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“Tobin’s analysis here is methodologically old-fashioned in the sense that no attempt is made to provide microfoundations for the postulated adjustment processes”

Rajiv Sethi writes the above in a discussion of a misunderstanding of the economics of Keynes.

The discussion is interesting. According to Sethi, Keynes wrote that, in a depression, nominal wages might be sticky but in any case a decline in wages would not do the trick to increase hiring. But many modern economics writers have missed this. For example, Gary Becker writes, “Keynes and many earlier economists emphasized that unemployment rises during recessions because nominal wage rates tend to be inflexible in the downward direction. . . . A fall in price stimulates demand and reduces supply until they are brought back to rough equality.” Whether Becker is empirically correct is another story, but in any case he is misinterpreting Keynes.

But the actual reason I’m posting here is in reaction to Sethi’s remark quoted in the title above, in which he endorses a 1975 paper by James Tobin on wages and employment but remarks that Tobin’s paper did not include the individual-level decision modeling that we’d usually expect today in an academic economics paper.

Not including microfoundations—that’s actually just fine with me! My impression is that microfoundations in economics and political science are typically a version of long-obsolete psychological models of human cognition and behavior. Such folk psychology can be helpful at times—I myself have written on the rationality of voting, using a simple utility model—but I think it’s a mistake of many social scientists to suppose that these models are in any sense necessary. Rather than seeing microfoundations as supportive of empirical or theoretical economics arguments, I think the opposite: if the economics is strong, the value of the microfoundations is to give insight into the real results.


  1. Steve Roth says:

    Thanks for this, and the preceding on accounting-based economics. Hallelujah.

    Run, don’t walk, to read Wynne Godley, Towards a Reconstruction of Macroeconomics Using a Stock Flow Consistent (SFC) Model (2004)

    It’s quite short, quite readable, and quite eye-opening. Godley (he died in 2010) wasn’t officially part of the “Modern Monetary Theory” school that’s rising so strongly of late: Randall Wray, Bill Mitchell, Jamie Galbraith, etc. (it was just acquiring that moniker), but they are the ones that are using his methods. I’ve been calling them “the accounting-based school” for a while. Clear-eyed thinkers find them remarkably insightful and convincing.

    Also Steve Keen, who has implemented a large part of Godley’s system of accounts in a dynamic simulation modeling program that you can download and run.

    He’s just received a grant from INET to build it out and make it a web app.

    Also run don’t walk to read the latest edition of his book, Debunking Economics.

    Again, clear-eyed thinkers who aren’t attached at the hip to outdated folk theories will find it incredibly compelling.

  2. Steve Roth says:

    Just a bit more on Keynes: most of what is described as Keynesian analysis today is in fact an emasculated version courtesy of Robert Hicks, whose “review” of General Theory a year after it was published essentially jiu-jitsued Keynes by ignoring his central insight — uncertainty (as distinct from risk) — allowing him via his IS-LM model to show that the General Theory was in fact a special case of neoclassical theory.

    Viola, the “neoclassical synthesis.”

    It’s worth noting that thirty years later Hicks acknowledged his failure to incorporate uncertainty, and explicitly disavowed the IS-LM model as little more than a “useful classroom gadget.”

    The resulting “Keynesianism” that the Greg Mankiws and Gary Beckers of this world propound (and yes, even Krugman to a great extent) is Keynes without Keynes.

    They are all still trying to model what is essential a barter economy (which Graeber, Wray et al have shown has never existed), with money as nothing more than a transparent vehicle for barter — ignoring credit (and all money *is* credit), debt, wealth, and importantly, their distributions and redistributions.

  3. Nick Cox says:

    Robert Hicks? Sounds like Sir John Richard Hicks (8 April 1904 – 20 May 1989).

  4. Wonks Anonymous says:

    From what I heard, Keynes actually gave his approval to Hicks’ interpretation. That in no way contradicts the claim that Hicks severely distorted the General Theory!

    Greg Mankiw is an important figure in New Keynesian macroeconomics. Becker is a microeconomist, known for imperialism into areas sociologists might study. So he might give a common explanation of what “Keynesian economics” (not the same thing as “the economics of Keynes”!), but he’s not much of a proponent.

    • Manoel Galdino says:

      Keynes was the editor of the journal where Hicks published his paper: “Mr Keynes and the Classics. A suggested interpretation”. Thus, as far as I know, it’s quite incorrect to say that Keynes approved Hick’s interpretation, although it’s correct to say that he though it should be published in the journal he was editor.

      Btw, I guess economist don’t read Keynes anymore. Mankiw said that economists shouldn’t read Keynes himself, but only Keynesians ideas. Everything worthwhile in Keynes’ thought was incorporated by Keynesians. See

      Here I quote Mankiw (apud Davidson):
      “one might suppose that reading Keynes is an important part of Keynesian theorizing. In fact quite the opposite is the fact … If new Keynesian is not a true representation of Keynes’ view, then so much the worse for Keynes. The General Theory is a obscure book … [it] is an outdated book … We are in a much better position to figure out how the economy works… Classical theory is right in the long run…”

  5. Rajiv Sethi says:

    Andrew, I happen to agree with the point you make here. As I said in my post:

    “Tobin’s analysis here is methodologically old-fashioned in the sense that no attempt is made to provide microfoundations for the postulated adjustment processes. But the logic is compelling, and I am certain that with sufficient ingenuity, the argument could be expressed in more modern terms. In any case, it is no less convincing than the partial equilibrium Walrasian analysis of the labor market that has led some to prescribe lower nominal wages as a solution to our current woes.”

    I think that rejecting “methodologically old-fashioned” models out of hand is a mistake, and I have argued on my blog that many such models by the likes of Kaldor, Goodwin, Foley, and others are helpful in understanding the dynamics of a capitalist economy. I think that some effort at providing microfoundations for such models (broadly defined, and not restricted to optimizing behavior at the individual level) is worthwhile.

  6. numeric says:

    Presidential general election campaigns have several distinct features that distinguish them from most other elections:

    1. Two major candidates;
    2. The candidates clearly differ in their political ideologies and in their positions on economic issues;
    3. The two sides have roughly equal financial and organizational resources;
    4. The current election is the latest in a long series of similar contests (every four years);
    5. A long campaign, giving candidates a long time to present their case and giving voters a long time to make up their minds.

    Ha. Two-party elections (such as president, but also the various gubernatorial, senate and house elections) are “predictable” (I think less variation in the outcome is what is really being discussed) because most people make the “standing decision” (read Keys).
    Primaries have no such default decision and hence have much more variation.

  7. Xi'an says:

    Overall, I do not get this quasi-religious attitude about Keynes as if he alone had penetrated the deepest secrets of economic theory and anything not working according to the General Theory is due to a distortion of his views….

    • Andrew says:

      Yes, I agree, it’s not like you get this in physics or chemistry, say. In psychology you used to hear people arguing about the true intentions of Freud, but that always seemed pretty silly too.

      • Nick Cox says:

        In psychology you used to hear people arguing about the true intentions of Freud…

        … still very much the case, I think.

  8. […] Thoma and Paul Krugman seem to agree with me on this one (as does my Barnard colleague Rajiv Sethi). They don’t go so far as to identify utility etc as folk psychology, but maybe that will […]