Markets, Productivity, and Happiness in a Historical Perspective

Peter Howitt’s ‘Keynesian Recovery’ and Keynes: An Assessment

Rivot Sylvie , Université de Haute-Alsace

The paper aims to assess Howitt’s achievements in the field of macroeconomic theory with regard to his reading of Keynes’ General Theory. The first part of the paper is dedicated to Howitt’s appraisal of Keynes’ central message regarding the functioning of a decentralised monetary economy, and especially the issue of the micro-foundations of macro-theory. Howitt challenged the interpretation standard interpretation of involuntary unemployment that considered sticky money wages as the source of involuntary unemployment. Hence Howitt’s concern for flexible wage and price policy that are very likely to prove destabilising. And his insistence on investment as an autonomous component of effective demand driven by pervasive uncertainty drew the attention towards intertemporal coordination issues. The second part of the paper investigates Howitt’s assessment of Keynes’ legacy, from his critiques of the IS-LM neo-classical synthesis towards the theoretical developments made by Clower and Leijonhufvud, which Howitt considered as earlier promising Keynesian alternatives that still deserved attention. Howitt established several tracks of research claiming to pursue Keynes’ original programme, some of them being in his views more fruitful and faithful to Keynes than others. Howitt worked closely with Clower and Leijonhufvud. On the one hand, Clower (who had a significant influence on Leijonhufvud), developed a disequilibrium approach thanks to his ‘dual decision’ hypothesis’. This allowed him to handle with possible failures of Walras law due to the lack of potential corrective forces. On the other, the tools developed by Clower helped Leihonhufvud to develop a theoretical framework of out-of-dynamics of an ‘income-constrained’ process. Accordingly, Leijonhufvud is mainly praised by Howitt for having developed a disequilibrium approach to macroeconomics, based on his ‘cynernetic approach’, according to which there is no presumption that the system might equilibrate. Third, from his appraisal of Keynes’ General Theory towards the lineage he drew from Clower and Leijonhufvud, the last part of the paper investigates Howitt’s own theoretical achievements with regard to his understanding of Keynes’ General Theory. Considering that price are not the main equilibrating variable in a decentralised system naturally raises concern for quantity adjustment and effective demand failures, especially in case a market economy suffered a large and protracted shock. It also resuscitates Keynes’ idea that wage and price flexibility might be destabilising. Howitt’s expressed reservations about the multiple equilibria approach to macroeconomic theory, for this literature merely evades the issue of how economic agents achieve their coordination and leaves aside the issue of micro-foundations of market results. Together with his appraisal of the General Theory, this also well explain that Howitt shifted his attention for agent-based models in the recent period.

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Keywords: agents-based model, flexible wages, effective demand, micro-foundations