Roger Farmer is one of those people I find interesting until they exceed my capacity to understand. So I was interested in the title of his Behavioural Economics is Rational After All -- interested enough to read the whole thing, though I don't think I understood any of it. Sometimes you just keep looking for that one sentence that will make sense.
When I got to the end, Farmer said maybe we need "a radical change in the way we define equilibrium". I was interested again. Farmer followed up by saying
As I have done here.
Well, that's an invitation if ever there was one!
Farmer's link brought me to Amazon's "look inside" his book Expectations, Employment and Prices. I got to page five:
In his 1966 book, Axel Leijonhufvud made the distinction between Keynesian economics and the economics of Keynes. The neoclassical synthesis is the interpretation of The General theory that was introduced by Samuelson (1955) in the third edition of his undergraduate textbook. According to this view, the economy is Keynesian in the short run, when prices have not yet adjusted. It is classical in the long run, after price adjustments have run their course. Leijonhufved pointed out that the assumption that The General Theory is about sticky prices is central to this orthodox interpretation of Keynesian economics, but it is not a central argument of the text of The General Theory.
In one of those books I thumbed through once, long ago, and cannot identify -- though I can still picture the relevant text on the lower third of the right-hand page, beneath a graph in whatever book it was -- it was pointed out that Keynes did not propose to run deficits forever; but rather, to run deficits as a way to escape the Great Depression and then return to the standard practice of budget-balancing.
So, yeah, the distinction between Keynesian economics and the economics of Keynes, yeah. But that's not why I'm quoting Roger Farmer's paragraph.
It's interesting, the little history there, that it was Samuelson who came up with the synthesis. I hope I'm not phrasing that too strongly. Farmer makes it sound like Samuelson invented the neoclassical synthesis. Huh.
But that's not why I'm quoting Roger Farmer's paragraph.
It's this last bit:
Leijonhufved pointed out that the assumption that The General Theory is about sticky prices is central to this orthodox interpretation of Keynesian economics, but it is not a central argument of the text of The General Theory.
Okay. I can accept that sticky prices are "not a central argument of the text". I didn't get "sticky prices" from reading Keynes. I didn't get a lot of things, granted, but for sure I didn't get sticky prices from The General Theory.
What I did get was the Chapter One thing:
I HAVE called this book the General Theory of Employment, Interest and Money, placing the emphasis on the prefix general. The object of such a title is to contrast the character of my arguments and conclusions with those of the classical theory of the subject ... I shall argue that the postulates of the classical theory are applicable to a special case only and not to the general case, the situation which it assumes being a limiting point of the possible positions of equilibrium.
If we ask what particular data Keynes was thinking of when he referred to "the possible positions of equilibrium", I think it is pretty clear he was thinking about the level of employment. There are many possible equilibrium levels of employment, but only one full employment level.
The full employment level is the upper limit; clearly, then, it is a "limiting point" as Keynes indicated.
Keynes also pointed out that the classical theory is "applicable to a special case only and not to the general case". The General Theory, by contrast, applies in all of these cases: It applies at all of these possible positions of equilibrium, including the special case of full-employment equilibrium. The General Theory, in other words, is "general".
Contrast that with Farmer's Leijonhufved's Samuelson, who seems to say the general theory does not apply in the long run, when the classical theory applies.
I'm pretty sure it's a misinterpretation of the term general and a misinterpretation of Keynes to say the general theory does not apply at full employment.
I don't know the source of this misinterpretation. Maybe it's Farmer. Maybe it's Leijonhufved. Maybe it's me. But if it is Samuelson, then it reflects badly on the neoclassical synthesis. For it would mean that the neoclassical synthesis is based on a misinterpretation of Keynes.