Keynes – The General Theory of Employment, Interest, and Money
My undergrad macroeconomics teacher was an avowed Keynesian. Most of what he taught was in this book, except in the forms of Marshallian geometric analysis and Samuelsonian algebra. I could have saved 19-year old me a great deal of time and anguish by simply reading Keynes’ original, mostly verbal explanations of his ideas. In fact, that pedagogical experience was one reason I switched my undergrad major from economics to history, despite my much greater enthusiasm for economics. Depending on who teaches intro classes, economic ideas are sometimes taught more clearly outside of economics departments.
People often forget that Keynes worked from the same quantity theory of money framework his rivals Friedman and Hayek relied on—an insight I was never taught in undergrad, thanks in part to poor standard pedagogical practices.
Nearly all economists, regardless of ideology, agree that tinkering with the money supply can induce temporary booms and busts. Where they differ is that for monetarists and other free-market types, the fact that policymakers can mess with the price system does not imply that they should. There are tradeoffs a boom now comes at the price of a bust later. Picking up one part of the economy comes at the cost of dragging down other parts. Moreover, unintended consequences can be unpredictable, and harder to manage than the original problems.
Keynes and many of the economists he has influenced instead work with idealized models of economics and government. Economists, using increasingly sophisticated techniques, are increasingly able to foresee and adapt to changing circumstances and unintended consequences to maintain economic stability. Fiscal and monetary policies will never be perfect, but with careful management they can outperform unmanaged markets. Also in this model, politicians actually listen to economists. Even more fantastically, politicians use their boom-and-bust power in the public interest. They do not use it to influence their electoral prospects, or give favors to rent-seekers.
On the positive side, Keynes’ remarks about animal spirits remain insightful, though underappreciated. Here Keynes shared important common ground with economists from Adam Smith on down to his rough contemporaries such as Philip Wicksteed, Frank Knight, and F.A. Hayek, who all emphasized human psychology in their works over formal modeling.
Keynes’ followers pursued a different path after Paul Samuelson, preferring instead to confine themselves to quantifiable models, and to study Homo economicus rather than Homo sapiens. The old joke about Keynesians being more Keynesian than Keynes ever was is often true. Fortunately, the behavioral economics movement has done much to revive animal spirits in the wake of MIT-Harvard-Princeton’s sterilizing the profession, though many of them forget that human frailties also apply to policymakers and the policies they make.
This is not Keynes’ fault. But his unintentional legacy has harmed economics as a discipline, which has missed out on important insights and discoveries by largely walling itself off from other, less quantitative disciplines for several decades. Keynesian models have also acted as enablers for policymakers eager to hear justifications for things they want to do anyway, and for excuses to forget that can does not always imply ought.