Why I Will Never Be a Keynesian
Epstein, Richard A., Harvard Journal of Law & Public Policy
Necessity is both the mother of invention and the source of self-reflection. Nowhere is the latter more true than in social and economic affairs, where massive social and economic dislocations rightly prompt leading theorists to reexamine their fundamental beliefs in trying to figure out, as Paul Krugman framed the question: "Just what went wrong?" (1) Unfortunately, these bouts of self-doubt have led many prominent thinkers to turn their attention back to the leading economic thinker during a past depression, John Maynard Keynes, and his most famous tome--book does not quite do--The General Theory of Employment, Interest and Money. (2) The tome appeared in 1936, during the depths of the Great Depression that had been running for seven years and counting. Clearly the book did not cause the Depression, but it did not do anything to abate it either. That only happened with the onset of a far greater tragedy, the Second World War.
I confess that in my youth I purchased a copy of Keynes's masterpiece. Dutifully, I sought to read it several times, only to give up in frustration while trying to wade through its turgid prose. Fortunately, it is not necessary to plow through Keynes in order to get some sense of his basic position. Today's skillful expositors, including my colleague Judge Richard A. Posner, have provided lucid explanations of the Keynesian position. (3) Judge Posner's fascination with Keynes has led to a belated confession of past sins, chief of which is an excessive devotion to Chicago-type economics on both the macro and the micro levels. Thus, he tellingly writes: "Economists may have forgotten The General Theory and moved on, but economics has not outgrown it, or the informal mode of argument that it exemplifies, which can illuminate nooks and crannies that are closed to mathematics." (4) I yield to no one in the insistence that critical institutional detail often reveals far more than mathematical equations about the operation of the economic system. But that one point alone is consistent with the work of such theorists as Ronald Coase and such institutionalists as Douglass North, neither of whom is steeped in the occult mathematical arts.
Try as I may, however, I cannot yield to the same level of open-mindedness on this subject that Posner expresses. I come away from reading the new Keynesians more convinced than ever that they lack a coherent diagnosis of the origins and depths of the Depression. By implication, they lack a sensible program to shake the current economic malaise. President Barack Obama may be in the thrall of Keynesian economics, or perhaps just captured by the labor unions. But either way, any move to a larger governmental role in planning or stimulating the economy is likely to make the current recession deeper and the recovery slower than they ought to be.
To develop this thesis, I shall proceed in two parts. Part I deals with those issues that the Keynesians either forgot or swept under the table. In this context, I address not only the distinctive features in the current economic situation, but also those structural from the 1930s, many of which have still not run their course today. My point here is not that Keynes or modern Keynesians necessarily support these dangerous precedents. It is that they have nothing distinctive to contribute to their resolution that is not already understood within the standard neoclassical framework.
Part II takes a closer look at the inner workings of the theory to explain why any centralized effort to rejigger aggregate levels of consumption or savings will only make the task of economic recovery more perilous. There is no reason to try to establish some collective priority of one type of behavior over the other. The key move is to eliminate waste so as to allow both savings and consumption to expand, without trying at the center to find what Robert Nozick rightly called "patterned principles" (5)--an effort that always turns out to misfire. …