t have a problem with mathematics being at the center of economics, my concern is that it seems as though it is the sole foundation of our science. My problem is the building of an intellectual edifice in such a fragile soil, the lack of dialogue among economists from different schools and the overall decline of interest in the history of economic thought. My stance towards economics is to get in touch with as many different approaches as I manage, although as Carlos Suprinyak once told me: “if there is one thing we should give credit for neoclassical economists is that time is scarce”. Therefore it seems almost impossible to become a great mathematician and a great historian. On the other hand, Suprinyak also said it is admirable that I am trying to combine historical analyses with an understanding of DSGE models and the like. 

I’m not sure how one divides optimally his time among studying different areas, and equating marginal benefit with marginal cost seems useless to answer such question. But there should be some effort among economists to understand one another, relying on each other’s expertise to create synergy.

If mainstream economists read or even talked to Post-Keynesians, for instance, they wouldn’t claim to be Keynesians. So, to the question are we all Keynesians now I answer:

No, we are all ultra specialized economists now.

We make a film out of a picture, and, even worse, claim to be one of the actors.