New Keynesians are a variant of old monetarism. They are grappling
with the same macroeconomic questions. Why does the economy experience extended
periods of disequilibria? One New Keynesian answer, for example, is sticky
nominal price and real wages. Despite a newly proposed answers, the question itself is not a
Keynesian question. This brings me to the problem that
Simon Wren-Lewis at
Mostly Macro presents.
When it comes to macroeconomic policy, and keeping to the
different language idea, the only significant division I see is between the
mainstream macro practiced by most economists, including those in most central
banks, and anti-Keynesians. By anti-Keynesian I mean those who deny the
potential for aggregate demand to influence output and unemployment in the
short term. [2] Why do I use the term anti-Keynesian rather than, say, New
Classical? Partly because New Keynesian economics essentially just augments New
Classical macroeconomics with sticky prices. But also because as far as I can
see what holds anti-Keynesians together isn’t some coherent and realistic view
of the world, but instead a dislike of what
taking aggregate demand seriously implies.
He mentions another division, that of mainstream and
heterodox, but this division appears to be swallowed by this [Mainstream] Keynesian/Anti-Keynesian
divide that Simon posits.
Generalizations are troublesome. This one is especially
troublesome because it obscures the origins of the arguments that New
Keynesians grapple with. It also suggests that Wren-Lewis either ignores or misinterprets the history of economic thought. If New Keynesians have abandoned the Old Keynesian position
on fiscal policy (it might be more accurate to say that they let the issue fade
into the background), then they are, as Leland Yeager points out in “New
Keynesians and Old Monetarists”, actually Old Monetarists. Two cases in intellectual history will suffice to
make the point.
In a recent post, I presented an argument between Ralph
Hawtrey and John Maynard Keynes where Keynes questioned the efficacy of monetary
policy in regard to high unemployment. This was an ongoing debate between Hawtrey
and Keynes. It did not only appear at the Macmillan Commission. Hawtrey
dedicated “Public Expenditures and Trade Depression” (1933) to confronting this
issue. In response to Keynes proposition that monetary policy can be impotent,
Hawtrey wrote
But to a great extent their [the central bank’s] purchases
of securities will result merely in the investment market paying off advances,
so that the desired increase in the banks' assets is offset. If the banks
persist in buying securities beyond the point at which the indebtedness of the
investment market has been reduced to a minimum, the result will be a
disproportionate rise in the prices of gilt-edged securities. There will thus
be very great pressure upon the banks to find additional borrowers, and, in
view of what I have said above as to the intermittent and partial character of
the pessimism which seems to dominate markets, I should contend that there is good
reason to expect that the borrowers would be forthcoming
Hawtrey accepted that the markets do not immediately adjust
to aggregate demand shocks and argued that, given an institutional arrangement
where central banks influence the money stock, an expansion via open-market
purchases is sufficient to offset negative aggregate demand shocks due to a
credit contraction. He also doubted the efficacy of fiscal policy. He was not a New Keynesian.
And consider also Herbert J. Davenport, who Yeager quotes
in the above-mentioned piece.
Goods and services exchange for each other through the
intermediary of money, for which an excess demand may sometimes develop. ‘The
halfway house become a house of stopping.’ The problem is ‘withdrawal of a
large part of the money supply at the existing level of prices; it is a change
in the entire demand schedule of goods.’ (290) [internal quote from Davidson]
Yeager continues on the same page,
Supplies of bank account money and bank credit typically shrink
at the stage of downturn into depression. A scramble for base money both by
banks’ customers and by banks trying to fortify their imperiled reserves
enters into Davenport’s story.
In this presentation, a negative aggregate demand shock initiated by a credit contraction occurs endogenously! Davenport accepts that economies do not immediately re-equilibrate after a demand
shock. According to Yeager, Davenport wrote this in 1913, so he can hardly be
considered a New Keynesian. No, this was the status-quo of pre-Keynesian arguments concerning the business cycle. Most theories from the time period implicitly
concerned themselves with upward sloping short run aggregate demand supply curves, though they did not point this out explicitly. Note that this was also the case with Hawtrey's earlier work, Good
Trade and Bad, which was written in 1913.
The short-run aggregate supply curve was not purely a discovery by Keynes, so can we stop deluding ourselves and just admit
that, except for the New Classicals, “we’re all monetarists now”?
I think that it works better.
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