One of my all-time favorite articles in macroeconomics is Leland Yeager’s 1973 “The Keynesian Diversion.” Studying that article again today, here’s one passage (among several) that stands out:
On rereading the General Theory, I was struck by how much of what Keynes says does resemble the supposedly vulgar Keynesianism of the income-expenditure theory. If Keynes was really a disequilibrium theorist, why did he make so much of the possibility of equilibrium at underemployment? Why did he minimize and practically deny the forces that might conceivably be working, however sluggishly, toward full-employment equilibrium? And why did he stress the possibility of chronic unemployment due to a gap between income and consumption that investment might not be able to fill?…. Keynes is rather clearly worrying about a deep-seated deficiency of demand and not about information deficiencies, discoordination, and the like.
[Leland B. Yeager, “The Keynesian Diversion,” Western Economic Journal, Vol. 11 (June 1973), pp. 150-163; reprinted in Leland B. Yeager, The Fluttering Veil (George A. Selgin, ed.; Indianpolis: Liberty Fund, 1997), pp. 199-216. The quotation above is from pp. 207-209.]
Leland’s assessment of Keynes squares in important ways with Hayek’s assessment (such as this one). Keynes was no brilliant economist, if indeed he can be said to have been an economist at all. He was instead a brilliant public intellectual who knew just enough economics to enable him to transform a decades- (centuries?-)old mistaken understanding of the economy held by business people into “the new economics.”
This mistaken understanding is an understandable result of being a businessperson: the greater is the demand for your product, the better is your business. And the better is your business, the more workers you hire and the more of other inputs you buy – thus making your suppliers’ business prospects better, too.
So the key to an economy’s success is high economy-wide – that is, high aggregate – demand. Q.E.D. All that stuff about relative prices, the complementarities and substitutabilities of different sorts of capital goods, the time-structure of production, the quest by entrepreneurs to profit from finding and then filling unfilled human needs – all that stuff collectively amounts to details whose significance pales against the backdrop of aggregate demand.
Keynes and his followers did indeed divert too many economists away from doing economics by luring them into the vain delusion that the economic problem is really so much simpler than the “classicals” insisted; for Keynesians, aggregate demand is where it’s at! Get aggregate demand right, and those coordination problems and issues that absorbed the attention of most pre-Keynesian economists would take care of themselves – or at least never loom so large as would problems of deficient aggregate demand.
Countless popularizers of this underconsumptionist view had emerged before Keynes and were correctly dismissed by real economists as being poor economists. For example, William Foster and Waddill Catchings pressed on the public an economic ‘theory’ very similar to that which appears in Keynes’s General Theory.
In 1929, Hayek wrote (in German) a long and scathing analysis of Foster’s and Catching’s work. An English-language version of this analysis was published in 1931 in Economica under the title “The ‘Paradox’ of Saving” [and is reprinted as Chapter Two of F.A. Hayek, Contra Keynes and Cambridge (Bruce Caldwell, ed., University of Chicago Press, 1995), pp. 74-120].
It’s easy to be a Keynesian – most business people are, and swarms of pseudo-economists long before Keynes were saying largely the same thing that Keynes himself said in 1936. It is, alas, far more difficult to be a real economist.
