Money, Banks and Finance in Economic Thought

'On Keynesian Economics and the Economics of Keynes' after fifty years

Ferreira Rodolphe Dos Santos Ferreira, BETA - University of Strasbourg
Clerc Pierrick, Swiss National Bank
Clerc Pierrick, Swiss National Bank

The publication in 1968 of Axel Leijonhufvud’s 'On Keynesian Economics and the Economics of Keynes' was an important event for the history of economic analysis and for macroeconomic theory. It deeply changed our understanding of Keynes’ theoretical contribution and of the nature of a Keynesian approach – with no quotation marks – to macroeconomic theorizing. Or so should it have been. The book had undoubtedly a significant impact, but did its message get through? “The book is essentially about the kind of information questions that do not occur in neoclassical Walrasian general equilibrium models. The issues [the author] was dealing with had to do with how information and communication flow in the system so as to enable a coordinated solution to be achieved” (Leijonhufvud in Snowdon 2004). Unfortunately, the author began his characterization of the “revolutionary” element of the General Theory by the following well-known (and admittedly incorrect) statement: “In the Keynesian macrosystem the Marshallian ranking of price- and quantity-adjustment speeds is reversed” (Leijonhufvud 1968, p.52). This idea was one of the major sources of the so-called disequilibrium macroeconomics, self-proclaimed non-Walrasian but essentially moving Walrasian tâtonnement from prices to quantities, with prices kept provisionally fixed. Paradoxically, we thus end up with an extension to output prices of the wage rigidity that supposedly characterizes the Keynesian approach, a “scandalously perpetuated falsehood” (Leijonhufvud in Snowdon 2004). Although the coordination question, at the core of Leijonhufvud’s book, was an important theme in the new Keynesian literature which followed disequilibrium macroeconomics in the early 1980s, explicit references to Leijonhufvud’s work turned out to become scarce, if not exceptional, in this literature. And the fundamental distinction found in the very first chapter of the book between Keynes’ involuntary unemployment – a consequence of coordination failures – and his voluntary unemployment – resulting directly from decisions by the worker, the union, the employer or the government – remained almost completely ignored by macroeconomists (of both neoclassical and Keynesian brands) as well as by historians. Also ignored, or at least neglected, was the emphasis on the way the aggregative structure of macro-models influences the understanding of the price mechanisms responsible for intertemporal coordination – or the lack thereof. My aim in this paper is not to scrutinize the main novel ideas in the book, nor to confront them with Keynes’ writings, but rather to consider their actual and would-be posterities as “alternative futures” (Leijonhufvud 2006), of which the most promising remained unfulfilled. Leijonhufvud, A. (1968), 'On Keynesian Economics and the Economics of Keynes'. Leijonhufvud, A. (2006), ‘The Uses of the Past’. Snowdon, B. (2004), ‘Outside the Mainstream: An Interview with Axel Leijonhufvud’.

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Keywords: Leijonhufvud, Keynesian, coordination, involuntary unemployment, aggregative structure

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