What Did Keynes Really Mean?

Roger Farmer writes,

As I have argued now for more than six years, Keynesian economics is not about sticky wages and prices. It is about the inability of a market economy to coordinate on a Pareto efficient steady-state equilibrium.

Thanks to Mark Thoma for the pointer.

This is an old controversy–a “well-squeezed orange,” as Charles Kindleberger described the question of what caused the industrial revolution. In the 1960s, Clower and Leijonhufvud were the spokesmen for Farmer’s view.

The coordination problem also can be given a classical reading, as I do with PSST. However, I totally reject the notion of a “steady-state equilibrium.” The economy is constantly creating new opportunities and destroying old business models. It is in the midst of these dynamic changes that workers become unemployed.

1 thought on “What Did Keynes Really Mean?

  1. “Steady-state equilibrium” is not incompatible with the fact that the economy is constantly creating opportunities and destroying models. A good analogy is self-ionisation of water: water molecules constantly associate and dissociate, ionize and recombine (workers are hired and fired). But from the outside it’s just a glass of water which has some proportion of ions and neutral molecules.

    The analogy begins to break down when you realize that the economy is an open system. Any equilibrium in an open system is a dynamic equilibrium. Energy (including people’s ambitions and views and preferences) and raw materials constantly go into it, and energy and raw materials are consumed and dissipated in a multitude of ways. We learned a lot about open systems since 1930-50-s: open systems are sensitive beasts, they respond to fluctuations, they create dynamic structures which emerge to effectively consume, produce and dissipate – just like your PSST.

    Perhaps it’s fair to say that a lot of Keyensianism and macroeconomics with their concepts of “steady-state equilibriums” is just a bunch of poorly substantiated physics analogies and fantasies, mostly of “a glass of water” type. (well, if you want to do a really advanced macro analysis, you study a mixture of water and some salts and dyes).

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