Thursday, June 12, 2014

Lucas on Keynes

Robert Lucas appears in the history of macroeconomics as the leader of a methodological "revolution" which supplanted the approach, predominant in the postwar era, of aggregate macro models based on Keynes' ideas, with general equilibrium models grounded in the optimizing behavior.  In his keynote address to the 2003 HOPE (History of Political Economy) convention, Lucas reminisced about his training in Keynesian economics as a grad student at Chicago (yes, at Chicago) in the 1960's.  He closes with an appreciative note on what he thinks Keynes was trying to accomplish:
I think that in writing the General Theory, Keynes was viewing himself as a spokesman for a discredited profession. That’s why he doesn’t cite anyone but crazies like Hobson. He knows about Wicksell and all the “classics,” but he is at pains to disassociate his views from theirs, to overemphasize the differences. He’s writing in a situation where people are ready to throw in the towel on capitalism and liberal democracy and go with fascism or corporatism, protectionism, socialist planning. Keynes’s first objective is to say, “Look, there’s got to be a way to respond to depressions that’s consistent with capitalist democracy.” What he hits on is that the government should take some new responsibilities, but the responsibilities are for stabilizing overall spending flows. You don’t have to plan the economy in detail in order to meet this objective. And in that sense, I think for everybody in the postwar period—I’m talking about Keynesians and monetarists both—that’s the agreed-upon view: We should stabilize spending flows, and the question is really one of the details about how best to do it. Friedman’s approach involved slightly less government involvement than a Keynesian approach, but I say slightly.

So I think this was a great political achievement. It gave us a lasting image of what we need economists for. I’ve been talking about the internal mainstream of economics, that’s what we researchers live on, but as a group we have to earn our living by helping people diagnose situations that arise and helping them understand what is going on and what we can do about it. That was Keynes’s whole life. He was a political activist from beginning to end. What he was concerned about when he wrote the General Theory was convincing people that there was a way to deal with the Depression that was forceful and effective but didn’t involve scrapping the capitalist system. Maybe we could have done it without him, but I’m glad we didn’t have to try.
This is consistent with the "Neoclassical Synthesis" view that Keynes himself presaged in chapter 24 of the General Theory, which Brad DeLong discussed on his WCEG blog yesterday and Krugman commented on today (the quote from Lucas makes me wonder if perhaps Lucas and Krugman aren't quite as far apart as they think after all?).

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