Keynes Against DeLong: A Comment on the Cowen-DeLong Debate

by Mario Rizzo


I am reading with some exasperation Brad DeLong’s comments in his exchange with Tyler Cowen on the efficacy of the stimulus package.


Clearly, DeLong is a rigid aggregate demand theorist. He talks about output and employment as if it were some homogeneous thing. In his mind, macroeconomics is just about spending to increase the production of stuff. Yes, there is lip service to the idea that the stuff should have economic value. But that is easy when you assume that the only alternative is value-less idleness.


On the other hand, I wish Cowen would push more of the issues that he treated so well in his book, Risk and Business Cycles. The sectoral problems generated, not only by exogenous shocks but by the low interest rate policy of the Fed, are of critical importance. The aggregate demanders are blind to this.


My purpose here, however, is to draw attention to the fact that John Maynard Keynes himself was not a rigid adherent even to the framework he himself developed. As I have shown in two previous posts (one immediately below and another here), Keynes believed that models were severe simplifications of reality. A good economist should depart from the model when it ceases to analyze appropriately.


On his blog DeLong dismisses the “sectoral” problems that Cowen raises in one of his posts:


  “I think that deep problems of structural adjustment melt away to normal annoyances whenever aggregate demand is high–that they appear to be insurmountable and painful difficulties only when aggregate demand is low.”


In 1937 when by most standards the Depression was not over, Keynes recognized that simply pumping up aggregate demand would not ameliorate the vast pockets of high unemployment that remained in many parts of Britain. He advocated targeted policies to deal with this. Keynes’s view was the opposite of Delong’s. Keynes believed that when aggregate demand was low these sectoral or geographic problems would be addressable by aggregate stimulus, but when demand was rising (or high) they would not be:


“But I believe that we are approaching, or have reached, the point where there is not much advantage in applying further general stimulus at the centre.”

(The Times of London, “How to Avoid a Slump I,” Jan. 12, 1937)


There are, it is true, important differences between today and 1937. In 1937 Keynes saw the recovery as proceeding apace; today the signs of recovery are very few indeed. But this is not the relevant point in the argument. Keynes understood that aggregate demand stimulus was not a good weapon against sectoral problems. I believe he was right here.


Keynes goes on to advocate targeted stimulus to relieve the distressed areas. This is because he did not pay much attention to the fundamental issue of correcting resource misallocations. He may have believed that these were secondary because idleness was the overwhelming factor in these areas. Perhaps he was worried about social unrest. Unemployment in the distressed areas was 20 or 25% or more.


But the issue really must be sustainability of the direction of resources. Sectoral problems, in the sense that is meant here, are allocations of resources that are inconsistent with the undistorted preferences of consumers, savers and investors. This is the medium-term problem.


We must lay the foundations for sustainable recovery and not try to postpone readjustments.


As I microeconomist, I must protest DeLong’s vastly over-simplified analysis.



9 thoughts on “Keynes Against DeLong: A Comment on the Cowen-DeLong Debate

  1. And as you and others have pointed out, DeLong shows no understanding that economics is a coordination problem, with prices and interest rates playing crucial roles in the intertemporal allocation of resources across markets. Does he understand what profit and loss have to do with this?
    One of the worst aspects of his writing on this subject is his failure to understand the role (too much) debt had in causing the misallocation of resources, and how market processes reveal the malinvestments and, eventually, reverse them and cause resources to flow to more highly valued uses.

  2. i don’t understand. if:

    “Keynes believed that when aggregate demand was low these sectoral or geographic problems would be addressable by aggregate stimulus”

    then isn’t that applicable now? coz AD is low?

  3. GabbyD,

    What I am saying is that at 10% general unemployment in 1937 (more by the method of calculation used then)Keynes believed that Britain had left behind the days of “low” aggregate demand. Now (1937) the sectoral problems would not be addressable by aggregate measures. But even when they are addressable by aggregate demand manipulation, they are only partially so. Sectoral problems, as such, require targeted stimulus in Keynes’s view.

    I admit my expression was confusing. Sorry.

  4. thanks. but isn’t the point that in 1937 AD was rising OR high relative to earlier in the decade (the peak of unemployment is 1934 right)?

    so that 10% figure is an improvement from earlier unemployment?

    meanwhile, the unemployment figure in the US is only beginning to max out now (at least we hope!:) )

  5. GabbyD,

    But why should the direction of demand change matter rather than the level of aggregate demand (relative to the stock of resources)? I am thinking like this: there is an aggregate demand component to the rate of employment in an area (perhaps simply due to the confidence factor)and then there is a relative demand component that captures the allocational factors.
    So at some very low level of demand relative to the stock of unused resources a spike in aggregate demand will make a big positive difference (1934?) but when the level of demand is higher relative to the stock of unused resources (1937 and now?) a spike in aggregate demand will not change very much.

    This is how I am interpreting Keynes. Nevertheless, you are making good points.

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