Keynesianism in One Country

Lester Thurow

Godley and Cripps devote their first seven seven pages to acknowledging the storms that are raging around the subject of macroeconomics. Deteriorating economic performances, and monetarists, ‘converted’ governments ‘to the idea that it was impossible for them to control output and unemployment. All they could do, the new story went, was create conditions (including the elimination of inflation) in which enterprise could flourish.’ They then spend the next 284 pages building a formal algebraic macro-economic model that will sail out of the storms of intellectual confusion. Finally they reach the safety of a two-page epilogue: ‘Our claim,’ they say there, ‘is to have provided a framework for an orderly analysis of whole economic systems evolving through time.’ They continue:

This logical framework is neither ‘monetarist’ nor ‘Keynesian’; it is non-denominational both in theoretical and political terms ... The most important result is, we believe, to re-establish the quintessentially Keynesian principle of effective demand as the determinant of real output and employment. In a closed economy real demand itself is determined, with quite a short time-lag, by fiscal policy; the effects of monetary (as distinct from fiscal) policy are transitory. The rate of inflation is, largely indeterminate in terms of economic forces and, although it has a dynamic of its own, is likely to be rather unstable.

Personally I agree with the nature of the building job upon which they embark and that it is a safe port which they eventually reach, but unfortunately their journey will only be persuasive to those of us who have already reached the same destination by independent means of transportation.

No formal model can accomplish what they seek to accomplish with theirs. Models can be built with behavioural hypotheses that lead to the Keynesian result, but models can also be built with hypotheses that do not lead to the Keynesian result. Godley and Cripps may see their model as a ‘non-denominational’ model, but every monetarist or rational-expectationist is going to see it as a Keynesian economic model. Keynesian assumptions in; Keynesian results out.

The point is that the existence of a financial sector does not, as Godley and Cripps seem to think, make a non-denominational, non-Keynesian model. One could agree to money-supply rather than interest-rate targets at central banks without giving up one’s status as a card-carrying Keynesian. The heart of the difference between Keynesians and monetarists is not the role of money but beliefs as to whether the economy is self-regulating and will, if left alone, quickly return to full employment. For Keynesians, aggregate demand is not self-regulating but must be corrected with either monetary or fiscal policies. For the monetarists, no such need exists. But both sides can build formal models consistent with their positions.

While the formal Godley-Cripps model is a very good pedagogical tool for teaching students the nature of a Keynesian economy which includes monetary and financial sectors, a formal model, by its very nature, cannot be a proof that the Keynesian conclusions are true. Those who are unconvinced to start with will remain unconvinced. Those who are uncertain will remain uncertain. For Godley and Cripps to have proved that their conclusions were right they would have had to have proved that their behavioural hypotheses were the right ones and that the behavioural hypotheses of the monetarists and the rational-expectationists are the wrong ones. And this they do not attempt to do. As a result, there is a certain lack of relevance in their effort. They are fighting the good fight, but on the wrong front.

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