Kenneth Boulding's Reconstruction of Macroeconomics

By Wray, L. Randall | Review of Social Economy, Winter 1997 | Go to article overview

Kenneth Boulding's Reconstruction of Macroeconomics


Wray, L. Randall, Review of Social Economy


Let us agree that Keynesian macroeconomics is a failure. It has not been taught for so long that few living university professors are capable of doing so even if there were a text to use. It was never understood by more than a handful of economists, and probably by even fewer policy-makers. It had never offered a reconciliation of "micro" behavior with "macro" behavior - it lacked "micro foundations." It was never able to dispel the major misconceptions about the operation of the macro-economy that had rendered economists impotent in the face of the Great Depression. And it proved to be just as useless for the formation of policy during the Great Stagflation of the 1970s as pre-Keynesian theory had been during the 1930s. It is not at all surprising that Keynesian macroeconomics is dead and that most economists and policy-makers have returned to theory and policy based on generalizations of the Robinson Crusoe "micro" experience.

Let me be clear. By Keynesian macroeconomics, I do not mean the macroeconomics of Keynes, but rather the bastard version enshrined in the popular textbooks. This version tried to "synthesize" the neoclassical micro theory of allocations of scarce resources among rational, utility-maximizing agents with the part of Keynes's theory that was easily presented through use of the National Income and Product Accounts. The synthesis was never convincing - either at the micro level or at the macro level. As neoclassical economists pointed out, the macro theory - specially that associated with policy recommendations - relied on implausible behavior of individual agents, who, for example, had to be "fooled" into mistaking "nominal" changes for "real" changes, or had to be induced to irrationally accept sticky wages and prices. At the macro level, the bastardization really could never explain why money and nominal values - which should be of almost no consequence, according to the microfoundations - are so ubiquitous and seemingly important in the real world.

The bastard ISLM model dichotomized the real and money sectors such that spending and income could increase without requiring more money - a source of confusion for generations of students who could not see how they could spend more without first receiving more money! The ISLM model also restored the old Treasury View, although in a slightly altered form, that government spending "crowds out" private spending; while the belief was that crowding-out might be acceptable under some economic circumstances, the theory perpetuated the perception that there is something basically evil about government spending. Further, while the bastard version did teach the "paradox of thrift," this was never understood by economists, their students, or policy-makers who continued to argue that thriftiness could increase growth while government deficits soak up savings and thereby reduce growth. Indeed, the bastard version was particularly ill-suited to the study of economic growth, relying on "thriftiness" as the primary source of growth, along with population growth and some other exogenous variables to round out the theory. Finally, the bastard version had no theory of distribution of income at the aggregate level, and was eventually forced to resort to aggregate "pseudo production functions" before abandoning any attempt to explain distribution.

As mentioned above, the bastard version of Keynes attempted to wed national income accounting to Neoclassical theory. We have all been brought up on the National Income and Product Accounts, in which production equals spending equals income and, ignoring for a moment the government and foreign sectors, spending is comprised of consumption and investment, while income equals consumption and saving. By simple algebra, then, investment somewhat magically equals saving. However, the paradox of thrift tells us that we cannot increase saving by reducing consumption, and all of us know how hard it is to convince anyone of this elementary proposition. …

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