“Peter Howitt’s Keynesian Recovery and Keynes: an assessment”

Abstract

This article examines Peter Howitt’s contribution to non-Walrasian economics in relation to his account of Keynes’ theoretical apparatus as developed in his General Theory. We address the following issues: first, what was, according to Howitt, the central message in Keynes’ General Theory? Second, how does Howitt assess the Keynesian legacy, from the initial works by Patinkin related to multiple equilibria models through to the disequilibrium macroeconomics of the 1970s? Third, how far do Howitt’s own theoretical findings connect with Keynes’ claims about the functioning of a decentralised market economy?

Keywords:

• Non-Walrasian macro-economics
• Keynes
• disequilibrium
• general equilibrium

JEL classification:

• B22
• B31
• E12

Acknowledgements

I am very grateful to the participants in the GREDEG seminar (Université Côte d’Azur) on 12 May 2022, as well as to the commentators of a version presented at the ESHET conference in Padua in June 2022, and to the participants in the workshop in honour of Peter Howitt held at the Université Côte d’Azur on 9 and 10 September 2022. Above all, I am extremely indebted to Jean-Luc Gaffard (Université Côte d'Azur) to David Laidler (Western University) and to two anonymous reviewers for their comments and criticisms; any shortcomings remain, of course, my responsibility

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Howitt’s 1986 lecture concludes as follows: “There is a certain irony that I cannot resist pointing out. Eight years ago Lucas and Sargent were writing stridently about the death of Keynesian economics. There is no doubt that the central message of their writings was to deny the central message of the General Theory. But more recently their tone has changed. […] If I am right, then this new classical methodology may turn out to be the mainspring of a Keynesian recovery.”

2 Laidler (2000) deplores the absence of diversity of opinion and intellectual tolerance during the 1980s at Western Ontario: “Western is a big department (close to fifty positions at that time) in a rather small country, and it seemed to me, as it still does, that it needed to accommodate considerable diversity of viewpoint and approach if it was to do its job properly; more, certainly, than in any American department needs to, for any department is ‘small’ relative to the size of the economics profession as a whole, which can and does provide for diversity among, rather than within, individual departments. However, my view that academic heaven was unlikely to be found in, shall we say, a department just like Rochester but three times the size, was not widely shared at Western and, inevitably, it was the majority who carried the day. At Berkeley I had been a bit discomfited by the way in which academic seriousness sometimes turned out into a humourless earnestness; now at Western, particularly among some of the younger people whom I myself had helped hire and promote, that same seriousness bred self-righteous intolerance. In the view of some of them, anyone who doubted the verities of new-classical economics was not merely misguided, but professionally incompetent” (Laidler 2000, 346–47).

3 This point was initially made by Leontieff (1947).

4 And “disutility must be here understood to cover every kind of reason which might lead a man, or a body of men, to withhold their labour rather than accept a wage which had to them a utility below a certain minimum” (Keynes 1936, 6).

5 This is not to deny the major differences between the two. While Modigliani (1944) explicitly introduced the labour market into his analysis, his main interest was in the monetary aspects of unemployment (Hagemann 2017, 956–57). It is true that Modigliani (1944) acknowledged that Keynes’ overall system relied on the assumption of perfectly rigid wages. But the assumption was made in Modigliani as “a convenient analytical device and a realistic assumption to show the working of a monetary economy in which real variables depend on the quantity of money” as well as a stability condition (Rancan 2017, 143). On the other hand, Patinkin denied that involuntary unemployment à la Keynes originates in perfectly sticky money wages. For Patinkin, “[…] if the General Theory were to be interpreted as being based on the assumption of absolute rigidity of money wages, then there would be no novelty to his message: for the fact that such a rigidity can generate unemployment was a commonplace of classical economics” (Patinkin 1976, 101; emphasis added).

For an analysis of the controversy between Modigliani and Patinkin on the issue of the wage-employment relationship, see Rancan (2017).

6 See for example Lucas (1978) who initiated the debate, and Shapiro and Stiglitz (1984) or Lindbeck and Snower (1988) for tentative answers.

7 Unfortunately, as was recently noted again by Marglin (2021) in Chapter 6 of his monumental Raising Keynes. A Twenty-First Century General Theory, the dynamic adjustment process is not fully elaborated in the General Theory Chapter 19 when the assumption of a fixed money wage is finally dropped (Marglin 2021, 192–93).

8 “This terminology suggests that the key to the distinction lies in some difference in the way two different types of unemployment are perceived by workers. Now in the first place the distinction we are after concerns sources of unemployment, not differentiated types” (Lucas 1981, 241).

9 Such a statement appears as a reminiscence of Clower and Leijonhufvud (1975).

10 See for example the paper by Howitt and Clower (2000), which formalize with a agent-based model the argument developed by Clower during the 1970s of the network externality guarantying the emergence of a universal medium of exchange.

11 For a appraisal of Leijonhufvud’s achievements by Howitt, see Howitt (2002).

12 The reading of Clower and Leijonhufvud’s paper dated 1975 shows the extent to which their own research programme departed from Barro and Grossman. The central question they identify in Keynes is the following: “is the existing economic system, in any significant sense, self-adjusting” (Clower and Leijonhufvud 1975, 182). To deal with what they call the ‘coordination issue’ a metaphorical “central supermarket” is designed, through which a “central trade coordinator” allows pairwise trade. Individual economic agent’s decisions are coordinated through price variations (trading occurring possibly at false prices), these price adjustments being “governed by reasoned and intelligent decisions of the trade coordinator” (p. 185), with quantity adjustment possibly superimposed on the latter. In such an economic system, coordination failures and corridor effects can appear with the use of money, possibly because of an “irrational passion for cash” (p. 187). The argument of the paper is verbal, and it is unfortunate that the ‘central supermarket’ is not modelled. Yet, it makes clear that Clower and Leijonhufvud parted company with Barro and Grossman regarding the non-market-clearing approach to macroeconomics.

13 For “an insistence on continuously clearing markets can eliminate discussion of empirical interesting, not to mention potentially accurate, predictions, and hence is not a scientifically neutral method of analysis” (Laidler this issue, 13).

14 As is well known, according to this parable an economy that produces and consumes only bananas will undoubtedly collapse in the event of a “thrift campaign” (Keynes 1930a, 158): The overproduction of bananas implies a fall in their price, and thus windfall losses. This will lead to cuts in production and in wages, but windfall losses will persist as long as savings exceeds investment.

“Thus there will be no position of equilibrium until either (a) all production ceases and the entire population starves to death; or (b) the thrift campaign is called off or peters out as a result of the growing poverty; or (c) investment is stimulated by some means or another so that its cost no longer lags behind the rate of savings.” (Keynes 1930a, 160).

15 Yet “the analysis is less clear cut concerning the long-run version of Keynes’s second proposition, because raising the flexibility of wages can cause shocks to be dampened more quickly, which tends to reduce the stationary variance of employment” (Howitt [1986b] 1990, 148).