catallaxy files

catallaxy in technical exile

Mixed messages in the first Boyer Lecture

with 4 comments

This year the Boyer Lectures were delivered by Ian Macfarlane, until recently the governor of the Reserve Bank of Australia. His topic is the ups and downs of the Australian economy since 1945 and the role of the Reserve Bank and Government policy in keeping the economy on track.

His first lecture contains some highly contentious views regarding the instability of modern capitalism and the contribution of  John Maynard Keynes in his 1936 book The General Theory of Employment, Interest and Money.

By the mid-1960s, 20 years into the Golden Age, there was a widespread belief that we had solved the macro-economic problem and found the way to overcome the instability of the modern capitalist economy. Up to and including the Depression of the 1930s, this instability had been accepted as a fact of life.

Accepted as a fact? According to that view “unfettered markets” and “laissez faire” lead to monopoly (and hence exploitation) and also to the trade cycle which generates booms and busts of which the biggest bust of all was the Great Depression of the 1930.

Of course that view is standard in Marxist circles and it became standard in the mainstream of economics after Keynes scored a hit with The General Theory. However it is contested, and it has been contested strongly enough in my view to justify the following claim:

The idea that the Great Depression was caused by “unfettered free markets” has as much credibility as claims that there was no Nazi holocaust that engulfed millions of Jews.

Let the people who believe the “inherent instabilty of free market capitalism” theory provide a list of the nations of  the world where there were unfettered markets during the 1920s and early 1930s.

Moving on to the contribution of Keynes and his general theory.

What was the solution to the macro-economic problem? The answer was Keynesian economics, a policy framework whereby the government ensures that aggregate demand is kept high enough to maintain full employment…In The General Theory of Employment, Interest and Money, first published in 1936, Keynes had provided an explanation of the Depression and a policy prescription on how to overcome it and prevent a recurrence.

To cut a long story short, the Keynesian account of the cause of  mass unemployment overlooked the most obvious reason – the intransigence of the trade union movement with regard to wage claims (against a background of depressed economic activity due to tariffs and other constraints on trade). The prescription was essentially a device to permit inflation to erode real wages as a politically acceptable alternative to reducing nominal wages.

The most obvious reason for the postwar boom was the diversion of human energies away from killing each other and destroying the infrastructure of the world into rebuilding from the ashes of war. The new Keynesians were just lucky to be there at the time. Their policies were coming unstuck around the time that Richard Nixon declared “We are all Keynesians now”.

It seems that Ian Macfarlane studied economics in the mid-1960s, at the high tide of the Keynesian diversion.

There was an enormous feeling of confidence in the economics profession at this time, and young undergraduates were attracted in large number. There was also a sense of idealism. It was felt that with the problems of the developed countries largely solved, it would be easy to apply the same prescription to lift the developing countries out of poverty.

Tell that to the Africans.

The latter part of the first lecture is very instructive in correcting any suggestion that it was the active pursuit of Keynesian demand management that accounted for progress after the war. He nominated the rebuilding in war-ravaged nations, the international control of exchange rates, a sense of constraint (hard work and saving) in the community and the liberalisation of trade. This is all good stuff and it corrects some of the indefensible views put on display in the first part of the lecture. It is not actually clear whether Macfarlane accepts the views that I have challenged, or whether he just articulated them because they used to be the “conventional wisdom”, the accepted mythology of the time.

Written by Admin

December 13, 2006 at 10:19 pm

Posted in Uncategorized

4 Responses

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  1. Rafe

    I have both listened to and read the transcripts (up to the penultimate Lecture 5). Overall, MacFarlane is not seeking to defend the indefensible. Indeed, I think he is trying to place into context the nature of the all encompassing embrace of Keynesianism until the wheels fell off the model- his elucidation of the dynamic instability of the Phillips Curve is a good example of this. To sum up, he is saying “we were all Keynesians then” (by which I mean economic practitioners in business and in government), but freely admits with hindsight that they were wrong. He is not Hayekian, though – I would say standard issue government practitioner, more monetarist than anything.


    December 14, 2006 at 11:56 am

  2. That is consistent with the note that he struck in the second half of the first lecture.

    The mystery is, how did Keynes of the GT manage to catch on in the first place? The General Theory is so confused and there were good economists who disagreed, but others like Robbins apparently went to water completely – I have not been able to understand why.

    The irrationalism of Kuhnian paradigm change is a partial explanation. Hutt also identified a scandalous refusal to engage in reasonable debate on the part of Keynesian fellow travellers.

    The notion that markets had failed is palpably absurd in view of the widespread interference with free trade, not only in goods but also in labour.

    Rafe Champion

    December 14, 2006 at 3:47 pm

  3. Non-clearing labour markets are tautological when they are expressly legislated from clearing.

    Contract rigidities do not cause recessions.

    Mark Hill

    December 14, 2006 at 3:53 pm

  4. I honestly think it was WWII – and the desire to control ones environment, homes fit for heroes etc. Interesting though that it catches on first in Britain, and only mid 1960s in the US, and later still in Germany.

    I don’t think the views of economists per say had much to do with it (except JMK, obviously, who had been the best connected english economist for a long time).

    The GT is sort of confused – but I think many modern macro textbooks are too. The aggregate demand concept was easy enough to communicate, and the downside was if it didn’t work, the government could just vacate the field. Since it gave the appearence of working, it persisted !


    December 14, 2006 at 4:29 pm

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