Lord Keynes: A Hayekian Appreciation

by Mario Rizzo

 

No, I haven’t gone crazy. John Maynard Keynes’s economics is not Austrian economics. He and Friedrich Hayek had serious disagreements over economic theory and policy.  I believe that Hayek was largely right in these disagreements. Nevertheless, Keynes was personally kind to Hayek. He found him a place to stay in Cambridge during the Nazi bombing of London. He also had some good things to say about Hayek’s controversial and, at the time, underappreciated book, The Road to Serfdom.

 

But, of course, this is not all. They shared a deep appreciation of the humanistic (for lack of a better word) aspect of economics. In effect, they looked at it as a “philosophical science” – a term that today might be considered a contradiction in terms.

 

A few things have inspired me to write this post. The first is Paul Krugman’s defense against the “accusation” that Keynes did not have a mathematical model. Krugman says, in effect, “Yes, he did and here are the equations.” Krugman is right. And yet the understandable implication that readers might draw is that Keynes would have approved of today’s “advanced” macroeconomics. This is wrong.

 

The second is that Keynes had some genuinely valuable things to say to us today about modeling and the limits of social science.

 

Perhaps, most importantly, I think that a mature intellect is not afraid to face up to the fact that a thinker of Keynes’s genius was not all right or all wrong. We who espouse a different economics need not paint him as some kind of demon to get our points across.

 

With that said, permit me to list some of Keynes’s general points about models and the nature of economics – most of which, probably all of which, Hayekians would approve. I base this statement in part on my reading of Hayek’s The Counter-Revolution of Science.

 

Despite the fact that Keynes’s economics is largely about the interaction of macro-aggregates (Consumption, Investment, etc.), Keynes was always conscious that he was modeling human beings whose behavior could not be entirely captured by a mathematical model. This implied several things.

 

1. Economics is a “moral science.” It deals with introspection and values. But even in its “scientific” manifestation it deals with motives, expectations and psychological uncertainties.

 

“One has to be constantly on guard against treating the material as constant and homogeneous. It is as though the fall of the apple to the ground depended on the apple’s motives, on whether it is worthwhile falling to the ground, and whether the ground wanted the apple to fall, and on the mistaken calculations on the part of the apple as to how far it was from the centre of the earth.” (Keynes, Collected Writings, vol. XIV, p. 300).

 

2. No model provides automatic answers. It must be evaluated, even superseded, by “intuitive” adjustments.

 

“The object of our analysis is, not to provide a machine, or method of blind manipulation, which will furnish an infallible answer, but to provide ourselves with an organized and orderly method of thinking about particular problems; and, after we have reached a provisional conclusion by isolating the complicating factors one by one, we then have to go back on ourselves and allow, as well as we can, for the probable interactions of the factors themselves. This is the nature of economic thinking” (Keynes, General Theory, p.297).

 

He even cautions the reader against his own “symbolic, pseudo-mathematical methods of formalizing a system of economic analysis…” in the General Theory (Id.)

 

3. Thus even when the economist is not making policy recommendation but is simply seeking to understand the world, the “art of political economy” (his father, John Neville Keynes’s expression) is at work.

 

“Economics is a science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world” (Keynes, Collected Writings, XIV, 296).

 

4. “Relevance” does not simply mean consistency with statistical series. Keynes was interested in what Wilhelm Dilthey and other philosophers called “verstehen” or understanding social phenomena in terms of the actions of human beings (See Anna M. Carebelli, On Keynes’s Method, p. 158). Keynes would have had less trouble than Hayek, however, in looking at this behavior in aggregate terms. (And yet the real issue here was which aggregates are appropriate. Hayek himself said he was not opposed to all aggregation.)

 

I realize that there are important differences, even at this abstract level. I further realize that there are some traditions in Austrian economics that would resist conceding even this much. But those are not my intellectual traditions.

 

I should like to close on a curious note. With respect to the above considerations, Hayekians are closer to Keynes than to many schools of macroeconomics, like the New Classical School, that have been associated with “free markets” and relative laissez-faire policy. Such are the puzzles of intellectual life.