Academic journal article Atlantic Economic Journal

The General Theory: Fabrication or Revolution?

Academic journal article Atlantic Economic Journal

The General Theory: Fabrication or Revolution?

Article excerpt

L.E. Johnson (*)

Thomas Cate (**)

David Laidler, 1999, pp. 377

Introduction

In The Golden Age of the Quantity Theory [1991], David Laidler traces the development of macroeconomic thought up to World War I. This paper, however, focuses on Laidler's recent book, Fabricating the Keynesian Revolution [Cambridge University Press, 1999, pp. 3-380], where Laidler takes up the story from the First World War to the formulation and spread of the IS-LM model. He argues that this model permitted the economics profession to rationally examine the issues of economic stability, fostering the development of modern macroeconomics. The General Theory [1936] was merely one small step in the development of the IS-LM model, hence in the emergence of modern macroeconomics.

One cornerstone of Laidler's book is the masterful survey of the ideas of various schools of macroeconomic thought during the inter-war period. The debate among the Wicksellians, the Austrians, the Stockholm School, the Marshallian tradition in Britain, and the various American streams of thought is the subject of Chapters 2-9. Laidler is to be commended for the quality of scholarship exhibited in these chapters.

This review will not focus on the first cornerstone of Laidler's book, but rather on its second cornerstone, which centers on the issue of whether there was a Keynesian Revolution. Laidler [pp. 3-4] argues:

"It is the contention of this book that there was no overthrow of an old economic orthodoxy after 1936.... The years between the wars saw an intense debate among competing schools of thought.... [and economics] acquired a new formal model, around which there would, in due course, develop an orthodox body of analysis called macroeconomics.

Chapter 10 reviews the principal points of the General Theory, while Chapter 11 examines the initial reactions to it. Some thought that the General Theory was interesting, others believed parts of the book's theoretical model to be inaccurate, but all of the reviewers cited by Laidler agreed the book was not revolutionary. At first glance, one might conclude that it is questionable whether there was anything original in Keynes' book [Hartley, 1999, p. 1709]. Thus, Laidler's first principal conclusion is that the notion of a "Keynesian Revolution is unfounded.

Laidler's view in this regard is reflected by his questionable analogy to European Christianity [p. 4].

"...if the state of economics before 1936 more closely resembled the state of European Christianity in the early sixteenth century than the state of the French Monarchy before 1789, then the development of economics after 1936 also bears more resemblance to a successful counter-reformation than to a triumphant revolution."

The authors suggest that Laidler's analogy is misapplied. Just as Martin Luther's thesis signaled the beginning of the Protestant Reformation and the demise of the then dominant orthodoxy of the Catholic Church, (1) so to the publication of the General Theory signaled the beginning of the Keynesian Revolution and the demise of the dominant orthodoxy of neoclassical economics. In each case, there was a pre-existing dominant orthodoxy that was successfully challenged and overthrown.

Chapters 12 and 13 trace the development of the IS-LM model, with particular emphasis given to Reddaway [1936], Hicks [1937], and Meade [1937]. Here Laidler brings together the various threads of his argument and shows how the IS-LM model "...represented a synthesis, albeit a very selective synthesis, of theoretical ideas which long antedated its appearance and which had underpinned the policy attitude in question" [Laidler, pp. 324-325]. Thus, Laidler's second principal conclusion is that the break that occurred in the profession should be associated with the adoption of the IS-LM model, and not with the publication of the General Theory.

This review questions Laidler's primary conclusions and argue that the evidence supports the existence of the revolution wrought by Keynes' General Theory. …

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