Keynesian Flavours

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Below, I am excerpting an excellent post by "Lord Keynes" on the different flavours of Keynesianism that have developed, arguably, since the late 1950s. I would tend to agree that the Neoclassical Synthesis Keynesians and the New Keynesians are deviating to such an extent from the spirit of Keynes's work that they cannot be credibly regraded as Keynesians.

The early bastardisation of Keynesian doctrine (Joan Robinson) is signficiant in explaining the victory of neoclassical thinking in the policy debate, as it has unfolded since the late 1970s, especially the merging of "progressive" economics with and its subordination under the neoclassical approach, and the consequential "neoliberalisation" of large parts of the left, especially the politically effective cohorts, except those who have given up economics altogether, replacing it with a green mythology denouncing rational economic conduct in a modern industrialised world.

I shall confine my brief comments to (I.) pointing to the anti-open-border position held by progressives in the Keynesian tradition, and (II.) explaining the three axioms whose rejection demarcates Keynesians from those only Keynesian by name.

I.

Writes "Lord Keynes":

The Old Left before the 1960s was, generally speaking, strongly opposed to Third World mass immigration. Open borders and mass immigration are very much part of free market capitalism, and, if anything, the “authentic” (if there is such a thing) non-Marxist socialist or Social Democratic attitude to open borders and unchecked mass immigration should be opposition to it, not support for it. 

II.

Now, more on different claims to being the rightful heirs to Keynes. From a Post-Keynesian perspective, the illegtimate "heirs" remain wedded to classical and neoclassical economics in adhering to three axioms that Keynes had rejected:

(1) the gross substitution axiom — which wrongly, from a Keynesian point of view, implies that all commodities are perfect substitutes for one another in a sense that makes it possible to equilibrate supply and demand so as to attain an optimal equilibrium no matter what kind of tradable objects are involved, including money, or near-money assets. But the increased demand for money type of assets cannot absord the employment lost in areas of production economically damaged by lower demand, notably demand diverted to liquidity-ensuring assets ( = money and near-money).

(2) the neutrality of money axiom — which wrongly, from a Keynesian point of view, implies that money cannot act as an economic factor sui generis, and, in particular, become a means that upsets the equilibriating process or ensures suboptimal equilibria such as an equilibrium at high levels of unemployment.

(3) the axiom of an ergodic economic world — which wrongly, from a Keynesian point of view, implies that the future can be correctely prognosticated from data recording the past and the present. Keynes world is non-ergodic, i.e. uncertain with respect to future events. The future is (in large measure and vital aspects) not probabilistic, it cannot be deduced from probabilities based on recorded history.

Writes "Lord Keynes":

 (1) The post-WWII Neoclassical Synthesis Keynesians (= Neo-Keynesians / hydraulic Keynesians / bastard Keynesians / Hicksian Keynesians).
In the aftermath of the Second World War, American economics was reformed by number of economists who were influenced by Keynes. However, partly in the environment of McCarthyism and partly through their own re-interpretation of Keynes (as well as the role of the Canadian economist Robert Bryce in spreading a flawed understanding of Keynes’ theories in the US), Paul Samuelson and Robert M. Solow diluted Keynes’s work by joining it with neoclassical economics (Davidson 2010: 247). Lorie Tarshis, the Canadian student of Keynes, had written a fairly good textbook summary of Keynes’s General Theory for American universities in the 1940s, but the book was attacked by conservatives who regarded it as inspired by communism, and in particular William F. Buckley denounced the book in his God and Man at Yale (1951). Consequently, a version of Keynesianism that used neoclassical microeconomics to justify general Keynesian macroeconomic policies was adopted as the orthodoxy in America, principally through the work of Paul Samuelson and Robert M. Solow, as well as the IS/LM model of the British neoclassical John Hicks (who worked at Oxford university). Hicks, Solow and Samuelson were influenced by neoclassical Walrasian general equilibrium theory.

Paul Samuelson coined the expression “neoclassical synthesis” to refer to the new theory that blended Keynesianism with neoclassical microeconomics. The “neoclassical synthesis Keynesians” assumed that involuntary unemployment was only due to inflexible wages and prices, and accepted the three neoclassical axioms of (1) neutral money, (2) gross substitution and (3) the ergodicity of the future, contrary to Keynes’s General Theory. Because of its departure from Keynes’s ideas, Joan Robinson labelled the neoclassical synthesis as “bastard Keynesianism” (Lodewijks 2003: 25; for the history of Keynesian policy in the US, see Turgeon 1996). This largely American version of Keynesianism was therefore open to theoretical attacks by monetarists and New Classicals in the 1970s, and today there are not many neoclassical synthesis Keynesians left.

Owing to their flawed neoclassical theory, the neoclassical synthesis Keynesians had difficulties explaining and dealing with stagflation, and were discredited in the 1970s. Many morphed into “New Keynesians,” and those who did not (e.g., James Tobin) came to be called “Old Keynesians.” Some well known neoclassical synthesis Keynesians were John R. Hicks (1904–1989), Frank Hahn, Abba P. Lerner, William J. Baumol, Franco Modigliani, Paul A. Samuelson, Robert Eisner, Walter W. Heller and Robert M. Solow. Notably, John R. Hicks actually renounced the IS-LM model (and the neoclassical synthesis) in the early 1980s and came to associate himself with the Post Keynesian school (Hicks 1980–1981).

(2) New Keynesians.
The New Keynesians emerged in the 1980s and are even further from Keynes’ theory than the neoclassical synthesis Keynesians. New Keynesians are one of the two main schools of mainstream macroeconomics today. The “new macroeconomic consensus” is essentially a mix of New Classical and New Keynesian theory, but the “Keynesianism” of the latter is so watered down that it hardly even deserves that name. In the wake of the monetarist and New Classical assault on neoclassical synthesis Keynesianism, New Keynesianism emerged by providing a more consistent neoclassical microeconomic foundation for Keynesian macroeconomics. New Keynesians are essentially neoclassicals who believe that monetary intervention is the main instrument of economic policy, although there are different strands of opinion within New Keynesian analysis, most notably that of Joseph Stiglitz (King 2002: 239). Some have recognised the usefulness of fiscal policy, but others are actually sceptical about fiscal intervention (Snowdon and Vane 2005: 364). For example, in some modern “New Keynesian” textbooks, one finds a loanable funds theory, Say’s law, opposition to budget deficits (on the grounds that they crowd out private investment and produce higher interest rates), the quantity theory of money, monetarist inflation targeting, and no discussion of aggregate demand – a complete and utter travesty of Keynes’s thinking (Lodewijks 2003: 29).

New Keynesians use rational expectations and assume that the cause of involuntary unemployment is sticky prices and wages, but also assume neutral money in the long run and Say’s law as well (King 2002: 233–239). Prominent New Keynesian include Joseph E. Stiglitz, Olivier Blanchard, John B. Taylor, David H. Romer, Christina D. Romer, Bradford DeLong, and N. Gregory Mankiw. Paul Krugman is a New Keynesian, but the question of how far Krugman has deviated from New Keynesianism or Neoclassical Synthesis Keynesianism is controversial.

(3) Post Keynesians.
Post Keynesians are the true heirs to Keynes and have built upon his work. The forebears of the Post Keynesian school were the Cambridge associates and students of Keynes who rejected the neoclassical synthesis. These were Joan Robinson (1903–1983), Richard F. Kahn (1905–1989), E. Austin G. Robinson (1897-1993), and Nicholas Kaldor (1908–1986). After WWII, Cambridge Keynesianism and Post Keynesianism were influential in the UK, Canada, continental Europe, and Australia (King 2002: 141–159), but went into decline after 1980, as neoclassical economics once again became mainstream economic theory. It should be noted that both the Sraffians (or Neo-Ricardians) and Kaleckians emerged as economic schools strongly associated with Post Keynesianism after 1945, but today they are usually excluded from the school, and certainly from the “narrow tent” definition of Post Keynesianism as advocated by Paul Davidson (Davidson 2003–2004: 247–248).

Paul Davidson (2003-2004: 251) dates the emergence of Post Keynesianism as a distinct school to the publication of Sidney Weintraub’s book An Approach to the Theory of Income Distribution (1958). Post Keynesians emphasise Keynes’ principle of effective demand and the fundamental role that liquidity preference plays in market economies. Post Keynesians also reject the three axioms of neoclassical economics, which are as follows:

(1) the gross substitution axiom;

(2) the neutrality of money axiom, and

(3) the axiom of an ergodic economic world.

None of these axioms is correct. They are simply not an accurate description of the real world characteristics of modern capitalist economies. In reality, money is never neutral, non-reproducible financial assets are not gross substitutes for commodities, and we face a fundamentally non-ergodic future.

Post Keynesians also emphasise liquidity preference theory and its role in causing involuntary unemployment. The essence of this is that increasing demand for liquid assets (money and financial assets) will not lead to demand for goods and services. Shifts in liquidity preference can cause long-run involuntary unemployment, since, in the face of fundamental uncertainty about the future, investment in commodity production can become unstable (Barkley Rosser 2001: 560).

The source.