The Practical Significance of Keynes’s Philosophy
During the 2010’s economics as a science has been heavily criticised. Eighty years ago the same happened. The First Great Depression of the 1930’s was a shock for the establishment of the academic profession. Hayek – a famous Austrian free market defender was embarrassed. His antagonist Keynes, however, was not surprised at all. In 2008 exactly the same happened: the academic establishment was shocked by the Second Great Depression of the 2010’s. The textbooks showed that mainstream economics had invented a strategy to stabilise the free-market economy by means of a sound monetary policy, executed by an independent central bank – and it did not work that way!
Many countries, such as the USA and the BRIC-countries reacted pragmatically or even opportunistically: ‘government intervention should prevent a total collapse; later we will see how we pay back government debts’. The eurozone, however, opted for a pro-cyclical policy: severe cuts in government expenditures and a liberalisation of the labour market. A wage decline was the result, aggravating the depression. Even today not any of the leaders of the eurozone admits that this strategy was counterproductive.
This article shows that the philosophy of a particular scientific programme has a decisive effect on the outcomes and on the effectiveness of policies that are derived from it. Knowledge of the paradigm, analysis and theory of the various and different programmes within economics is a necessity for developing a well-deliberated policy. Given the classical dominance in Northern eurozone, universities need to introduce competition between the different schools of economic thought. In the next section we discuss the main topics in the philosophy of science, namely ontology, epistemology and methodology. Then we apply it to Keynes’s economics, and compare it with the philosophy of the classical approach. It is obvious that the policy debates of the last ten years would have profited, if the economic and political participants had studied economics in a multidisciplinary way.
The ontology, epistemology and methodology of Keynes’s reality
Ontology answers the question what of the nature of our reality: hat is human nature, and what is the nature of the situation of humans. Classical economics assumes that all humans are economic, rational and atomistic, and that they operate in a determined and mechanical world. The concept ‘economic’ refers to the relationship between a human and his natural environment. The term ‘rational’ means that economic actors are well aware of their true preferences, and are able to behave accordingly. In this way classical economists abstract from psychic problems, which originate from the tensions within the mind. Humans disagree with their selves; in other words, they act against their true interests and follow immediate impulses. The term ‘atomistic’ suggests that humans, who co-operate with each other, exchange information, money and goods – but their preferences do not change in the interactions. Humans are like atoms, which never collude to molecules. Keynes rejects this research strategy. Humans are not just economic, but can also develop moral intuitions, and have the capacity to face their self-denial. Reality is not mechanic, but organic, and must be considered as an open system, not a determined one. If we imagine a classical wage equation, with the excess supply of labour as the determinant, the autonomous wage component as well as the coefficient are constant in a strictly closed and determined system. In case of extrinsic closure the autonomous component is a constant. Intrinsic closure means that the coefficient that relates the wage rate and the excess supply is constant. Keynes assumes openness in both respects. Classical economists assume that the economic system is closed, but is shocked extrinsically now and then. Keynes considers a mechanism as a simplification of an organic reality.
Epistemology asks what are the primary sources of knowledge. Neoclassical economics suggest that introspection leads to the discovery of economic man: he cannot not satisfy all his needs given the resources available. This makes him economically motivated. Empirical observation of prices and quantities makes it possible to explain their development by means of this one and only motive. Keynes’s picture of man is affected by the historical situation. He distinguishes between a period of scarcity – the period of economic man – , and a period of abundance – the time that man can transform himself from economic man to moral man. Economics is a moral science: it must support man in this transformation. In conclusion, introspection leads to the formulation of ontological content. Empirical observation checks whether the theoretical content corresponds with the empirical content of that programme. So, each programme has its own paradigm and its own empirical world.
Classical economists consider a competitive market as the key element of a capitalist system. If some suppliers are driven by more than just the economic motive, their competitiveness will decline, and finally they have to leave the market. Keynes, however, makes a distinction between two stages of capitalism, namely early and late or managed capitalism. In the early stage competition together with poverty drive man to work hard, thereby reducing scarcity. In the managed stage, large firms produce abundance, but become strong private monopolistic powers. Government must function as a countervailing power. So with unions and other private organisations, which play an important role in society. Within these large organisations people meet each other on a regular basis. They try to persuade each other of what must be seen as their common interest: moral persuasion. A social world emerges. When abundance grows, more people have the opportunity to educate themselves to professionals. Closed groups and closed minds might open up – if so, we are in the middle of the transformation to moral man.
When we internally and externally observe reality neoclassical economics assumes that we face a simple, closed, determined, mechanical world. Economic man is a utility maximising machine. If his income increases met x %, his consumption wil increase by y%. The relationship between x and y is a stable one. History delivers data which makes the calculation of coefficients possible. For an economy as a whole, neoclassical economists can construct an empirical model, which describes the past, and predicts the future. Government intervention should never hamper the functioning of the price mechanism – it would make the allocation of scarce resources suboptimal.
Keynes does not start with a simple and partial model of reality. He begins with the assumption of reality being complex and partly unknown (we do not know what we don’t know). Like scientists people always observe reality through a particular frame, whether it is empirical or introspective. Most people never become aware of their frame, and consider what they observe as natural and logical. Keynes considers our intuition as an important epistemological source. When we observe, we always use a frame of interpretation, whether we are aware of it or not. Framed external observation leads to experiences. Our intuition has the capacity to store experiences in a very concise way. If we have to interpret a particular situation and have to judge it, we use our intuition. It gives answers in terms of emotions: agreeable or disagreeable , true or not, morally tricky or not, beautiful or ugly. It gives direction to policy. Yes to cuts in government expenditures; no to monetary financing, investments in a poor neighbourhood somewhere in Africa: dangerous or adventurous.
Students economics in the Western world develop a classical intuition. In 2008 they were shocked: the recession is larger than expected. So, the influence of the government must be reduced. So, let us talk with other economists about the ways we can reduce its influence. Imagine that Keynes would have had a significant place in the programmes at the universities. Economists might have reacted as follows: is this a recession or a depression? Can we find empirical indicators of depression? If so, then we must stimulate government spending, and must keep the nominal wages constant. Quite different policies, just because of the different frame of interpretation. In the section on Keynes’s economics we will elaborate on this issue.
Methodologically, Keynes’s economics is macro-orientated. Whatever the level of the problem, being it micro-, or meso-, or macro, it must be approached from the macro-level. Moreover, he pretends to deliver an integral rather than a partial approach. Besides the economic motive, people are also social and psychic man, so to speak. His economic theory is about the functioning of a large, relatively closed economy – a closed economy means relatively low exports and imports. His economics is not universal, but history-specific. It is about managed capitalism, characteristic for the Western world during the first half of the 20th century. In a world of complexity and uncertainty stability is the most urgent problem. The government is responsible for a stable economy, which is a necessary condition for the many micro-markets to function well. By intervening the economy the government should offer people protection. Only then can we expect people to move from an anxious economic man to a confident moral man, with an open eye for inner psychic tensions, for positive social relationships and for the beauty of arts.
Neoclassical economists assume that an economy is stable, as long as the government does not disturb the price-mechanisms on the micro-markets. Keynes suggests that flexible prices on the micro-level only clear all these markets, if the government is successful in stabilising the economy as a whole. In 2009 the eurozone was in a depression, but decided to cut government expenditures, and announced a programme of deregulation of the labour market – a typical neoclassical programme. But the depressive expectations of the investors and consumers led to lower profit expectations and lower wages for a longer period. This aggravated the downturn. Keynes would have advised to improve the system of governance, which should be responsible for the stability of macro-prices, such as the interest rate, the wage rate and the goods prices. Only then flexible micro-prices clear their market. One example as a matter of illustration of the co-existence of a stable macro-price and a flexible micro-price. Suppose the macro-governors for wages decide to let real wages grow proportional to the expected labour productivity increase, which is 2%. The governors for price stability focus on a structural 3% increase. It means that on the micro-level firms and workers have a space of 5% each year, to let some nominal wages grow, and hold some other nominal wages constant. It means that the wage structure can be very flexible, while macroeconomically wages are stable and in line with labour productivity.
In case of negative external quantity shocks the governance system should decide to stimulate government investments, so as to stabilise the economy as a whole. Both expenditure cuts and wage reduction are pro-cyclical, and the eurozone leadership ignored this fact.
Long-term prospects for the capitalist system
The hard core of capitalism is the widespread love of money. Uncertainty makes people anxious. But if there is economic growth for a couple of years, and the government has stabilised the economy, economic man still goes on consuming increasing amounts of goods – as if growth is forever. In a free-market society someone’s success in solving his economic problem determines his well-being. His social recognition and self-respect are dependent on it. If the government does not accept its responsibility for stability and justice, uncertainty and anxiety prevents the transformation to moral man. Free labour and capital markets create social strife and promotes self-denial. There are no countervailing moral forces in the pure capitalist form.
The most important opponent of the free-market society is the communist system. In Soviet Russia the system of central economic planning appears inefficient, but communism offers a religion. It all turns on the fate of the common man. Russians have a purpose, they have something to fight for, and to sacrifice. It creates heroes and attractive rituals. It has a story to tell – the secular and atomistic liberal order does not offer social cohesion. Fragmentation might result, followed by growing nationalism, based on an ethnic identity.
The free society can only be maintained if abundance of resources is used to transform people from economic into moral man. Secular societies should develop a religion first – a moral anchor. Religion is about a particular state of the mind. It is about the relationship of a person with his self, and with the ultimate. Ethics is about the ends humans derive from their religion. Morality is about the rules people derive from their ethics. These rules are focussed on the typical social relationships between people, and between people and their natural context. An institutional framework should be developed, which supports countries, organisations, and persons in their transformation to a free and morally responsible actor.
Using the philosophy of Keynes, we can say that In a free society culture cannot be imposed by the government. China today is a good example of the opposite: culture is imposed, and people are far from free. Russia went from communism to chaos to nationalism: national pride rather than solving economic problems. The USA is moving from a culturally empty capitalism towards more nationalism, while leaving the poor free to die. Europe should try to work on a democratic alternative: every person counts. Every sentence we speak must be checked on its trustworthiness – primarily by the speaker himself.
‘All we need is inspiration’
In the 1930’s as well as in the 2010’s classical economists were unpleasantly surprised by the depression. Their empirical research did not give them warning signals. Keynes, and later the post-Keynesians had developed their own analysis, including its own empirical content, which warned them for an upcoming decline – with no effect on the policies pursued by the politicians. Their philosophical framework appears decisive for the variables, which play a central role in the analysis. The empirical indicators of these variables should be part of the political dashboard. Even now, they are not.
How can we choose between different frameworks of interpretation? By introspection and by moral persuasion in a powerfree setting. So we can formulate a series of axioms, which function as the paradigm upon which analysis and theory are built, and which decides which empirical variables are important. The classical paradigm states that man is economic, rational and atomistic. It is unrealistic – social and psychic problems are – on purpose – left out. The first constructors of the typical economic world intended to model the economic aspect of human behaviour (Menger, Walras, Pareto). Economic man operates in a closed and mechanic world, which can be described by means of classical logic, and the mathematics which is based on it. The paradigm of Keynes and the post-Keynesians is more realistic. Its man has a flexible essence: from economic to moral man. It operates in a permanently evolving reality. Behaviour is history-specific, motivated by an organic nature. Relationships between variables are regularly changing. It creates uncertainty, making man anxious. He is inclined to group together with family and tribe. Groups develop conventions about how to deal with particular circumstances. The system of governance must create stability and justice. All persons, families and firms should hold values in stock. Buffers are the answer to omni-present uncertainty. Stocks of money, economic value, social and mental capital.
Applied to the eurozone, the realism of Keynes’s paradigm makes his policy advices more valuable than the typical classical advices. Macro-prices should be stabilised. Then flexible micro-prices clear micro-markets. Government budget policy must create a balance on the domestic capital markets, and on the current account of the balance-of payments. In exceptional cases, such as a corona-crisis Brussels must show European solidarity. In case of economic external shocks, Brussel must coordinate national stabilisation policies. On all markets there must be a protection policy – Brussel sets minima. Countries can be stricter if they want to. For the EU holds that a common story must be formulated, which defines EU-identity. Nations are allowed to specify these identifiers. Once a year Brussels organises a ‘Day for Europe’, where federalists and populist can meet each other and search for commonalities.
Keizer, Piet (2015), Multidisciplinary Economics, A Methodological Account, Oxford: Oxford University Press.
Keynes, John Maynard (1936), The General Theory of Employment, Interest and Money, London: MacMillan Press.
Krugman, Paul (2008), The Return of Depression Economics, London: Penguin Books.
Skidelsky, Robert (2009), Keynes, The Return of the Master, London: Allen Lane, Penguin Group.
Skidelsky, Robert (ed.) (2015), The Essential Keynes, London: Penguin Classics.
Piet Keizer 29-05-2020
Utrecht University School of Economics