Thursday 11 June 2015

The Horror of the Confidence Fairy (and viii)

(From Part vii)
"The impression of Keynes that one gains [reading his interpreters] is that of a Delphic oracle, half-hidden in billowing fumes, mouthing earth-shattering profundities whilst in a senseless trance -- an oracle revered for his powers, to be sure, but not worthy of the same respect as that accorded to the High Priests whose function it is to interpret the revelations." (Axel Leijonhufvud, quoted here)
Studying a minimalist Keynesian model -- the income determination model -- we've seen what role Animal Spirits play among Keynesian infidels: by assumption, it strikes once and with enough power to throw the economy into a recession. But, there's no a priori reason supporting that assumption.

So far, we have considered the contradictions popping up when Keynes, non-ergodicity, Animal Spirits, are allowed to change the scenario above, as the Keynesian literalists demand. The end result, a powerful -- if ironic -- defense of laissez-faire: capitalism may suck big time, but reform/intervention could make things worse, through non-ergodicity.

For those intent on preserving Keynes' legacy at any cost and selling Keynesianism as the way for the Left, the road leading from Keynes to Hayek seems not so much of reconciliation, but of capitulation.


Let's turn our gaze to the other side of the Keynesian religious war: the apostates. Among them -- de facto -- Keynes, non-ergodicity, Animal Spirits no longer reign. That's probably a good thing.

However, while one could suspect apostates regard their pious opponents' faith with little respect, don't expect open admissions of apostasy from them. For reasons we better omit, you won't see many Keynesians ever coming out -- proud and loud -- of the anti-Keynesian closet, and apostates, too, will still pay lip service to Our Lord. (Suffice it to say that there is a strong cultish element in economics in general, particularly evident in Keynesianism -- and, no, Marxists aren't immune, either).

Be that as it may. If one assumes the Confidence Fairy is not powerful enough to derail stabilization policies (as Hicks and certainly most contemporary Keynesians do), one cannot assume Animal Spirits cause recessions, either.

But if Animal Spirits do not cause slumps, well, what does?

Apostates may be able to cure recessions, as claimed, and experience seems to confirm; they may be able to predict the economy's behaviour. But -- at least based on the Master's teachings -- they don't know what caused the disease, in the first place. Beyond generalities about aggregate demand, they have no explanation. In fact, they don't know they don't know.

Deus Ex Machina Man, by Phil Foglio. (source)

They, in other words, lack a theory of crisis. But the search for one -- ironically, too -- could lead these economists -- often considered Centre-Left -- away from a comfortable deus ex machina and into troublesome places:
"For it was Keynes, not Marx, who cracked the code of crisis economics -- who explained how recessions and depressions can happen." (here)
There may -- after all -- be something wrong with capitalism.

It's hard to tell which of his competing crises theories Marx would have supported: he died before clarifying his views. But this passage seems highly suggestive:
"The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit." (here)

The internal inconsistencies of Keynesianism have a way to come back to haunt Keynesians, don't they?

Post Keynesians, the self-appointed alternative, may keep Keynes' thought, but at the cost of Keynesian policies. Mainstream Keynesians may keep Keynesian policies, at the cost of Keynes' thought. (Update: 09-09-2015 see here; yet another update, 19-05-2016, because it's really cool to be proven right)

Which, if any, of those two paths will Keynesians take? Faithfulness to the Master, or Apostasy? Faced with this dilemma, Lord Skidelsky seemed to join mainstream Apostasy, after debating Paul Krugman, a chief apostate. In a supreme irony, apparently Hicks himself moved in the opposite direction, influenced by Paul Davidson.

This may depend on how personally invested one is in Keynes' hero-worship: Keynesians are a diverse bunch.

One option is to ignore the contradictions. This should prove popular: go on about one's business.

Another approach, open to high-profile mainstream Keynesians actively involved in promoting Government intervention, requires discreetly jettisoning Keynes, whenever hounded by the more recalcitrant loyalists:
"One way to answer this is to point out that Keynes said a lot of things, not all consistent with each other. (…)
"But surely we don't want to do economics via textual analysis of the masters. The questions one should ask about any economic approach are whether it helps us understand what's going on, and whether it provides useful guidance for decisions." (here)
Those closer to the classical political economists, particularly Marx and Sraffa, and/or to MMT, should find it easier to distance themselves from the Master (Update: 09-09-2015 see here). Some of them have already started down that path, anyway: the idea that capitalism may have something inherently self-destructive should not be alien to them.

It is those highly visible and vocal heterodox, ideologically and philosophically (some of them, politically) closer to the Austrian School, who may face a more serious challenge. Having built their group identity as alternative in strident opposition to mainstream Keynesians, neoclassicals, and Austrians, and around their strict adherence to the laws of Moses their interventionist version of Keynes' doctrines as theoretical foundation for their reformism, it should be costly for them to admit any inconsistency. For them, this could lead to a serious identity crisis.

And, apart from the contradiction treated here, there is also the issue of Keynes' own attitude towards neoclassicism. Not Kosher, definitely.

In retrospect, it was always doubtful they would have ever gained a significant foothold in academy. Perhaps now it's more a matter of whether they will eventually lose steam and subsist as a kind of fringe group, as so many other economic fads, or simply vanish. However, among the Austrians there are already those who think in terms of Austrian/Keynesian syncretism: keep an eye on this space.

Realistically, while the issues at stake are serious, this is unlikely to result in a paradigm shift against the whole of Keynesianism, although it should come very close to that for some of its sects.


As the Great Recession fades from memory, it's likely that the movement calling for a renewal of economic thinking and education it's already past its peak and changes achieved, if any, should be marginal.

It may be mere coincidence, but the parallel between most of Post Keynesianism and new political pseudo-Left parties product of the crisis, like Syriza, seems striking: too many expectations, too little substance.

While I regret the lost opportunity, seeing the contradictions in what for a time looked like one of the main alternatives, it's hard to say whether that's such a bad thing.

Image Credits:
I found that image on the internet. If readers know for a fact I am infringing anyone's property rights, please leave a comment and, at your discretion, I will either remove the image or provide full credits.

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