Macroeconomic Issues from a Keynesian Perspective: : Selected Essays of A.P. Thirlwall, Volume Two

Citation

Michie, J. (1998), "Macroeconomic Issues from a Keynesian Perspective: : Selected Essays of A.P. Thirlwall, Volume Two", Journal of Economic Studies, Vol. 25 No. 4, pp. 344-345. https://doi.org/10.1108/jes.1998.25.4.344.1

This is a welcome publication of a selection of Tony Thirlwall’s articles. He has grouped them under three headings, with seven or eight articles in each: first, “Keynesian theory and multiplier analysis”; second, “Unemployment and inflation”; and third, “The balance of payments and growth”. The book also contains an introduction written by Thirlwall in which he discusses each of the articles, putting them into context regarding when the work was done and why, how it related to debates at the time, and what implications might be drawn regarding academic and policy debates today. Thirlwall’s introduction therefore already does admirably what a review such as this might otherwise attempt. However, there seems little point in here attempting to paraphrase Thirlwall’s own introductory overview. So instead, in what follows I will focus on what I take to be the key issues on which the book offers useful material that deserves to be re‐read ‐ or to be drawn to the attention of those who might not have read the pieces already.

Firstly, on the nature of economies and economics, Thirlwall makes a number of important points. His analysis is far from the caricature that is sometimes painted, of Keynesians having some simple view of the economy, so that Government spending automatically boosts output and employment, without realising that there are various secondary and feedback effects to consider. On the contrary, as Thirlwall points out, it is the heavy premium placed in universities on the mathematization of economics that prevents the subtleties of Keynesian economics from being incorporated into economic theory (p. 5). There are, no doubt, simplistic Keynesians, but Thirlwall is not one. And the real culprits regarding inappropriate simplification are those who ignore and then forget everything that can’t be modelled. In economics that means ignoring and then forgetting some of the most fundamental issues of all.

Secondly, Thirlwall exposes the view that wage cuts are required to price workers back into jobs during an economic expansion. The major task here is not just to get the above statement accepted ‐ since even most mainstream economists would probably say “yes, of course”. It is to point out that the mainstream economics that most of these people use and teach is based on assumptions that do require wage cuts for employment to expand. Wages are assumed to equal the marginal product of labour, and this is assumed to decline with increased employment ‐ there is a diminishing marginal product of labour curve, sloping downwards to the right. As Thirlwall points out, empirical research shows that productivity movements are actually quite different, with no such decline. Likewise, empirical research on the actual movement of real wages over the business cycle demonstrates that the implied countercyclical pattern does not actually accord with reality (Michie, 1987). There are good discussions in the book of these issues, including of Keynes’s own considerations of the various factors involved (e.g. p. 19).

Thirdly, Thirlwall demonstrates the quite spurious nature of the “natural rate of unemployment” and its descendant the “non‐accelerating inflation rate of unemployment” (NAIRU) in economic theory, and hence their dismal performance empirically (not to mention the disastrous economic and social consequences when used as a guide for policy).

Finally, as indicated above, one of the strengths of the book is that it reminds the reader what Keynes’s key insights were, and what he was actually on about. It was not the 45° line, or the slope of the IS and LM curves. It was that, firstly, the free enterprise system if left to itself would not necessarily produce full employment and could well get itself stuck in prolonged recession. Secondly, that economic policies of laissez‐faire were inappropriate, and that the Treasury arguments to the contrary regarding crowding out and the like were based on restrictive and false assumptions. And thirdly, that these policy errors were matched ‐ indeed, were aided and abetted by mainstream economic theorists who all too easily forgot that their results were entirely dependent on unrealistic assumptions. Such theorising is fine if it helps you to think. The problem is that all too often its results are then presented as if they actually relate to the real world.

Thus Thirlwall ends his introductory overview to this book by paraphrasing what Keynes said about the characteristics of neoclassical general equilibrium theory not being those of the society in which we live, with the result that its teaching is misleading, and disastrous if we attempt to apply it.

There is much additional material in this book which is both interesting and important that the above review has not even mentioned, such as Thirlwall’s discussions of Britain’s economic problems, and of the role of deindustrialisation and of balance of payments constraints in both economic theory and practice. The interested reader will need to consult the book itself for this. In defence of my decision to highlight the above three issues of Keynes’s method, wages and employment, and NAIRU, these are not only central to current economic theory and policy, but they are areas where the overwhelming majority of the profession still cling, explicitly or implicitly, knowingly or unknowingly, to a body of theory that is at best misleading or inadequate, and at worst simply wrong. And this despite the fact that Thirlwall (and others) have, for some time now, pointed out that the emperor’s clothes are at best rather fanciful.