"We're All [mostly] Monetarists Now", not New Keynesians

New Keynesians are a variant of old monetarism. They are grappling with the same macroeconomic questions. Why does the economy experience extended periods of disequilibria? One New Keynesian answer, for example, is sticky nominal price and real wages. Despite a newly proposed answers, the question itself is not a Keynesian question. This brings me to the problem that Simon Wren-Lewis at Mostly Macro presents.

When it comes to macroeconomic policy, and keeping to the different language idea, the only significant division I see is between the mainstream macro practiced by most economists, including those in most central banks, and anti-Keynesians. By anti-Keynesian I mean those who deny the potential for aggregate demand to influence output and unemployment in the short term. [2] Why do I use the term anti-Keynesian rather than, say, New Classical? Partly because New Keynesian economics essentially just augments New Classical macroeconomics with sticky prices. But also because as far as I can see what holds anti-Keynesians together isn’t some coherent and realistic view of the world, but instead a dislike of what taking aggregate demand seriously implies.

He mentions another division, that of mainstream and heterodox, but this division appears to be swallowed by this [Mainstream] Keynesian/Anti-Keynesian divide that Simon posits.

Generalizations are troublesome. This one is especially troublesome because it obscures the origins of the arguments that New Keynesians grapple with. It also suggests that  Wren-Lewis either ignores or misinterprets the history of economic thought. If New Keynesians have abandoned the Old Keynesian position on fiscal policy (it might be more accurate to say that they let the issue fade into the background), then they are, as Leland Yeager points out in “New Keynesians and Old Monetarists”, actually Old Monetarists. Two cases in intellectual history will suffice to make the point.

In a recent post, I presented an argument between Ralph Hawtrey and John Maynard Keynes where Keynes questioned the efficacy of monetary policy in regard to high unemployment. This was an ongoing debate between Hawtrey and Keynes. It did not only appear at the Macmillan Commission. Hawtrey dedicated “Public Expenditures and Trade Depression” (1933) to confronting this issue. In response to Keynes proposition that monetary policy can be impotent, Hawtrey wrote

But to a great extent their [the central bank’s] purchases of securities will result merely in the investment market paying off advances, so that the desired increase in the banks' assets is offset. If the banks persist in buying securities beyond the point at which the indebtedness of the investment market has been reduced to a minimum, the result will be a disproportionate rise in the prices of gilt-edged securities. There will thus be very great pressure upon the banks to find additional borrowers, and, in view of what I have said above as to the intermittent and partial character of the pessimism which seems to dominate markets, I should contend that there is good reason to expect that the borrowers would be forthcoming

Hawtrey accepted that the markets do not immediately adjust to aggregate demand shocks and argued that, given an institutional arrangement where central banks influence the money stock, an expansion via open-market purchases is sufficient to offset negative aggregate demand shocks due to a credit contraction. He also doubted the efficacy of fiscal policy. He was not a New Keynesian.

And consider also Herbert J. Davenport, who Yeager quotes in the above-mentioned piece. 

Goods and services exchange for each other through the intermediary of money, for which an excess demand may sometimes develop. ‘The halfway house become a house of stopping.’ The problem is ‘withdrawal of a large part of the money supply at the existing level of prices; it is a change in the entire demand schedule of goods.’ (290) [internal quote from Davidson]

Yeager continues on the same page,

Supplies of bank account money and bank credit typically shrink at the stage of downturn into depression. A scramble for base money both by banks’ customers and by banks trying to fortify their imperiled reserves enters into Davenport’s story.

In this presentation, a negative aggregate demand shock initiated by a credit contraction occurs endogenously! Davenport accepts that economies do not immediately re-equilibrate after a demand shock. According to Yeager, Davenport wrote this in 1913, so he can hardly be considered a New Keynesian. No, this was the status-quo of pre-Keynesian arguments concerning the business cycle. Most theories from the time period implicitly concerned themselves with upward sloping short run aggregate demand supply curves, though they did not point this out explicitly. Note that this was also the case with Hawtrey's earlier work, Good Trade and Bad, which was written in 1913. 

The short-run aggregate supply curve was not purely a discovery by Keynes, so can we stop deluding ourselves and just admit that, except for the New Classicals, “we’re all monetarists now”?

HT David Glasner for his follow-upon the Wren Lewis post and Nick Rowe for his suggestion that "'Monetarist' vs 'anti-Monetarist' would work as well.”

I think that it works better.