I’ve mentioned before that I’ve attempted The General Theory on several occasions but have never really “got” it. Knowing Keynes was a smart guy and he basically founded the field I research in, I assume the problem is me not him. Really.
Judge Posner wrote a “Nixon in China” summary of the book which is quite good. Posner says the fundamental tenants of Keynes’ thought are ((Also, he mentions the book’s most important historical context was the persistent unemployment in the UK, not the Great Depression. Embarrassingly, this is the first I’ve heard of that.)):
- Consumption spending is more important than investment spending
- Hording leads to the paradox of thrift
- Animal spirits and Knightian uncertainty
Consumption is more important than investment spending, except, of course, investment spending IS consumption spending only in the future. I’m not sure what to make of this concern in the context of modern dynamic models where a trade-off is made between consuming today and consuming tomorrow. And the idea that consumption drives growth is alien to me in light of all the research in growth that’s happened since Keynes. I guess we can thank him for being the first to tell us to keep our eyes on the ball. Thanks dude!
The paradox of thrift is interesting for two reasons. First, its a case were micro-based thinking gives you wrong answers when you aggregate up. Saving is good unless everyone does it, then its bad and counter-productive. Learning this paradox gives one good instincts about the macroeconomy: the sum doesn’t look like its parts. Second, the paradox is only an issue when prices can’t adjust and monetary policy is ineffective. Thanks again Lord Keynes!
Now for some good ‘ol psychology. Posner says Keynes says investors have “animal spirits” and he, apparently, goes on to commit a fallacy of composition of his own. Its true that investors are frightenable creatures, manic depressive and dumb. I kid. But even if we take this investor psychology as given, its not obvious that it matters in aggregate. Unless these mood swings are highly correlated, crazy investor A’s zig will be matched by crazy investor B’s zag. Just to repeat myself: it is not enough to identify systematic individual psychological biases. You have to show those biases change over the business cycle and those changes are heavily correlated.
Also, I wonder what is meant by animal spirits exactly. Did Keynes mean investors respond to interest rates? That’s uncontroversial. Does he mean risk preferences are volatile? In which case, how important is this effect? This is an empirical question; one needs to model “animal spirits” and quantify their importance.
This leads to my final point. Keynes had tons of insight into the macroeconomy. For that, thanks dude! Its not clear, though, how these insights fit together and its doubly uncertain how they interact with his policy prescriptions. For example, Russ Roberts wonders how animal spirits are impacted by large deficit spending. The only way to answer this question would be to model these effects and see if that model generates data that looks like data generated by the actual economy.
To me the difference between old style, Keynes-influenced macroeconomics and modern macro is this empirical discipline ((This is a nice way of saying THE SALT/FRESH WATER “DEBATE” IS MOOT!!!)). As I’ve said before, its not enough to come up with plausible mechanisms, you have to show how those mechanisms generate the data. Almost every mechanism that the critics of modern macro have come up with, at least the ones I’m aware of, has been tested and has been found to be quantitatively irrelevant.
Posner, and most everyone else, doesn’t like the stories modern macro tells (i.e. exogenous technology and monetary shocks drive business cycles). He likes the stories Keynes told. For what ever reason, quantitative relevance isn’t an important criterion for folks to like a story.