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What Did Keynes Explain?

Posted By Don Boudreaux On September 5, 2011 @ 10:53 am In Economics,Myths and Fallacies,Prices,State of Macro,The Economy | Comments Disabled

Here’s a letter to the Washington Post:

Even if everything Lord Keynes [1] wrote about a capitalist economy is right, Nicholas Wapshott is wrong to write about Keynes that “we owe our understanding of how an economy works to him” (“Was Keynes a Keynesian?  In theory. [2]” Sept. 4).

Keynes contributed nothing to that most fundamental analytical tool used by economists still today: supply and demand.  (That analysis was fully formed a generation before Keynes wrote.)  Not surprisingly, then, Keynes added nothing to our understanding of the vital role of prices in allocating resources.  Likewise, he added nothing to our understanding of competition, of the determinants of industrial concentration, or of the function of the entrepreneur.  His contribution to international-trade analysis was minimal, as were his additions to our knowledge of economic history and of economic development.

The claim that “we owe our understanding of how an economy works” to Keynes is like saying that we owe our understanding of the way an automobile works to someone who famously explained only why automobiles sometimes run out of gas and what are the consequences of such a misfortune.  Even if unassailable in every detail, such an explanation isn’t remotely close to being a “general theory” of how the mechanism in question operates.

Sincerely,
Donald J. Boudreaux

Hayek wrote in 1937 [3] that “before we can explain why people commit mistakes, we must first explain why they should ever be right.”  Reasonable people might credit Keynes with better explaining why people commit mistakes, but it is simply absurd to credit Keynes with playing a key role in explaining why and how economies work well enough in the first place ever to break down.

UPDATE (reflecting a comment that I just made to this post): If economics were automotive science, Keynes and the Keynesians can at most be credited with drawing more attention than pre- (or non-) Keynesians gave to the importance of keeping the automobile’s fuel tank filled adequately with gasoline.  Yes, adequate fuel is important.  The car doesn’t run without it.  And Keynes and his followers also offered explanations for why the car’s fuel tank might become dangerously low on gasoline – explanations either regarded as special cases by non-Keynesians, or dismissed by non-Keynesians as wrong.

But even if Keynes’s and his followers’ explanations of why a fuel tank can get too low on fuel, and of what are (some of) the consequences of a fuel tank being too low on fuel, are compelling, such a focus says next to nothing about what makes the engine and transmission work.  It says nothing about what the pistons do and how the pistons work in detail; nothing about how the energy produced by the engine is transformed smoothly into the rotation of the tires; nothing about steering; nothing about carbueration; nothing about braking; nothing even, really, about all the details of the mechanics of ensuring that the fuel is fed into the engine at just the right rate.

That is, even if non-Keynesian automotive engineers said too little (or too much that is mistaken) about the importance of keeping the fuel tank adequately filled with appropriately octaned gasoline – and even if everything Keynesians said about why and how the fuel tank can get too low, and about the consequences of its getting too low, is spot-on correct – the analysis offered by Keynes and his apprentice mechanics is not an explanation of how the car works.  It’s no “general theory” of automotive engineering.

Not all – not even most – stalled or sputtering or herky-jerky or inadequately powerful automobiles can be fixed simply by adding more fuel to the tank.  The problem almost always is something detailed, under the hood, in the ‘micro’mechanics of the engine, transmission, or some other non-fuel-tank part of the car.  Simply creaming “add more fuel!” isn’t good automotive science even though there are situations in which adding more fuel is the correct remedy.

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URLs in this post:

[1] Lord Keynes: http://www.econlib.org/library/Enc/bios/Keynes.html

[2] Was Keynes a Keynesian?  In theory.: http://www.washingtonpost.com/wp-srv/special/opinions/outlook/whats-in-a-name/keynes.html

[3] Hayek wrote in 1937: http://www.econlib.org/library/NPDBooks/Thirlby/bcthLS3.html#Hayek,%20Economics%20and%20Knowledge

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