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American Economic Association

Keynesian Economics: The Search for First Principles

Author(s): Alan Coddington
Reviewed work(s):
Source: Journal of Economic Literature, Vol. 14, No. 4 (Dec., 1976), pp. 1258-1273
Published by: American Economic Association
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of Economic Literature.
Keynesian Economics:
The Search forFirst Principles

Queen MaryCollege
of London

I would like to acknowledge variousforms of indebtedness in con-

nection with this paper: to, among others, Thanos Skouras, Alan
Peacock, David Currie,and an anonymous refereeof thisjournalfor
helpful commentson an earlier draft; to Michael Kennedy and Co-
lette Bowe for indispensable guidance at various stages; and to the
Universityof Manchesterfor the Hallsworth Fellowship in Political
Economy, which made this work possible.

I. Introduction

N The General Theoryof Employment, methodconsistedofanalyzingmarketson

Interestand Money [13, 1936] and else- thebasisofthechoicesmade byindividual
where, Keynes attacked a body of theory traders.Thus, the resultingtheoryoper-
that he designated "Classical." In posing ates at two distinctlevels-that of in-
a threat to the "Classical" system-or at dividual choice, and that of market
least to a recognizable caricature of it- phenomena-even thoughtheconnection
Keynes also called into question the betweenthe two levels maybe provided
method of analysis by which this system onlybyan analysisofthechoicesofa "rep-
was constructed.The purpose of this arti- resentative"trader.Moreover,in orderto
cle is to inquire into the various ways in providea basisfora manageableanalysis
which methods of economic analysishave of marketphenomena,the analysisof in-
come to terms with this threat,either by dividualchoice has to be ofa particularly
responding to it or by reinforcingit with stereotyped and artificialkind. This
furtherthreats; it seeks to ask the ques- methodof analysis,usingmarkettheory
tion:"What has to be changed or sacrificed based on choice theoryof a typethatal-
in order to accommodate Keynesian ideas lowsthetwolevelsto be connected,I will
within standard methods of analysis?" Its referto as "reductionism,"on thegrounds
theme will be the varietyofways in which that the centralidea is the reductionof
this may be done: three broad types will market phenomena to (stylized) in-
be presented and the contrastsbetween dividualchoices.
them explored. Considerationsof tractabilityimpose
The firsttask accordingly is to charac- restrictionson the kind of choice theory
terize the method of analysisof thatbody on whichthemarkettheorycan be based:
of theory in opposition to which Keynes the theorycannotdeal withchoicesin all
presented his own. Very broadly, this the idiosyncraticdetail in which actors
Coddingtonon Keynesianism 1259
conceive of them, nor in termsof the elu- gram, I will refer to as "fundamentalist
sive and wayward manner in which actors Keynesians." It is the purpose of this sec-
make up theirminds; stable objectives and tion to expound such an interpretation,to
well-defined constraints are needed to consider some of the difficulties in sustain-
provide a firmenough foundationformar- ing it,and brieflyto discuss its significance
ket theory.And just as the choice theory for economic theorizing.
has to be restricted in the interests of Like the interpretationof the work of
building up to market theory,so the mar- any active mind, the interpretation of
ket theoryhas to be restrictedin the inter- Keynes's writingsrequires the use of se-
ests of working back to choice theory. lection and emphasis: it requires a view as
Overwhelmingly,reductionist theorizing to what is central and what merely periph-
has confined its attention to situationsof eral, what is essential and what merely in-
market equilibrium; for these situationsa cidental, in his writings;in thisway appar-
choice theory basis is relatively straight- ent inconsistencies and obscurities may
forward. There may be, in accordance readily be resolved, at least to the satisfac-
with the standard schedules, a gap be- tion of those adhering to that interpreta-
tween market demand and market sup- tion. For fundamentalists,what is central
ply, but the choice theory from which and essential in Keynes's writingis to be
each of these schedules is derived sup- found primarilyin his article "The Gen-
poses that all choices are realizable; ac- eral Theory of Employment" [14,1937] in
cordingly,the standard schedules can tell the Quarterly Journal of Economics of
us nothingabout what will happen when 1937, an article concisely restatingthe ar-
the tradersattempt to do what, in the ag- gument of the General Theoryin response
gregate, is impossible; nor are the to various critics; in the General Theory
schedules likely to persist as the traders itself,the essence is said to lie in chapter
become aware of the difficultyof doing 12, "The State of Long-Term Expecta-
what they had regarded, in making their tions," and, to a lesser extent, in chapter
(intended) choices, as straightforward. 17, "The Essential Properties of Interest
Overwhelmingly, therefore,reductionist and Money." The kind ofconsiderationsto
theoryhas been concerned with the con- be found in these places can be traced
nection between equilibrium states of back at least to the work of ten years ear-
market phenomena and the choice logic lier in The End of Laissez-Faire [12, 1926]
from which these states could be gener- and, with hindsight,still furtherback.
ated. It should be noted, however, that An early statementof the fundamental-
this concern with market equilibrium is ist position was provided by Hugh Town-
not a definingcharacteristicof reduction- send [28, 1937]. He argued that the kind
ism: it is rathera way in which reduction- of considerations raised by Keynes in his
ist theorizinghas been rendered manage- theoryof liquiditypreference have quite
able. devastatingconsequences forreductionist
price theory if they are allowed to apply
II. FundamentalistKeynesianism to all assets. Once all prices are seen as
If Keynes's ideas are to be seen as a money prices, and all assets as bearing a
threat to the reductionist program, the liquidity premium, price theorybecomes
question naturallyarises of how serious a enmeshed in the same tangle of expecta-
threat they are: of how fundamental the tional and conventional elements that
aspects are that are threatened. Those characterizes Keynes's theory of the rate
who have seen Keynes's work as a frontal of interest. On this view, the hope of ex-
assault on the whole reductionist pro- tracting"real" (relative) prices fromtheir
1260 Journalof EconomicLiterature
monetary context looks bleak; although the clearly specified and stable objectives
we should not, as Hicks [9, 1946, chap. 12] and constraintsrequired by reductionist
has pointed out, confuse Keynes's innova- theorizing, Keynes emphasises that the
tion in analytical procedure (in dealing basis of choice lies in vague, uncertain,
with the rate ofinterestin associationwith and shiftingexpectations of futureevents
money-holdingdecisions ratherthan with and circumstances:expectations thathave
borrowing and lending) with his sub- no firmfoundationin circumstances,but
stantive contributions.Nevertheless, the thattake theircues fromthe beliefsofoth-
threat to the reductionist program does, ers, and that will be sustained by hopes,
on thisview, indeed appear to be a funda- undermined by fearsand continuallybuf-
mental one. feted by "the news." He was drawing at-
Perhaps the most uncompromising,and tention to both the importance and the
certainlythe most tirelesslyeloquent, ex- elusiveness of the state of business confi-
ponent of fundamentalistKeynesianismis dence, and the way it unfolds. Keynes
G. L. S. Shackle [25, 1967; 26, 1972; 27, focused on the conventional element in
1974]. His own work has centered on the valuation: the way in which valuations
irreducibly creative element in human may persist to the extent that they are
choice: its basis in constructsof the choos- shared, but are therebyrendered sustaina-
ing mind. His appreciation of Keynes's ble in the face both of minor events and
contributionsto economic theoryhas, ac- of changes in circumstances,but vulnera-
cordingly,centered around thissame con- ble to anythingthatthreatensthisconven-
cern, and naturallyhe sees these matters tional basis. In the course of a riot,forex-
ofexpectation,uncertainty,and ignorance ample, the moods and feelings of the
-matters of the provision of knowledge- rioters may be widely shared until, at a
surrogatesin the face of knowledge defi- later stage when the riot has lost its force,
ciency-as of the essence. A most succinct the moods and feeling may generally and
distillationof Shackle's reading of Keynes rapidly revert to normal. The coordina-
has recentlybeen provided by B. J.Loasby tionofsuch crowd behavior and itscharac-
[17, 1976]. teristicdynamics arise fromthe fact that
One furtherline of thought must be the participants are taking their cues di-
mentioned in the present context: this is rectly from one another. Reductionist
one that has attempted to use the funda- choice theory as it has been developed
mentalistaspect of Keynesianismas a way does not shed any light on decisions in-
of clearing the ground to permit a return volving such immediate and stronginter-
to a certain cluster of doctrines and con- dependence as this.
cerns that are variously referred to as Once its choice-theoretic foundations
"classical" (as distinctfrom"neoclassical") are threatened, the whole reductionist
or "Neo-Ricardian." The objective of this program is called into question; for with-
school, whose most distinguished practi- out them the market theory would have
tioner is Joan Robinson, is to produce a nothing on which to stand, nothing to
hybridof Keynesianismwith those aspects which it could be reduced. The concept of
of Ricardo's work that were appropriated market equilibrium is in this way left ex-
by Marx: Ricardo minus Say's law and the posed to attack. For without a clearly-
quantity theoryof money. specified and stable basis in choice logic,
Keynes's QJE paper of 1937, to which the idea of market equilibrium is no
fundamentalistsattach such great impor- longer connected to the realizabilityof in-
tance, is, firstand foremost,an attack on dividuals' intentionsin the aggregate. This
the kind of choice theorythat is required does not mean that market equilibrium
for the reductionist program. As against cannot be rehabilitated; what it means is
Coddingtonon Keynesianism 1261
that the sustainabilityof equilibriummust fromthe restrictionsthatit imposes on our
depend on conditions that are confinedto thinking.This, however, is not so much a
the level of the market. For the funda- matter of what Keynes said, as of what we
mentalist, however, Keynes's ideas re- are led to if we followhis line of thought,
quire the rethinkingand reconstructionof taking the QJE article as the definitive
the whole body of reductionisttheory:its guide to its direction.
choice-theoreticbasis and the equilibrium Where we are led by a line of thought
theoryof markets that rests on it. depends a great deal, of course, on where
The objections to equilibrium theoriz- we are disposed to go. Fundamentalists
ing have been elaborated by fundamental- have, correspondingly,contributedfreely
ist Keynesians. Joan Robinson has shown of theirown preoccupations in arrivingat
that if the idea of equilibrium is pursued interpretations of Keynes's thought. At
relentlessly,then as the concept becomes their most uninhibited, fundamentalist
all-embracingit becomes paralyzed by its Keynesians have presented Keynes's ideas
own logic: equilibrium becomes a state of as an escape fromthe essential "timeless-
affairsthatis, strictly,unapproachable: un- ness" ofthe modes ofthoughthe attacked.
less it already exists, there is no way of More concretely,they have presented his
attaining it [20, 1953]. Similarly,in the central message regardingemploymentas
work of G. L. S. Shackle, the idea of gen- concerning the existence of a liquid asset
eral equilibrium is shown to require the in a world of uncertainty,thus providing
pre-reconciliation,one with another,ofall a retreat from the holding of real assets
present and futurechoices of all economic and the associated commitment to (em-
actors [26, 1972]. On either ground it ployment-generating)productionofa par-
would follow that the standard use of the ticular output. This theme has been much
method of comparative statics(or, better, elaborated by Shackle and is concisely ex-
"comparative equilibria") to analyze the pounded by Loasby; in Joan Robinson's
effects of changes in circumstances, is work,however, we findits place taken by
strictlyunwarranted and illegitimate.' Of a preoccupation withthe heterogeneityof
course, thisline of thoughtwould have ni- capital goods: the fact that individual
hilisticconsequences forthe entire corpus items of the capital stock that historybe-
of economic theory and in particular for queaths to us cannot be costlessly trans-
its applicability;in thisrespect, the line of formed into one another, but exist in
thought reaches a purist and impractical particular forms, embodying particular
conclusion that is in marked contrast to techniques, reflectingthe superseded ex-
Keynes's own highlyeclectic approach to pectations of the past. The problems
economic theory. raised by the existence of liquid assets and
The concept of equilibrium is accord- durable, functionallyspecific capital as-
ingly seen by fundamentalistsnot as a sets, are not, however, unrelated; the na-
useful simplificationFor economic theo- ture of capital goods means that holding
rists,but as a distraction.2The essence of them involves a kind of commitment,
Keynes's thoughtis seen as the liberation while the nature of liquidityallows an es-
fromequilibrium theorizing,as an escape cape from that particular commitment.
Fundamentalist Keynesianism, in see-
' This argumentis elaboratedin Coddington[3,
ing Keynes's ideas as a wholesale on-
1975] and Loasby[17, 1976,chap. 3].
2Thus: "The argumentstopswhen. . . the equi- slaught on the reductionistprogram,does
libriumlullabyhushesfurther inquiry"[21, Robin- not see those ideas as providing a substi-
son, 1964, p. 80]. But thissoporific
effectis never tute for that program. Rather, it sees
reconciledwith the concurrently held view that
"The conceptof equilibrium, ofcourse,is an indis- Keynes's own ideas as a firststep in a thor-
pensabletoolofanalysis"[21, 1964,p. 78]. ough-going revision of economic theory.
1262 Journalof EconomicLiterature
Accordingly, it sees what Keynes did spondingto fullemploymentas nearlyas is
constructivelyas merely a makeshift,an practicable,the classicaltheorycomesintoits
ownfromthispointonwards.Ifwe supposethe
improvisation, a stop-gap. To take the volumeofoutputto be given,i.e. to be deter-
constructivepart of Keynes's work (in de- minedbyforcesoutsidetheclassicalschemeof
veloping the consumption function,the thought,thenthereis no objectionto be raised
marginal efficiencyof capital schedule, againstthe classicalanalysisof the mannerin
etc.) as being the substance or result of whichprivateself-interest willdeterminewhat
in particularis produced,in whatproportions
"the Keynesian Revolution" would there- the factorsofproductionwillbe combinedto
forebetoken a failureof nerve, a betrayal produceit,and howthevalueofthefinalprod-
of fundamentalistprinciples.3 uct willbe distributed betweenthem.
In order to sustain the fundamentalist
interpretation,it is necessary to postulate This is abundantly clear, and in obvious
that Keynes himselfhad occasional lapses. conflictwith the fundamentalistview of
Thus, Joan Robinson [23, 1973, p. 3] Keynes's thoughtbeing subversive of the
writes: whole classical ("reductionist") scheme.
. . .there were momentswhenwe had some Accordingly,we findJoan Robinson writ-
troublein gettingMaynardto see what the ing [21, 1964, p. 92], in connection with
pointofhisrevolutionreallywas,butwhenhe this passage, of the "fallacy" that Keynes
came tosumitup afterthebookwaspublished fell into, and remarking sadly that, "He
he gotit intofocus.
was himselfpartlyto blame forthe perver-
Here she refers,of course, to the QJEarti- sion of his ideas" and "Keynes himselfbe-
cle of 1937. gan the reconstruction of the orthodox
Again, she writes [21, 1964, p. 75]: scheme that he had shattered" [22, 1971,
The GeneralTheory brokethrough theunnatu- p. ix].
ral barrierand broughthistoryand theory A further embarrassment for funda-
togetheragain. But fortheoriststhe descent mentalistsis that Keynes indicated quite
intotimehasnotbeen easy.Aftertwenty years clearly that he found nothing to object to
the awakened Princess is still dazed and
groggy. in Hicks's distillation[8, 1937] of the Gen-
eral Theoryinto the IS/LM framework,or
Keyneshimselfwas not quite steadyon his
feet.. what has come to be known as "the in-
come-expenditure model," quite devoid
She then goes on to refer [21, 1964, p. 75] of any fundamentalist characteristics.4
to Keynes's ("highly suspicious") remark This again must be seen as some kind of
about the timeless multiplier[13, 1936, p. momentary lapse on Keynes's part if the
122]. fundamentalistinterpretationis to be sus-
A major embarrassmentforfundamen- tained, at any rate if Keynes himselfis to
talistsis to be found in the finalchapter of be allowed to be a fundamentalistKeynes-
the General Theory.Here we findKeynes ian.
arguing as follows [13, 1936, pp. 378-79]: What, then, does fundamentalismadd
. . .if ourcentralcontrolssucceedinestablish- up to? It does not provide any sort of de-
ing an aggregatevolume of output corre- terminate theory or model of how the
economy functionsat the aggregate level;
3An immediate difficulty
forfundamentalistsisthe it does not enable one to make any definite
factthatthe QJEarticleof 1937, afterhavingad- predictions about the likely effectsof al-
vancedthearguments alreadydiscussed,goes on to ternative policies or circumstances. On
stressthe importanceof the consumption function,
whichis thendeployed(anticipating terminology I
will introduceat a laterstage)in a thoroughly hy- 4See Keynes'sletterof March31, 1937,to Hicks
draulicfashion. in Hicks[10, 1973,pp. 9-10].
Coddingtonon Keynesianism 1263
the contrary,it is a viewing point from inhibitingeffectson alternative modes of
which such constructionswould appear as economic regulation. More broadly, the
rather desperate makeshiftsof transient comparison also arises among the alterna-
applicability. Fundamentalist Keynesian- tive effectsof investmentdecisions taken
ism is concerned with the texture rather within alternative institutional frame-
than the direction,as it were, of the eco- works (various powers and responsibilities
nomic process. having been given to agencies of the
To stress the basis of all economic ac- State), whose regulative capacities then
tivityin more or less uncertain expecta- also become a part of the appropriate
tions is precisely to emphasize the open- comparison.
ness and incompleteness of economic In summary,we can say thatfundamen-
theorizingand explanation. It does not it- talist Keynesians are united in seeing
self provide any kind of fixedmechanism Keynesian ideas as posing a threat to the
according to which the unfolding of whole reductionist program; and that
events takes place; but it does show how their primary concern has been to rein-
one would set about constructinga narra- force this threat with further threats.
tive of events. It is a view about where the When it comes to providingan alternative
gaps are in the causal chains that can be to the reductionist program, however,
identifiedin the economy: the points at mattersare less unified.There is a marked
which the economic process is susceptible contrast, for example, between the pro-
to influence.We can accordinglybegin to spectus offeredby Joan Robinson for the
appreciate the deep ambivalence of this completion of the Keynesian revolution
standpoint towards economic policy. On and the insightofferedby Shackle into its
the one hand, it sees potentialityforenor- integrityand essence. And when we move
mous leverage, the whole economic proc- from the critical to the constructive as-
ess moving in response to changing states pects of fundamentalism, not only are
of mind and consciousness; on the other mattersless unified,they are also less defi-
hand, the very precariousness of this vi- nite. In Loasby's work, this indefiniteness
sion leads very naturally to thorough- is transformedinto a methodological prin-
going scepticism about the predictability ciple [17, 1976, p. 167]:
of the effectsof deliberate attemptsto ap-
If one can summarise in one sentencethe the-
ply leverage in pursuit of political objec- oryofemployment set forthby Keynesin his
tives. The point of view in itselfprovides [QJE]articleof 1937,it is this:unemployment
no guidance on whether the precarious- in a marketeconomyis theresultofignorance
ness is so pervasive as to undermine the too greatto be borne.The fully-specified
roeconomicmodelsmissthe point-which is
potential forpolitical leverage. That is to
preciselythatno modelofthissituationcan be
say: the wayward and unrulycharacter of fullyspecified.
individual choices-and in particular in-
vestmentdecisions-is seen as an impedi- III. HydraulicKeynesianism
ment to economic functioning;but the During the nineteen fortiesand fifties,
question that must be faced froma policy there appeared a number of expositionsof
point of view is whether it is a greater "Keynesian economics," attempting to
impediment to the self-regulationof the make the ideas accessible to students,and
economy than it is to the workingsof dis- even to intelligent laymen. What these
cretionaryfiscaland monetarypolicy.This works had in common, quite apart from
matter would involve not just the consid- mattersof substance,was an unmistakable
eration of an impediment to economic enthusiasm for (what were taken to be)
functioning,but a comparison between its Keynes's ideas. This enthusiasm was at
1264 Journalof EconomicLiterature
timesunrestrained to the pointofexcite- aggregatelevel.7 Indeed, the esteem in
ment;it was the authorsof these works whichthetwoaspectshave been held has
who spoke without reservationof a tendedtomovein oppositedirections, the
"KeynesianRevolution,"one ofthebooks periodwhen "fiscalist" policyenthusiasm
in facthavingthistitle[15, Lawrence R. was at itsheightbeinga timeat whichthe
Klein,(1949) 1966]. It is some indication intellectualinterestin theunderlying the-
of the level of enthusiasmreached by oryhad become moribund.Again,the de-
these expositorsand popularizersthat mise of "fiscalism"in the late sixtiesand
one,JanPen,wrotea booksettingoutand earlyseventieswas accompaniedbya rea-
discussinga particularspecification of a wakeningof interestin the underlying
static"Keynesian"model ofrelationships theoreticalconceptions.(We shall have
between a small number of macroeco- moreto say aboutthisrevivalin the next
nomic aggregatesand gave it the title section.)
ModernEconomics[19,1965].It is notmy Allthisshouldnotbe allowedtogivethe
intentionhere, however,to attemptto impression,which would be quite mis-
chart the process of the diffusionand taken,thatthefiscalenthusiasm stemming
popularizationof Keynes'sideas.5 fromKeynes'sideas did not include, or
The period of Keynesian enthusiasm could not provide,a theoryin supportof
was reallythe post-warperiod:the ideas its policy doctrine.It could and it did.
wentcanteringbrisklythroughthe fifties What,then,we are led to ask,is the theo-
and earlysixties;falteredsometimein the reticalbasisforfiscalist enthusiasm?How
middlesixtiesand stumbledintothe sev- is it to be characterizedas one of the
enties.6This,at any rate,is the pictureas strandsin the developmentof Keynesian
its emergesat the level of popularinflu- thought?It is to these questionswe now
ence,at thelevelofwidelyand influential- turn.
ly-heldviewson macroeconomic policy;at The theoreticalcontentof the body of
thelevel,thatis,ofKeynesianism as a doc- ideas thathas been propagatedthrough
trineabout how a largelydecentralized the educationalsystemin the West since
economymaybe subjectto broad (as op- WorldWar II as "KeynesianEconomics"
posed to detailed)centralcontrolor influ- (by,forexample,Paul Samuelson'speda-
ence through the instrumentof the gogically authoritative textbook [24,
budget.It is temptingto adopt the prac- 1973]) I shall proceed to referto as "hy-
ticeofreferring to thisdoctrineas "fiscal- draulic Keynesianism."This designation
ism"to showthatit is a particularvariant reflectstheviewthatthenaturaland obvi-
(and perhaps a corruptionor vulgariza- ous way to regard elementarytextbook
tion)of Keynes'sideas. At any rate,it is Keynesianism is as conceivingoftheecon-
importantto keep distinctthe ups and omy at the aggregatelevel in termsof
downs of Keynesianismas a policydoc- disembodiedand homogeneousflows.Of
trinefromthose of Keynesianismas an course,conceivingofthe macro-economy
academicallyrespectable theoryof the
functioningofa capitalisteconomyat the 7 Reflecting on the fragmentation of Keynesian
thought, AxelLeijonhufvud makesthefollowing ob-
5 But see JohnKennethGalbraith's"How Keynes servation:"For some timenow,contentment with
came to America"forsomeinteresting insights into thisstateof the artshas restedon the motto'The
the wayKeynesianideas made theirentryintothe Theoretically TrivialisthePractically
U.S. academiceconomicsestablishment [5, 1971]. the PracticallyImportantis the Theoretically
6 Foran attemptat intellectual
at that Trivial.'It is a disturbingformulawhichcan hardly
time, see my "RethinkingEconomic Policy" [4, be a permanentbasisforthe further development
1974]. of the field"[16, 1968].
Coddingtonon Keynesianism 1265
in thiswaywillbe fruitful onlyto the ex- is onlyone agencymakingdeliberateacts
tent thatthere exist stable relationships ofchoice;thatone agencyis "the govern-
betweentheseoverallflows.And it is my ment."And it is the beliefthatthereare
contentionthatthe centralcharacteristic indeed stablerelationsamongthe various
of "hydraulicKeynesianism"is the belief overallflowsin theeconomythatprovides
thatsuch stable relationships do existat a basisfor"the government" to pursueits
the aggregatelevel. It is thisbeliefthat policygoalsregardingthe overalllevel of
givessomepointto thehydraulicconcep- economicactivityand hence,relatedly,of
tion;withoutsucha beliefthe conception thelevel ofemployment. It is thestability
would simplybe a matterof nationalin- of theseaggregaterelationships thatpro-
come accounting, notofeconomictheory. vides"thegovernment" withtheleverage
It should be noted that the flowsin- it needs to influencethoseflowsthatare
volvedin thisconceptionare flowsof ex- not under its directcontrol.By making
penditure,income or output.That is to deliberate choices for the flowsit does
say, neither prices nor quantities per control(via the budget),and bearing in
periodmake a separateappearance:they mind the (allegedly)stable relationships
appear inextricablyin the contribution betweenthisand the otherflowsthatare
each makesto the overallflowsofspend- objects of concernfor economic policy,
ing and receipts.It shouldnow be appar- "the government" can,in principle,exer-
entwhythebeliefin theexistenceof,and cisean indirectcontrolon theoveralllevel
the attemptto establish,stable relation- (althoughnotthecomposition) oftheflows
shipsbetweentheoverallflowsis radically thatare notthe objectsofanyone'sdelib-
inconsistentwith reductionism.For any eratechoice.Thatis thestory.On theface
reductionist programmustgive a crucial ofit,itmayappeara majortriumphin the
rolein itstheorizingto pricesas such(not marchof humanreason:a dramaticand
to the contribution theymake to overall irreversibleextensionoftheboundariesof
spendingflows).The groundsforthisview Instead of unem-
are thatitis pricesas suchthatprovidethe ploymentand depressionbeing seen and
incentivesthatindividualsfacein making accepted passively,liketheweather,they
thechoiceson whichthewholeschemeis are to be seen as mattersforhumanwill
to rest.Thisdoes notmean thathydraulic and design, something that human
Keynesianismcan allow no part at all to agency,throughtheinstrument ofcentral
be played by prices; when we come to government,could actually resist and
thinkof such prices as embracingwage remedy.8As an idea it lookedbothsimple
rates and interestrates,we can see that and good; accordingly, it was, at the end
thiscannotbe so. Correspondingly, itdoes ofthewar,rapidlyassimilatedto boththe
not mean thatreductionismis incapable policystatements and rhetoricofall major
of allowingoverallflowsto play any part politicalparties.9
in itsscheme.Since these are alternative 8
This changed attitudedid not come easily or
programs fortheorizing, ratherthanalter- quickly,and fundamental attitudeshad been under-
nativetheories,theyrevolvearoundmat- goinga processof erosionforsome decades by the
ters of emphasis.They do not concern timeKeynescame on the scene. For a painstaking
documentation of thisprocessin Britain,see Jose
whatcan orcannotplaya partin a theory, Harris[7, 1972].
butwhatcan orcannotplaya centralpart. 9 The majorbridgein Britain betweenKeynesian
In fact,contraryto the standpointas- doctrinesand politicalplatformswas WilliamHenry
Beveridge[1, 1944]. The ideas were given official
sociated with reductionism,hydraulic recognitionin theWhitePaper Employment Policy
Keynesianism is a schemein whichthere [6, 1944].
1266 Journalof EconomicLiterature
In summary, it can be seen thatthehy- ever reason,in itsattemptsto respondto
draulicapproachis in conflict withreduc- changesin expenditure.
tionistmarkettheory.The hydraulicap- Since the IS-LM apparatuswas put for-
proach shows how thingswould work ward by Hicks, however,we have had
when marketprices(and wages)willnot, somethinglike30 yearsexperienceofde-
or willnotquicklyenough,or willnotbe mand managementpoliciesbased on the
allowed to, performtheirallocativerole; assumptionthat the economy exhibits
it analyzesa situationin whichpricesare marked hydrauliccharacteristics in the
failing,both as disseminators of informa- short-run; and the questionof whythese
tion about relativescarcitiesand in the policieshave been less effectiveat some
provisionofincentivesto act on the basis times than others naturallyraises in a
of thatinformation. practicalwaythequestionofthe scope of
If the centralmessage of the General thehydraulicconception.It is therefore
Theory is thatoverallemployment is more considerableinterestthatHicks,in a revi-
a matterofthedemandforoutputthanof sion of Keynesianeconomicsin the light
real wages, except when "full employ- ofthisexperience,does notadopthisown
ment"alreadyobtains,thenthatmessage IS-LM apparatus for the purpose [11,
is certainly embodiedin thehydraulicap- 1974,chap. 1]. Rather,he providesan al-
proach.As such,itis an audacioussimplifi- ternativeframework inwhichthepossibil-
cation,whichis, on the face of it,in con- ityofan expansionin demandbeingtrans-
flict with the corpus of reductionist latedintoan expansionofoutputdepends
theorizing.Furthermore,as a way of cruciallyon thestructureofinventoriesat
thinkingabout macroeconomicpolicy,it the outsetof the process.In particular,it
seemsto workto some extent,sometimes. dependscruciallyon therebeingplentiful
The intellectualproblem that it raises, stocksof materialsto sustaininvestment
however,is thatofitsown scope.Whatwe projectsuntildecisionstoincreasetheout-
need to know are the circumstancesin put of thesematerialsare taken;or what
which,and theextentto which,theopera- amountsto the same thing,it dependson
tionof an economymaybe conceivedof there being ample foreignexchange re-
in hydraulicterms.There are variousap- serves representingcommand over for-
proachesto thisquestion.A familiarone eign inventoriesof materials.Unless this
is provided by the IS-LM apparatus, conditionis met,theattemptedexpansion
withinwhichit can be readilyshownthat can easilyrunup againstbottlenecksand
the economyexhibitsthe characteristics dissipate itselfin the diversion of re-
of the hydraulicmodel to the extentthat sourcesfromotheruses and, notoriously,
theinterestelasticity ofexpenditure islow in creatingbalanceofpaymentsproblems.
and ofthedemandformoneyishigh;with Of course,if the increasein investment
a zero interestelasticityof expenditure expenditureis translatedinto a net in-
and an indefinitely largeinterestelasticity crease in real investment,the multiplier
ofdemandformoney,theoperationofthe processcan set in,and adequate stocksof
economywouldbe exactlyin accordance consumergoods will thenbe requiredto
withthe hydraulicmodel: changesin ex- avoidbottlenecksat thisstageand sustain
penditureflowswould lead to changesin the exDansion.'I
outputflowswithoutanyrepercussions on 10Thisanalysiscan readilybe transformed
the rateofinterest.In sum,it followsthat "fixprice"
basistoa "flexprice"
one;inwhichcase the
the economymayexhibitthe characteris- preconditionfora successful
thepricesofthevariousgoodsneeded to sustainthe
ticsof the hydraulicmodel to the extent expansionwhilechangesin expenditureare being
thattheinterestrateis impeded,forwhat- translatedinto changesin outputare significantly
Coddingtonon Keynesianism 1267
There are, of course,otherapproaches ity of the concept of equilibrium:the
to the questionof the scope of hydraulic Clower-Leijonhufvud positionbeing that
theorizing.Indeed, the Monetaristargu- the concept of equilibriumshould be
mentsagainstKeynesianconclusionsmay abandonedin theinterests ofa morethor-
be seen as one possible answer to this ough-goingreductionof Keynesianideas
question:namely,that the scope of hy- to choice logic. The thesisis that once
draulictheorizingis practicallynonexist- equilibriumhas been abandonedand one
ent. In these argumentsthe Keynesian focuseson a processoftradingat disequi-
conclusionsare underminedby the rein- libriumprices,thenone has a framework
troductionof a choice-theoretic basis of that is entirelycongenial to Keynesian
thestandardreductionist type.Aswe shall ideas, unlike the frameworkof equilib-
see in thenextsection,theworkofClower rium theorizingwhich, on this view,
and Leijohhufvud mayalsobe seenas con- leaves roomforthemin onlythe mostat-
tributingto this question of scope, al- tenuatedand ad hoc form.The problem
thoughthisis nothow eitherofthempre- thenbecomesone ofprovidinga moreso-
sentedhis work. phisticatedspecificationoftheconstraints
on individualchoices,openingup thepos-
IV. Reconstituted
Reductionism sibilitiesfortheoreticallynovel and chal-
During the 1960's there emerged a lengingformsofmarketinterdependence
school of thought,associated primarily arisingfroma schematization ofthe proc-
withthe names of RobertW. Clower [2, ess of disequilibriumtilading.
1969] and Axel Leijonhufvud[16, 1968], In orderto lead up to mycharacteriza-
concerned with reappraisingKeynes's tionoftheworkofClowerand Leijonhuf-
contribution to economics.These writers vud,it is appropriateto beginby discuss-
presentedtheirworkas concernedwith ing each writer'sown characterization of
reestablishingand reasserting the discon- his work:how each ofthemconceivedof
tinuity betweenKeynesianeconomicsand the taskhe had set himself.I will argue
its alternatives,
a discontinuitythatthey that their own characterizations are in
saw as havingbeen blurredand finally lost variousrespectsunsatisfactory, and that
to view by the variousactivitiesof inter- myalternativeis nottherefore gratuitous.
pretation,condensation,and reconstruc- I shallnot,however,attemptto substanti-
tionthatcame in thewake ofthe General ate the designationof the workof these
Theory.It is withinthis perspectiveac- writersas reductionist.I shalltake it that
cordingly thatthe contribution ofClower once the idea of what is involvedin the
and Leijonhufvud to ourunderstanding of reductionistprogramis appreciated, it
Keyneshas been discussedand appraised. shouldbe clear thatthisworkfallswithin
Mypurposehere,however,willbe to pre- the program.
sentthedisputebetweenClowerand Lei- Let us take Clower first.Having ad-
jonhufvud,on the one hand, and those vanced the "dual decisionhypothesis"as
whoseviewstheywere combating, on the a basis forexpectingconsumerspending
other,as a familyquarrelwithinthe re- to depend on currentincome, Clower
ductionistprogram.Most fundamentally, goes on to speak unguardedlyof Keynes
thefamily quarrelis abouttheexpendabil- having had this theory of household
behavior"at thebackofhismindwhenhe
belownormal, so thatas theexpansionproceedstrad- wrote the General Theory"[2, 1969, p.
erswillreleasetheirstocksontothemarketas prices 290]. Clower goes on immediatelyto ad-
impetuswillbe whollydissipatedin priceincreases mitthat"I can findno directevidencein
[11, Hicks,1974,pp. 23-30]. any of his writingsto show thathe ever
1268 Journalof EconomicLiterature
thoughtexplicitlyin these terms."After new perspectiveis to be apportionedbe-
advancingwhat he takes to be "indirect tween Keynesand Leijonhufvud.Keynes
evidence" for this, he concludes that maywellhaveprovidedtheinspiration for
"Keynes either had a dual-decisionhy- the task,but ifthe productofthe distilla-
pothesisat the back of his mind,or most tionis tobe presentedas a (purified)"Eco-
of the GeneralTheoryis theoreticalnon- nomicsof Keynes"to be contrastedwith
sense."The picturehere seemsto be one the (corrupted)"KeynesianEconomics,"
of Keyneswitha mindfullofideas,some thenwe are back in the realmsof mind-
ofwhichhe gotontothepagesofthe Gen- reading,especiallyas this"Economicsof
eral Theory,the task being to workout Keynes"can be readintothe GeneralThe-
whattheremaindermusthave been. This oryonlywithwhat seems to me to be a
is a problemof readingnot so much be- greatdeal ofingenuity and determination.
tweenthelinesas offtheedge ofthepage. So althoughLeijonhufvud at first
In hisconclusion,however,Clowermain- be concernedwiththerathermodesttask
tains,rathermore soberly,thathis pur- offindinga freshperspectivefromwhich
pose has been "simplyto clarifythefor- thedevelopmentofKeynesianEconomics
mal basisoftheKeynesianrevolution and can be surveyedor appraised,it turnsout
itsrelationto orthodoxthought"(empha- thathe is in searchof theone perspective
sis added) [2, 1969, p. 295]. This then fromwhichtheKeynesianness ofthesede-
leaves the taskquite up in theair,forit is velopmentscan be judged. Whatlooksat
not explainedto the reader how thisre- firstlikea searchfornew anglesturnsout
lates to the previousconcernwithwhat to be a searchforauthenticity.
Keyneshad "at the back ofhis mind." Butitis notjusta matterofauthenticity,
Turningto Leijonhufvud, we findthat forthefundamental presumption thatun-
he is at somepainsto trytomakeclearthe derliestheworkofClowerand Leijonhuf-
taskhe has set himself.First,he makesit vud is thatKeynessaid somethingimpor-
plainthatthe doctrine-historicalquestion tant,notonlyforeconomicpolicy,butfor
of "what Keynesreallysaid" is a strictly economictheory.Theyare saying:"Let us
secondarymatterfor his purposes [16, read the General Theoryin a search for
1968, p. 9]. "The primarypurpose,"he theoreticalinnovation."In other words,
explains, "remains . . . to provide a fresh far frombeing engaged in disinterested
perspectivefrom which the income- exegesis(as the concernforauthenticity
expendituretheorymaybe reconsidered" mightsuggest),theywereconcernedwith
[16, 1968,pp. 9-10]. (The "income-expen- reworking witha viewto rejuvenating(by
dituretheory"is Leijonhufvud's label for whichstandardstheymustbe judged to
the "conceptual frameworkwhich has have had some success).
crystallizedoutofthedebatetriggered by How, then,is the taskthatClower and
the GeneralTheory"[16,1968,p. 6].) This Leijonhufvudset themselvesto be ex-
seems straightforward enough. The dif- pressedand understood? The view I want
ficultyarisesbecause whatwas presented to advanceis thattheywere settingthem-
was not just "Leijonhufvud'sfreshper- selves the task of constructing a frame-
spective,"butratherthefreshperspective workthatwould provideroom or scope
that Leijonhufvudclaimed to have dis- for Keynesian ideas. This quite rightly
tilledfromthe General Theoryitself.On takesit forgrantedthatwe alreadyhave
thefaceofit,thetaskappearsto be to get a good roughidea what Keynesianideas
a perspectiveon the whole debate by go- are: ofwhatthe GeneralTheorywas driv-
ingback to the originsofit. But theques- ingat. Whatwas wantedwas a theoretical
tionarisesofhowtheresponsibility forthis niche in which what were taken to be
Coddingtonon Keynesianism 1269
Keynes's insightscould take root and somethingthatClowerand Leijonhufvud
thrive.The motiveforthissearchwas evi- simplytake forgranted.
dentlytherecognition thattheframework The wholequestionofwhetherKeyne-
of general equilibriumtheorythat had sian ideas should be accommodatedby
been widelyadoptedforattemptsat pre- abandoningequilibriumtheorizingrather
cise expressionof Keynesianideas leaves naturallyraisesthe questionof what use
practicallyno room or scope for them: Keynes himselfmade of the-concept of
they may appear in only the most at- equilibrium." It is certainlytrue that
tenuatedand ad hoc form. Keynes made use of the term "equilib-
On itsown terms,then,the essence of rium." But before we conclude that if
the Clower-Leijonhufvud positionis this: Keynes could expresshis ideas in these
thatin orderto accommodateKeynesian termsthen theymustbe perfectlycom-
ideas, we have to abandon equilibrium patible with equilibriumtheorizing,we
theorizing and addressourselvesto an un- must pause to considerthe meaning of
derstandingof the processof disequilib- equilibriumand theusestowhichan equi-
riumtrading.In my terms,however,it is libriumconcept mightbe put. We must
not just equilibriumtheorizingthat has bear in mindthatit is entirelyin keeping
been shownto be uncongenialto Keyne- withKeynes'seclecticismthathis use of
sianideas,butratherequilibriumtheoriz- the termequilibriumcould have been a
ing withinthereductionist program.And rather desperate improvisationat one
one can see whythisshouldbe so without stage in the "long struggleof escape."
even takingany detailedview about the An equilibriumis a configuration which,
workingsof the economy.For withinre- once attained,will be maintainedpro-
ductionismeverything boilsdown to acts vided the underlyingcircumstances(for-
ofchoicewithina well-specified systemof mally,theparametersand exogenousvari-
objectives,constraintsand formsofinter- ables) remain unchanged. Accordingly,
dependence;and in equilibriumtheoriz- the interestand usefulnessof an equilib-
ing we confineour attentionto situations riumconstruction, as an end in itself,de-
in whichall the independently arrivedat pendson a questionwhichis,in principle,
choicescan be simultaneously realised.It an empiricalone, namely: what is the
thenfollowsrathernaturally, irrespective rangeofvariability ofthe underlyingcir-
of any detailsof marketformsor institu- cumstancesover the orderof magnitude
tionalarrangements, that such a system of the time involvedin adjusting(near
leaves no roomforthe "unintended"and enough) to its equilibrium configura-
"involuntary":formalfunctioning and dis- tion?'2Thatis to say,iftheunderlying cir-
order. It follows,however, from my cumstancesare fairly stablerelativeto the
characterization of such theorizingthat speed of adjustmentof the endogenous
thereare two distinctpossibilitiesforthe variables,theequilibriumconfiguration of
accommodation ofKeynesianideas:(i) the the systembecomesa matterof some in-
abandonmentof equilibriumand (ii) the terestin itselfand mayprovidea reasona-
abandonmentof reductionism.Clower bly useful substitutefor becoming in-
and Leijonhufvud consider only the volved in the complexitiesof the ad-
formerpossibility.We can see, however, justmentprocess.It is somethingto know
thattheclaimthatequilibriumtheorizing II For a detailedexegesisof thispoint,see Don
mustbe abandonedin orderto accommo- Patinkin[18, 1976,pp. 113-19].
12 We are here avoidingthe large question of
date Keynesianideas postulatesthattheo-
whetherthe systemmay approachan equilibrium
rizingmustbe carriedout in accordance configuration withoutshifting the equilibriumthat
withthe reductionist program;but thisis is beingapproached.
1270 Journalof EconomicLiterature
wherewe are heading,providedwe have to theproblemofattainingit.13It asksthe
some groundsforbelievingthatwe will question how a decentralized market
get mostoftheway therebeforewe start economy might,with some degree of
headingsomewhereelse. effectiveness, performthe task that the
It is in the lightof theseconsiderations Walrasian auctioneer would perform
thatwe can saywhyKeynes'suse ofequi- smoothly. To ask thisquestion,one needs
libriumconstructions was a peculiarone: a construction in whichpricesadjustless
He was concernedwithdiscussing, among thaninstantaneously to economiccircum-
otherthings, theinstabilityoftheunderly- stances,so thatat any pointin time the
ing circumstancesof his construction. pricesmaybe effectively providingincen-
That is, one of his focusesofinterestwas tivesto act, but the information theyre-
preciselythe failureof his equilibrium flectwillnot be appropriateforthe equi-
construction to satisfythe conditionsfor libriumthatis being approached.
the routineusefulnessof an equilibrium Nowitmaywellbe thatformulating this
construction. Therefore,in arrivingat an questionraisessomeofthemostprofound
appreciation Keynes'smethod,it is not questionsin macro-and monetaryeco-
enoughto ask the natureofhis construc- nomics;but we are stillin need, forthe
tion;we mustenquire also intoits mode practicaldeploymentof Keynesianideas,
ofanimation. Whenwe have reasontoex- of a usable simplificationsuch as the hy-
pect relativelystableunderlyingcircum- draulicapproachprovides.And theuse of
stances,theconstruction maybe animated such a simplificationwill require an
accordingto the methodof comparative awareness of the circumstancesunder
statics.When the animationis endemic, whichit maybe expectedto worktolera-
when one is concerned,as it were,with blywell: an awarenessofits scope.This is
therestlessness ofthe underlyingcircum- where a reconstituted reductionismmay
stances, the use of the construction play a part.For in orderto examinethe
becomes less straightforward, and cer- scope ofa theoryin whichpricesfailalto-
tainlyless mechanical.Whether,in this getherto playtheir(ideal) allocativerole,
case, thereis anythingmuch leftof the one needs a theoryin which there is a
conceptof equilibriumis a matterof no partialfailurein thisrespect.This latter
particularimportance.Whatis important theorycouldthenbe used to interpretthe
is to see that,just as one does not expect practicalsuccessesand failuresof the hy-
to quell a riotby takinga photographof draulicapproach:as a wayoftryingto dis-
it, neitherdid Keynes'smakeshift use of tinguishthe circumstancesconducive to
the equilibriumconcept involvethe ex- its being an adequate simplification.Ac-
pectationthathe could freeze the econ- cordingly,we shouldsee Leijonhufvud's
omyin a particularstate.Shacklehas ex- book as notso muchaboutthe economics
pressed this idea with characteristic of Keynesas about the scope of the eco-
elegance [25, 1967, p. 182]: nomicsofKeynes.Clowerand Leijonhuf-
vud claimto have shownthatKeyneswas
Ateach curtainrisethe GeneralTheory shows
us,notthedramaticmomentofinevitableac- trying to adaptthereductionistmethodto
tion,but a tableauof posed figures.It is only theexpressionofhisownideas byrefocus-
afterthecurtainhas descendedagainthatwe ing it on situationsof marketdisequilib-
hear theclatterofviolentscene-shifting.
We have seen thatClowerand Leijon- 13 In order
to do this,Clower and Leijonhufvud
avoidJoanRobinson's ultra-strict
hufvud'sversion of Keynesianismis a accordingto whichthe equilibriumstate is unap-
reconstitutedreductionism:it addresses proachableand hence the problemof attainingit
itselfnot to the stateof equilibrium,but insoluble.
Coddingtonon Keynesianism 1271
rium. But in displayingthe analytical istprogram:thefundamentalist approach
unmanageability of such a program,they by its rejectionof the choice theorythat
make it clear that,insofaras Keyneswas is essentialto and the (equilibrium)mar-
able to come to any definiteconclusions ket theorythatis typicalof reductionist
abouteconomicfunctioning, he musthavetheorizing;the hydraulicapproachby its
short-circuitedsuch problems. short-circuiting of reductionistmarket
Withinthehydraulicapproach,employ- theoryand its eschewalof formalchoice
mentproblemsare quite distinctfromal- theoryfoundations; and thereconstituted
locationproblems;theyariseat theaggre- reductionistapproach by its attemptto
gate level, and theyare independentof makeroomforKeynesianideas withinthe
relativepricesand the compositionofde- reductionistprogramby refocusingthe
mand or output.The thrustof the recon- market theoryon disequilibriumstates
stitutedreductionistapproach,however, whilstretainingthestandardchoice-theo-
is to present unemploymentas a by- reticfoundations.
productor even a species of allocation It remainsonlytomakesomecomments
problem.But ifthisformulation does not
on the relationshipof the approachesto
set anydefinitelimitson the scope ofthe one another;thethrust ofthesecomments
hydraulicsimplification,all it can suggest
will be that the variousapproachesare,
is a generalscepticismregardingthe ap- in their contributionto understanding,
propriatenessof aggregatetools to deal largelycomplementary.
withproblemsthatare seen as involving The fundamentalist approachprovides
the internalcompositionof those aggre- a verygeneralcritiqueof the methodsof
gates;this,however,adds nothingto what reductionism withregardto bothitsstyle
we alreadyknow,namelythatthehydrau- ofchoice theoryand the equilibriumthe-
lic approach is a simplification and ab-
oryof marketswithwhichit is typically
stracts from allocation problems. The associated.As suchitclearsthegroundfor
questionthatstillremainsis essentiallya theintroduction ofKeynesianideas;at the
questionofdecomposability. It is theques-
same time it formsa kind of backdrop
tion of the separabilityof employment against which hydraulic thinkingcan
problemsfromtheallocationproblemson thrive,and, as it turnsout,reductionism
Whichtheyare,inpractice,superimposed. can reappearin a modifiedform.Hydrau-
To whatextentmay we disregardthe al- lic thinking can thrivebecause,in the ab-
locativestructureof macroeconomicag- sence ofstandardreductionist results,one
gregates?Justhow bluntan instrument is
needs some drasticsimplification in order
demand management? If the recon- to say anythingat all definiteregarding
stitutedreductionistapproach could be forecasting orpolicy.(The alternativecan-
made tractablewithoutcollapsingintothe didate is the drasticsimplification pro-
Monetaristsimplification, it could be ex-
vided by the quantitytheoryof money
pectedtoshedsomelighton thesematters and its modern variants.)Reductionism
(as indeedtheMonetarist simplification it-
can thenreappearbecause,in makinguse
selfhas done). ofa drasticsimplification,one is led to ask
questionsaboutitsscope and limits;these
V. Conclusion
questionswill concernwhythe economy
In thispaper we have consideredthree may not workin the way that standard
varietiesofKeynesianism: the fundamen- reductionisttheory indicates and are
and thereconstituted questionsthat could be formulatedin a
reductionistapproaches. Each one has modified and expanded reductionist
been locatedin relationto thereduction- framework.
1272 Journalof EconomicLiterature
Thus, the fundamentalistapproach 6. GREAT BRITAIN PARLIAMENT. Em-
clearsthegroundforKeynesianideas,the ploymentPolicy.Cmd. [6527], Lon-
hydraulicapproachprovidesthe danger- don: H.M.S.O., May 1944.
ous simplification
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