A Macroeconomics Reader

By Brian Snowdon; Howard R. Vane | Go to book overview

2

Keynesian economics

The search for first principles

Alan Coddington

Journal of Economic Literature (1976) 14, December, pp. 1258-73


INTRODUCTION

In The General Theory of Employment, Interest and Money [13, 1936] and elsewhere, Keynes attacked a body of theory that he designated ‘Classical’. In posing a threat to the ‘Classical’ system—or at least to a recognizable caricature of it—Keynes also called into question the method of analysis by which this system was constructed. The purpose of this article is to inquire into the various ways in which methods of economic analysis have come to terms with this threat, either by responding to it or by reinforcing it with further threats; it seeks to ask the question: ‘What has to be changed or sacrificed in order to accommodate Keynesian ideas within standard methods of analysis?’ Its theme will be the variety of ways in which this may be done: three broad types will be presented and the contrasts between them explored.

The first task accordingly is to characterize the method of analysis of that body of theory in opposition to which Keynes presented his own. Very broadly, this method consisted of analyzing markets on the basis of the choices made by individual traders. Thus, the resulting theory operates at two distinct levels—that of individual choice, and that of market phenomena—even though the connection between the two levels may be provided only by an analysis of the choices of a ‘representative’ trader. Moreover, in order to provide a basis for a manageable analysis of market phenomena, the analysis of individual choice has to be of a particularly stereotyped and artificial kind. This method of analysis, using market theory based on choice theory of a type that allows the two levels to be connected, I will refer to as ‘reductionism’, on the grounds that the central idea is the reduction of market phenomena to (stylized) individual choices.

Considerations of tractability impose restrictions on the kind of choice theory on which the market theory can be based: the theory cannot deal with choices in all the idiosyncratic detail in which actors conceive of them, nor in terms of the elusive and wayward manner in which actors make up their minds; stable objectives and well-defined constraints are needed to provide a firm enough foundation for market theory. And just as the choice

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