Keynes’s Innocence of Microeconomics

by Mario Rizzo  

I was recently accused in a private email by a very smart economic journalist of not knowing the difference between macro and microeconomics. At first, this got me quite annoyed. But then I thought more calmly about why Keynes rarely talked about issues relating to the efficient allocation of scarce resources. This is not simply a doctrine-historical matter. It is intimately connected to his views of macroeconomic policy. It might also be informative to those modern-day “Keynesians” who retain his policy vision but do not know how, at least, he grounded it.


First, Keynes believed that with proper government (or “quasi-government”) long-run management of investment, the long-run expectations of agents could be stabilized. Thus the marginal efficiency of capital (that is, investors’ expectations of the return to capital) would not jump around all over the place. It would also ensure lower long-term interest rates by reducing needless uncertainty. Keynes was convinced that by the day of “our grandchildren” (today?) this kind of low interest policy would ensure that the marginal efficiency of capital would be driven down to zero. Capital would no longer be scarce. But even in Keynes’s day, as he insisted to Hayek, Keynes believed that scarcity mattered much less than ever before.


Second, and related to the first point, Keynes believed that the money measure of value (that is, willingness to pay) had become inappropriate in a modern advanced economy. As he put it on the BBC in April, 1942:


Where we are using up resources [as in public building programs], do not let us submit to the vile doctrine of the nineteenth century that every enterprise must justify itself in pounds, shillings and pence of cash income, with no other denominator of value but this. I should like to see that war memorials of this tragic struggle take the shape of an enrichment of the civic life of every great centre of population. Why should we not set aside, let us say, £ 50 millions a year for the next twenty years…above all perhaps, to provide a local centre of refreshment and entertainment with an ample theatre, a concert hall, a dance hall, a gallery, a British restaurant, canteens, cafes, and so forth. Assuredly we can afford this and much more. Anything we can actually do we can afford. Once it is done, it is there. Nothing can take it from us. We are immeasurably richer than our predecessors. It is not evident that some sophistry, some fallacy, governs our collective action if we are forced to be so much meaner than they in the embellishments of life?  (Keynes, Collected Works, vol. XXVII, p. 270)


Re: “Anything we can actually do we can afford.”  The rationale here is that anything we actually do will be done only with resources that have a very low opportunity cost because of the idleness of resources. Of course, there are many conceivable alternative uses that are superior to idleness. So there is a possibly large opportunity cost to the decisionmaker after all. What means does Keynes have to determine that building State-sponsored theaters and such exceeds the true opportunity cost?  In the absence of market employment of these specific resources, he obviously thinks anything is better than idleness – so why not? So much for serious economic calculation.


Re: “…do not let us submit to the vile doctrine of the nineteenth century that every enterprise must justify itself in pounds…”  Before the reader thinks that Keynes is simply thinking of public goods and such, I should point out that Keynes held a normative theory of value derived from the philosopher G.E. Moore called “ideal utilitarianism.” This is the view that there are certain mental states of intrinsic value such as the appreciation of beauty. So the “vile doctrine of the nineteenth century” is to be viewed in this light. Intrinsic values, like local centers of refreshment and entertainment, trump pounds and shillings. Taken seriously, the notion of intrinsic value makes economic calculation unnecessary.



12 thoughts on “Keynes’s Innocence of Microeconomics

  1. This is probably the best post that I have read in this blog.

    Keynes practically denies everything that modern economics (be it austrian or mathematical economics) is all about. He was one heterodox economist that influenced the entire profession, I think it is impressive to notice that the most famous economist of the 20th century was fundamentally against rational choice theory.

    “Taken seriously, the notion of intrinsic value makes economic calculation unnecessary.”

    This notion of intrinsic value has any relationship with the labor theory of value (value is something objective that exists beyond the valuations of individuals)?

  2. Excellent comment, though maybe avertion rather than innocence would be a more proper title.

    All ingenious intellectual artifacts and rationalisations aside, the simple truth that probably only an infinitely small number of economists would accept is that Keynes was, at the end of the day, a poet – a poet in prose, a poet of his age, of the interbellum period, dreaming like many thers of a new world and new Jerusalem…

    It’s unfortunate that your point was not understood, maybe these passages Keynes wrote in 1933 will help to make it more explicit :

    I have become convinced that the retention of the structure of private enterprise is incompatible with that degree of material well-being to which our technical advancement entitles us, unless the rate of interest falls to a much lower figure than is likely to come about by natural forces operating on the old lines. Indeed, the transformation of society, which I preferably envisage, may require a reduction in the rate of interest towards vanishing point within the next thirty years. But under a system by which the rate of interest finds a uniform level, after allowing for risk and the like, throughout the world under the operation of normal financial forces, this is most unlikely to occur.

    I think, of the re-orientation of our minds. The nineteenth century carried to extravagant lengths the criterion of what one can call for short “the financial results,” as a test of the advisability of any course of action sponsored by private or by collective action. The whole conduct of life was made into a sort of parody of an accountant’s nightmare. Instead of using their vastly increased material and technical resources to build a wonder city, the men of the nineteenth century built slums; and they thought it right and advisable to build slums because slums, on the test of private enterprise, “paid,” whereas the wonder city would, they thought, have been an act of foolish extravagance, which would, in the imbecile idiom of the financial fashion, have “mortgaged the future”–though how the construction to-day of great and glorious works can impoverish the future, no man can see until his mind is beset by false analogies from an irrelevant accountancy.

    But once we allow ourselves to be disobedient to the test of an accountant’s profit, we have begun to change our civilization. And we need to do so very warily, cautiously, and self-consciously. For there is a wide field of human activity where we shall be wise to retain the usual pecuniary tests. It is the state, rather than the individual, which needs to change its criterion. It is the conception of the Secretary of the Treasury as the chairman of a sort of joint stock company which has to be discarded. Now, if the functions and purposes of the state are to be thus enlarged, the decision as to what, broadly speaking, shall be produced within the nation and what shall be exchanged with abroad, must stand high among the objects of policy.
    The second danger–and a worse danger than silliness–is Haste. Paul Valery’s aphorism is worth quoting: “Political conflicts distort and disturb the people’s sense of distinction between matters of importance and matters of urgency.” The economic transition of a society is a thing to be accomplished slowly. What I have been discussing is not a sudden revolution, but the direction of secular trend. We have a fearful example in Russia to-day of the evils of insane and unnecessary haste. The sacrifices and losses of transition will be vastly greater if the pace is forced.

    John Maynard Keynes, “National Self-Sufficiency,” The Yale Review, Vol. 22, no. 4 (June 1933), available here

    The Valéry quote from the last paragraph tells in fact the whole story: we “know now that we’re mortals”, but we also know that l’esprit – culture, science and the arts – are our only salvation…

  3. I think Bogdan Enache’s comment is the real point here. One could argue that Keynes was a dilettante economist who cloaked his theories with a veneer of fake intellectualism. What is sad is how much time is spent by Austrians pointing out neo-Keynesian errors.

    It is so much easier to accept the blandishments of Keynes than to do the real intellectual work required to understand the epistemological foundations of Mises. This intellectual laziness is rampant in mainstream economics as we all know.

    The question then is, how can we change the debate? I suggest that debating among ourselves is not the way to go. I say go after the Krugmans of the world.

  4. My monetary theory professor, a dyed-in-the-wool Keynesian,
    once told me during his office hours that he didn’t believe in microeconomics. I had taken a course in the history and philosophy of social science the previous semester, and had read a swathe of history of both the social and physical sciences. I thought he was nuts, but refrained from asking him the obvious question about how science in general advances–did physicists start with subatomic particles and later discover molecules, or was it the reverse?
    Did economists progress by discovering the theory of marginal utility and then going up the causal chain to money and macroeconomics, or were money and the broader economy studied before marginal utility?
    He invited his class to a gathering at his home near the end of the term. There were four books on his mantle. One was his dissertation, one was Keynes’ GT, one was Mao’s Little Red Book, and I forget the fourth one.

  5. Bogdan’s quotation from Keynes is an excellent summary of his ideas on the matters discussedin this post. Thanks. I agree that in many respects Keynes was a poet.

    I don’t agree with Jeff that we ought to spend more time trying to understand Mises’s epistemological foundations. I spent a long time doing that and don’t feel I learned all that much. Roderick Long has an excellent article on the subject about five or so years back in the Review of Austrian Economics.

  6. why haven’t i heard of think markets, while i was an undergrad at stern? Class of ’04. I thought i was the only person there who believed in free markets.

  7. “Keynes was convinced that by the day of “our grandchildren” (today?) this kind of low interest policy would ensure that the marginal efficiency of capital would be driven down to zero. Capital would no longer be scarce”

    In a way, he was almost right – just look at interest rates and the inflationary explosion. My only thought is – how could he miss the obvious connection between scarcity of capital and “quality of investments”. If there is an infinite amount of capital – investors will be driven towards investments of ever-decreasing quality. Then again, I am no real economist so maybe I’m wrong. Keynes was probably still an idiot though.

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  9. […] to them to improve their lives through commerce. Generally there are two levels of economics, micro economics and macro economics. Macro economics looks at the bigger picture and deals with all the components of the system of […]

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