My short piece on Solow and his relation to the Review of Keynesian Economics

(1924-2023)

Robert Solow, who was a member of the editorial board of the Review of Keynesian Economics (ROKE), died in December 2023. Solow holds a special place in the history of macroeconomics, and he was a strong supporter of the ROKE project. In this brief note I want to honor Solow’s contribution to economics and to place on record his contribution to ROKE.

Histories of macroeconomics tend to emphasize the disputes between Keynesians and Monetarists, at least up to the 1970s. Those disputes very often pitted Milton Friedman against either Paul Samuelson, with whom he alternated in a famous Newsweek column, or James Tobin who was, perhaps, the most prominent of Friedman’s opponents when the Journal of Political Economy edited a debate with Friedman’s critics. In the broader cultural wars, Friedman was often pitted against John Kenneth Galbraith, and his Free to Choose series was seen as a response to the latter’s BBC series The Age of Uncertainty. Solow appears, if at all, as Samuelson’s co-author of a paper on anti-inflation policy (Samuelson and Solow 1960), which is widely viewed as introducing the Phillips curve to the American economics profession.

Yet Solow is, in many ways, the central figure of ‘American’ Keynesianism, and he was awarded the 1987 Nobel Prize in Economics. His work was central to the building of what Samuelson referred to as the Neoclassical Synthesis, which was dominant during the post-war era up to the 1970s. This synthesis combined microeconomic competitive general equilibrium theory, Keynesian macroeconomics, and Solow’s (1956) Neoclassical growth theory. It gave short-run space for Keynesian policy effectiveness but asserted a long-run belief in market forces and Say’s Law, which Solow defended in his growth model and in the Cambridge debates with more heterodox Keynesians. Additionally, Solow contributed decisively to the development of what eventually would be called New Keynesian Economics, with the development of the efficiency wage model in the late 1970s. He lived long enough to see fiscal policy rehabilitated after the Great Recession of 2007–2009, and to see what many view as the return of Keynesian Economics.

Read rest here.

On the state of the worldly philosophy: reflections after a visit to the New School

 Dr. Vernengo I presume?

I am pessimist by nature (or nurture), I guess. So I never thought that the current crisis would lead to a collapse of mainstream economics. As I often point out to my students, in the US, it was the Great Depression, and the rise of the Neoclassical Synthesis that made Marginalism dominant. Up to that point the profession was dominated by an eclectic group that included many institutionalists, like Commons or Seligman, a non-Marxist defender of an economic interpretation of history, both of whom were presidents of the American Economic Association (AEA). Mitchell, another institutionalist that was president of the AEA, was the head of the National Bureau of Economic Analysis (NBER). And the administration was full of institutionalist economists during the New Deal. So a crisis might actually lead to the consolidation of a paradigm that was actually contradicted by the facts (yes, full employment of factors of production is hard to defend if you have 25% unemployment, but blame it on rigid wages and you're fine).

On the role of the New School in academia, the topic of our table with Rajiv Sethi and Ramaa Vasudevan, what I suggested, as my interpretation was rather broad, was it is the production of heterodox economists by means of heterodox economists (my definition of the heterodox camp here). In that, at least in the US, the New School is aided by three four other programs, namely Colorado State (CSU), UMass-Amherst, UMKC (Kansas), and Utah. Not sure what is the actual output of all these centers, but most newly minted PhDs end up finding jobs in academia, mostly public universities and liberal arts colleges, in government, in think tanks, and in organizations related to progressive activism from unions to environmental groups. In that respect, even though the profession is not likely to move closer to any heterodox perspective, there is space for heterodox economists to continue to do the kind of work that they were trained to do. In other words, if the crisis will not open new space for heterodox groups, at least not by default, it will also not close old doors.

There was a debate, to some extent represented in our table by the contrast of my and Rajiv's views, on whether to engage the mainstream or tear it down, as Ali Khan put it in another section. I have already written on that here (for a whole book in response to critics that suggest that heterodox authors do not engage the mainstream go here). Still not convinced that engagement is necessary, or that helps to advance the research agenda of heterodoxy. Sure enough that there are ideas here and there that might be useful, but that doesn't require engagement per se. Note that this also does not mean that the study of the mainstream can or should be abandoned. But as I noted, New School students, and heterodox economists in general, understand better the logic and meaning of the mainstream than neoclassical authors themselves (see my debate with Noah Smith here).

The idea that isolation (And from what really? From publishing in the more prestigious journals? From having Ivy League chairs? Or from reality? You choose, but I'll rather be part of the group that was not surprised by the crisis, like Baker, D'Arista, Epstein, Galbraith, Godley, Palley, Pollin, Taylor, Zezza, Wray, etc., and many more) does not allow for the development of reasonable ideas or to have influence is also questionable. In all fairness, by the 1830s, Ricardian economics, and the main propositions of the surplus approach were forgotten and modified in incoherent ways by the likes of Nassau Senior, Stuart-Mill and others. A German philosopher studying alone in the British Museum was able to reconstruct and advance the classical ideas. Yes his academic influence was small at best, but I would be surprised if someone suggested he had no influence (and I don't mean politically, but strictly as an economist). All the same, by the 1930s most of these ideas were again forgotten and misrepresented, and an Italian scholar, working in isolation, while editing Ricardo's works, also reconstructed and advanced on the classical ideas. And on top of that, the 1930s provided the idea of effective demand, and the possibility of upturning Say's Law in the long run. All of these achievements have NOT been lost, in part, because places like the New School continue to produce heterodox PhDs.

This time around there is no need to reconstruct everything from scratch. There is a wealth of accumulated knowledge, and the shoulders of giants to stand upon. Yes, one can be pessimistic about the profession as whole, and probably should be, as Foley seemed to be in the last section, arguing that the heterodox moment after the crisis was really brief. But that is the norm for heterodox authors. And this time around we have the New School!

On principles courses, DeLong, Krugman and the limits of the mainstream

 

'cause it has no implications...

In a previous post, Anonymous commented: "Brad DeLong has been posting slides from one of his classes going over supply and demand (and quotas and price ceilings, market equilibrium, etc.) on his blog. They're pretty entertaining and filled with pop-cultural references. I was wondering what a Post-Keynesian perspective on them might be."

I promised to check Brad's posts and provide a short answer. So here it is. In fact, this semester I am teaching an intro course, something I haven't done since my time in Kalamazoo College. This is not a regular course for me to teach, in other words, like say intermediate macro. At Bucknell all intro courses provide more than the neoclassical (marginalist) perspective. While Brad starts with a neoclassical version of supply and demand (see here) on the basis of Krugman's intro textbook, we start with history and history of ideas, based on a discussion of the classical authors and Marx (here, here and here) and only then get to the supply and demand approach (here). In fact, I am also using Krugman's textbook, together with Heilbronner and Milberg's The Making of Economic Society and additional readings.

In other words, while there is a need to teach the basics of what the mainstream of the profession thinks it is relevant, it is also important to provide critical alternatives to the mainstream. The liberal arts education in the US allows for a lot of flexibility and for the introduction of alternative perspectives. The textbooks (almost all neoclassical) tend to fudge the fact that the notion that economics is about rational choices of individuals faced with scarcity is relatively new (the Marginalist Revolution of the 1870s)*, and quite different from the old classical (or surplus approach) tradition of the material reproduction of society.

* Interestingly enough, in the US the profession was not dominated by neoclassical economics until the 1930s and 1940s, when the rise of Keynesian economics, in the Neoclassical Synthesis version, brought it to the forefront of research, teaching and policy influence. Samuelson's 1948 Economics, the forerunner of all mainstream textbooks, did probably more than any other book to make neoclassical economics the dominant view. Before that the profession in the US was dominated by a potpourri of eclectic and institutionalists authors that held the main teaching positions and were at the head of key institutions like the American Economic Association and the National Bureau of Economic Research (NBER).

Lawrence Klein author of The Keynesian Revolution has passed away

Lawrence R. Klein (1920-2013)

Lawrence Klein, of Klein-Goldberger US econometric model fame, and author of The Keynesian Revolution (here the Google Books link), and winner of the Sveriges Riksbank Prize in Memory of Alfred Nobel in 1980, has passed away. Klein was a Neoclassical Synthesis Keynesian (often referred to as Old Keynesian now, to distinguish him from the New Keynesians) that made his contribution by developing the empirical applications of the Keynesian model for the US economy.

The seminal work was done in the late 1940s and early 1950s in the context of the Cowles Commission. His book An Econometric Model of the United States, 1929–1952 was further developed in 1955 with his co-author (Arthur Goldberger), published as An Econometric Model of the United States 1929–1952, introduced the celebrated Klein-Goldberger model. The Cowles Commission Model still lives in Ray Fair's macro-econometric model, that maintains essentially the same methodology, resisting to the Lucas critique and the Dynamic Stochastic General Equilibrium (DSGE) models of the Real Business Cycle School (RBC) and their New Keynesian alternatives.

It must be noted that in Klein's original model, expectations did not play a role, since it was complicated to incorporate those, interest rates did not have an impact on investment (basically adopting an accelerator) and that wealth effects (which allow for the Pigou effect, and the return to full employment) on consumption were also absent. So in a sense his model did differ, because of the need to adapt to economic data, from the theoretical versions of the Neoclassical Synthesis, and was closer to heterodox interpretations of Keynes.

Krugman on Friedman, Austrians, and Paradise Lost

I was a bit busy this week and did not weigh in on Krugman's latest incursion (and here too) on the history of economic ideas. He correctly dismisses Conservative economists in pre-Keynesian times, and particularly Hayek (and Austrians), who suggested that recessions and depressions were useful, as not relevant. And also, notes Friedman was more sophisticated. He also notes correctly (as was pointed out here before), that Friedman used when he was forced to present a complete model and ISLM with a Phillips Curve, that was not very different from the more Keynesian versions of the model done by the Neoclassical Synthesis authors.

He is more positive about Friedman because:

"He [Friedman] was willing to give a little ground, and admit that government action was indeed necessary to prevent depressions. But the required government action, he insisted, was of a very narrow kind: all you needed was an appropriately active Federal Reserve... [But Krugman does not ] want to put Friedman on a pedestal... [since] the experience of the past 15 years, first in Japan and now across the Western world, shows that Keynes was right and Friedman was wrong about the ability of unaided monetary policy to fight depressions."

Note that Krugman also notes Friedman's critique of Austrian business cycle theory (see here), which shows that in spite of being marginalist and part of the mainstream, still the extreme laissez faire view makes them part of the fringes  of the profession. In other words, Austrians stand for the mainstream as the Tea Party stands for the more moderate right wing.

Perhaps the most important point in Krugman's reflection on the state of the profession is his confession that he used to consider himself "a free-market Keynesian — basically, a believer in Samuelson’s synthesis. But [he is] far less sure of that position than [he] used to be." Good enough. Note, however, that what he means by a 'free market' Keynesian is a peculiar mix.

The Neoclassical Synthesis, was based on Hicks ISLM and Modigliani's fixed wages. The fundamental idea is that with wage flexibility the system would lead to full employment, a proposition that Keynes denied in the General Theory. In addition, the capital debates have shown, and Samuelson admitted in 1966, two years before Friedman re-introduced the Wicksellian notion of a natural rate, that the neoclassical parable in which substitution led to full employment of factors of production does not hold.

So, beyond the ideological stance (which made more sense at the time of the Old Neoclassical Synthesis, during the Cold War) Free Market Keynesianism was always kind of a misnomer. Remember that Keynes in 1926 suggested that Liberalism (in the traditional European sense of Laissez Faire) was dead.