Tuesday, July 1, 2014

Response to Sumner on Keynes and Market Monetarism

Yesterday Scott Sumner made the claim that market monetarists are the true heirs of Keynes. Sumner is a terrific scholar who I am much indebted to for my own intellectual growth and the trajectory of my own research. I do not believe that his claim is  altogether unfounded, but I do believe that it is contradicted by intellectual history. I commented that his claim was not exactly true because 1) Hawtrey was the first to formulate the relationship between deficiencies in aggregate demand and money and 2) Keynes posited that, in order to be effective, the increase in the money stock must be channeled through the labor market via fiscal expansion, at least in times of depression. Keynes's support of fiscal expansion as necessary to make monetary policy effective, which,as I have discussed previously, was attacked by Hawtrey, fundamentally shifts him away from the tradition of the market monetarists. As I noted in my comment, market monetarists are the heirs of Hawtrey, not Keynes.

Consider this passage from a lecture by Keynes in 1931 (quoted by Don Patinkin):

I am not confident, however, that on this occasion money the cheap money phase will be sufficient by itself to bring about an adequate recovery of new investment. Cheap money means that the riskless or supposedly riskless, rate of interest will be low. But actual enterprise always involves some degree of risk. It may still be the case that the lender, with his confidence shattered by his experiences, will continue to ask for new enterprise rates of interest which the borrower cannot expect to earn. Indeed this was already the case in the moderately cheap money phase which preceded the financial crisis of last autumn.
If this proves to be so, there will be no means of escape from prolonged and perhaps interminable depression except by direct State intervention to promote and subsidize new investment. Formerly there was no expenditure out of the proceeds of borrowing, which it was though proper for the state to incur, except war. In the past, therefore, we have not infrequently had to wait for a war to terminate a major depression. I hope that in the future we shall not adhere to this purist financial attitude, and that we shall be ready to spend on the enterprises of peace what the financial maxims of the past would only allow us to spend on the devastations of war. At any rate I predict with an assured confidence that the only way out is for us to discover some object which is admitted even by the deadheads to be a legitimate excuse for largely increasing the expenditure of someone on something! (211)

One of these deadheads was Hawtrey, with whom Keynes clashed at the Macmillan Commission. Hawtrey wrote an article decrying this position before the Keynes wrote his General Theory

Keynes believed monetary policy to be inadequate to lift the economy from deep depression. He was not referring to only the Great Depression amidst which he was writing, but depressions more generally as he said explicitly that "we have not infrequently had to wait for a war to terminate a major depression." In other words, Keynes believed that his posited economic scenario was relatively common. This aligns with much of what he wrote in The General Theory.

Market monetarists like Scott Sumner - in some ways I consider myself in this camp -  promote NGDP targeting because it can offset deficiencies in aggregate demand. Given that Keynes believed that this policy could not successfully lift the economy out of depression, precisely the time when it would be most useful, I find any claim to the Keynesian legacy far-reaching. Most of what was Keynes said that was useful had already been stated by Hawtrey long before Keynes said it (for example, see Glasner's working paper ).

I should close by noting that any claim to a Keynes's legacy is difficult to substantiate because Keynes's ideas across his academic career were not wholly consistent. This is typically true of anyone. But if Keynes's legacy is wrapped up in his General Theory, which is no great claim to make, then it is appropriate to accept the doctrine set forth in that work as most accurately representing his legacy. I would say much the same for Hayek at the end of his career with regard to his work on social orders and currencies. Sumner is right that market monetarists have some agreement with Keynes, and even much overlap, but I believe that the few discrepancies between Hawtrey and Keynes left a chasm between the programs of these two thinkers. This gap leaves market monetarism squarely within the tradition of Hawtrey contra Keynes.

Late Thought: Scott definitely agrees that Hawtrey is a better representative of market monetarism. 1359 EST


  1. "Deadheads": It is true: I'm pretty sure I saw Hawtrey at the Saratoga show in 1985.