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 Stable URL: http://www.jstor.org/stable/2722548 . Accessed: 19/03/2012 09:33 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. American Economic Association is collaborating with JSTOR to digitize, preserve and extend access to Journal of Economic Literature. http://www.jstor.org Keynesian Economics: The Search for First Principles ByALAN CODDINGTON Queen Mary College Universityof London I would like to acknowledge various forms 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, methodconsisted of analyzing markets on Interestand Money [13, 1936] and else- thebasis of the choices made byindividual where, Keynes attacked a body of theory traders.Thus, the resultingtheory oper- 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 thoughthe connection Keynes also called into question the between the two levels may be provided method of analysis by which this system onlyby an analysisof the choices of a "rep- was constructed.The purpose of this arti- resentative"trader. Moreover, in orderto cle is to inquire into the various ways in providea basis fora manageableanalysis which methods of economic analysishave of marketphenomena, the analysisof in- come to terms with this threat,either by dividualchoice has to be of a particularly responding to it or by reinforcingit with stereotyped and artificialkind. This furtherthreats; it seeks to ask the ques- methodof analysis,using markettheory tion: "What has to be changed or sacrificed based on choice theoryof a type thatal- in order to accommodate Keynesian ideas lowsthe twolevels to be connected,I will within standard methods of analysis?" Its referto as "reductionism,"on thegrounds theme will be the varietyof ways 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 contrasts between dividualchoices. them explored. Considerationsof tractabilityimpose The firsttask accordingly is to charac- restrictionson the kind of choice theory terize the method of analysis of that body on whichthe market theory can be based: of theory in opposition to which Keynes the theorycannot deal withchoices in all presented his own. Very broadly, this the idiosyncraticdetail in which actors 1258 Coddingtonon Keynesianism 1259 conceive of them, nor in terms of 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 difficultiesin sustain- provide a firmenough foundationfor mar- 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 nothing about 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 of considerationsto 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 definingcharacteristic of reduction- send [28, 1937]. He argued that the kind ism: it is rather a way in which reduction- of considerations raised by Keynes in his ist theorizinghas been rendered manage- theory of liquidity preference have quite able. devastating consequences 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 theory becomes 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 ofinterest in associationwith and shiftingexpectations of futureevents money-holdingdecisions rather than with and circumstances:expectations that have borrowing and lending) with his sub- no firmfoundation in circumstances, but stantive contributions.Nevertheless, the that take theircues fromthe beliefs of oth- threat to the reductionist program does, ers, and that will be sustained by hopes, on thisview, indeed appear to be a funda- undermined by fears and 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 fundamentalistKeynesianism is 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 anythingthat threatensthis conven- cern, and naturallyhe sees these matters tional basis. In the course of a riot,for ex- of expectation,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