The Keynesian Revolution and the monetarist Counter-Revolution OR。 Harry G. Johnson The American Economic Review, Vol 61, No. 2, Papers and Proceedings of the Eighty-Third Annual Meeting of the American Economic Association(May, 1971), pp. 1-14 Stable url: ttp: //inks. istor orgsici?sici0002-8282%28197105%2961%3A2%3C1%3ATKRATM%3E2.0. C0%3B2-P The American Economic Review is currently published by American EconomIc Association Your use of the jStoR archive indicates your acceptance of jSTOR's Terms and Conditions of Use, available at http:/lwww.istororg/about/terms.htmlJstOr'sTermsandConditionsofUseprovidesinpartthatunlessyouhaveobtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JStOR archive only for your personal, non-commercial use Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission JSTOR is an independent not-for-profit organization dedicated to and preserving a digital archive of scholarly journals. For more information regarding JSTOR, please contact support(@jstor.org http://www.jstor.org Fri mar1601:38:352007
The Keynesian Revolution and the Monetarist Counter-Revolution Harry G. Johnson The American Economic Review, Vol. 61, No. 2, Papers and Proceedings of the Eighty-Third Annual Meeting of the American Economic Association. (May, 1971), pp. 1-14. Stable URL: http://links.jstor.org/sici?sici=0002-8282%28197105%2961%3A2%3C1%3ATKRATM%3E2.0.CO%3B2-P The American Economic Review is currently published by American Economic Association. Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/about/terms.html. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/journals/aea.html. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is an independent not-for-profit organization dedicated to and preserving a digital archive of scholarly journals. For more information regarding JSTOR, please contact support@jstor.org. http://www.jstor.org Fri Mar 16 01:38:35 2007
RICHARD T ELY LECTURE The Keynesian Revolution and the Monetarist Counter-Revolution By HARRY G. JoHNSON The London school of Economics and Political Science and The University of Chicago When James Tobin and I agreed on the difficult to transfer from its origins in poli subject of this lecture last spring, it ap tics to other fields of social science. Its es peared to be a highly topical subject that sence is unexpected speed of change, and would command widespread interest this requires a judgment of speed in the among the membership of this Associa- context of a longer perspective of histori tion. Unfortunately, as so often happens cal change, the choice of which is likely to with forward planning for academic pur- be debatable in the extreme. leaving the poses, others have also been alert to tor judgmental issue aside for the moment cality, and have undermined our forward one could characterize the history of our lanning by getting in earlier with their subject in terms of version of the theme. Thus Milton Fried- tions very broadly u: began with what man himself gave a widely publicized lec- Economics as we know it began with what ture on"The Counter-Revolution in Mon- might be called the "Smithian Revo- etary Theory"last September in London, lution"against the established body of which lecture has recently been published doctrines generically described as"mer by the institute of Economic Affairs, [4]: cantilism, "a revolution which changed Karl Brunner has recently circulated a ideas on the nature and sources of the typically scholarly paper on"The'Mone- wealth of nations and the policies required tarist Revolution In Monetary Theory' to promote the growth of what we now [1]; and undoubtedly many others have call"affluence. "The Ricardian revolution been writing and publishing on the same turned the attention of economists from subject. My treatment of this beginning. concern with national wealth and it to-be-well-worn theme today will, I hope, growth to the distribution of income still retain some novelty, inasmuch as i among social classes and the interactions shall be primarily concerned, not with the of growth and income distribution. The scientific issues in dispute in the monetar- marginalist revolution of the 1870's essen- ist counter-revolution against the Keyne- tially introduced a new and superior ana- ian revolution, but with the social and in- lytical technology for dealing with ricar tellectual conditions that make a revolu- do's distribution problem, in the process tion or counter-revolution possible in our gradually depriving Ricardian economic profession. This lecture is therefore an ex- of its social content; hence, the results of cursion--amateurish. i must confess-- that revolution have been described as into the economics and sociology of intel- neo-Ricardian or more commonly neo- lectual change classical economics As is well known from the field of eco- Contemporary economics is based on nomic history, the concept of revolution is this development and on at least four dis-
AMERICAN ECONOMIC ASSOCIATION cernible "revolutions"' that occurred in cant counter-revolution in the develop- the late 1920 s and in the 1930's. One was ment of our subject. In venturing this the imperfect-monopolistic competition judgment, however, I should note that the revolution, which challenged the validity disrepute into which the theories of imper- of the assumption of perfect competition fect and monopolistic competition have built following the marginalist revolution, trial competition, in the period since the and particularly the conclusions about the second world war could be described as elfare effects of competition to which the result of an intellectual counter-revo- that theory led. This revolution has more lution, based on a combination of faith in or less fizzled out, though its fossilized the preexisting theory of competition and remnants continue to plague both students devotion to the empirical revolution; and and their instructors in elementary also that, if one is prepared to disregard courses. Another was the empirical or the political labels that people choose to econometric revolution, with its insistence attach to themselves, the left-wing student initially on the measurement of economic and faculty demand for a politically and relationships and, subsequently and more socially relevant"radical"economics and ambitiously, on the testing of economic protest against emphasis on mathematical hypotheses-though the "testing of hy- and econometric quantification can be potheses "is frequently merely a euphe- classed as counter-revolutionary, inas- mism for obtaining plausible numbers to much as it seeks to revert to the pre-mar provide ceremonial adequacy for a theory ginalist-revolution concern with the eco- The third was the general equilibrium rev- among social classes. olution, based on the introduction by As i have already mentioned, the chief Hicks and Allen of the continental Walra- problem in identifying revolutions and sian-Paretoan approach into the anglo- counter-revolutions and distinguishing Saxon tradition in replacement of the them from slower and more comprehensi then-dominant Marshallian partial-equi- ble and rational processes of change in librium approach. Finally, and most economic thought is to arrive at a judg sweeping in its effects, there was the ment of the relative speed of change and Keynesian Revolution in monetary the- the degree to which the speed is justifi able. From this point of view, some of By contrast with the abundance of rev- what i have just now described as revolu olutions, counter-revolutions are hard to tions were not really revolutionary-no- find in the development of economic tably the Smithian and marginalist revolu thought. About the closest one can come tions, the imperfect-monopolistic compe- to a counter-revolution in the history of tition revolution, and the general equilib economic thought is to interpret the devel- rium and empirical revolutions. The Smith- opment of the Austrian theory of value as ian and marginalist revolutions spread a counter-revolution against the socialist, relatively slowly, through the force of and especially the Marxist, tradition of their scientific superiority and intellectual economic theorizing; and that aspect of appeal and the process of natural wastage the work of the Austrian school was a side of their opponents. The imperfect-mon issue in the marginalist revolution. The opolistic competition revolution was the d result of puzzling by inds porary times is probably the first signifi- a problem that Marshall had stated but
RICHARD T ELY LECTURE had been unable to solve satisfactorily. cording to which purely scientific consid- the existence of downward-sloping cost erations and not political considerations curves for individual firms. The general are presumed to motivate scientific work equilibrium revolution was a result of the but I can claim the protection of the"as delayed appreciation by economists of the if"methodology against any implication leed for a better command of mathemati- of a slur on individual character or a deni cal techniques, the delay being occasioned gration of scientific work. by the long association of the subject with From this point of view, obviously, the philosophy in the English academic tradi- first problem is to identify the elements in tion and its continuing association with the situation at the time of the general law in the continental tradition. And the Theory that accounted for its rapid accep- empirical revolution depended on the de- tance and propagation among professional velopment of the techniques of statistical economists. Such elements are of two inference--most of the historically great types, one relating to the objective social economists were quantitatively oriented, situation in which the new theory was pro- or at least paid lip service to the need for duced, the other relating to the scientific quantitative work, but lacked the requi- characteristics of the new theory itself site tools to carry out such work them As regards the objective social situa selves. For real intellectual revolutions, tion, by far the most helpful circumstance we are left with three major examples: the for the rapid propagation of a new and Ricardian revolution, the reasons for revolutionary theory is the existence of an whose rapid propagation were examined established orthodoxy which is clearly in- some twenty years ago by s. G. Check- consistent with the most salient facts of land [2], the Keynesian revolution, and reality, and yet is sufficiently confident of the monetarist counter -rev olution.These its intellectual power to attempt to explain last two are the subject of my lecture to. those facts, and in its efforts to do, so ex- poses its incompetence in a ludicrous fash My concern, specifically, is with the ion (on this see [8]). Orthodoxy is,of reasons for the speed of propagation of course, always vulnerable to radical chal the monetarist counter-revolution; but I lenge: the essence of an orthodoxy of any cannot approach this subject without ref- kind is to reduce the subtle and sophist- erence to the reasons for the speed of cated thoughts of great men to a set of propagation of the Keynesian revolution, simple principles and straightforward slo since the two are interrelated. Indeed, i gans that more mediocre brains can think find it useful in posing and treating the they understand well enough to live by problem to adopt the "as if"approach of but for that very reason orthodoxy is most positive economics, as expounded by the vulnerable to challenge when its principles chief protagonist of the monetarist and slogans are demonstrably in confiict counter-revolution, Milton Friedman, and with the facts of everyday experience to ask e I wished to start a So it was in the 1930,'s, and particularly counter-revolution against the keynesian in the 1930 s in britain, which had al revolution in monetary theory, how would ready experienced a decade of mass unem i go about it-and specifically, what could ployment associated with industrial I learn about the technique from the revo- senescence and an overvalued exchange lution itself? To pose the question in this rate, mass unemployment which the pre- ray is, of course, to fly in the face of cur- vailing orthodoxy could neither explain rently accepted professional ethics, ac- nor cope with. This, it may be noted was
AMERICAN ECONOMIC ASSOCIATION in large part the fault of the economists lished conservative orthodoxy and an es themselves. There existed already a body tablished self-termed"radical"orthodoxy of monetary analysis that was quite capa- and, since each recognizes and accommo- ble of explaining both Britains and the in- dates the other's arguments, there is no dustrial world,s unemployment problems real hope of progress being achieved by a as a consequence of monetary mismanage- switch from one position to the other. ment. But, hypnotized by the notion that To be more specific, a revolutionary oney is merely a veil cast over real phe- theory had to depend for its success on nomena--the homogeneity postulate of five main characteristics--here I must ad contemporary monetary theory-the mit that I am conducting my analysis in economists of the time attempted to ex- the blinding light of hindsight. First, it slain what were essentially monetary phe- had to attack the central proposition of nomena by real causes. Eminent British conservative orthodoxy-the assumed or economists sought to explain mass unem- inferred tendency of the economy to ployment as a consequence of the satia- employment--with a new but academi tion of real human wants, a satiation that cally acceptable analysis that reversed the should have produced a general reduction proposition. This Keynes did with the in working hours but unfortunately and help of Kahns concept of the multiplier inexplicably operated instead differen- and his own invention of the propensity to tially to reduce the working hours of a consume. Second, the theory had to ap stantial part of the population to abso- pear to be new, yet absorb as much as lute zero. Other economists viewed the de- possible of the valid or at least not readily pression as a punishment justly visited disputable components of existing orthodox upon enterprises and individuals for past theory. In this process, it helps greatly y sins of speculation and erroneous micro- to give old concepts new and confusing economic decision-taking. The concern for names, and to emphasize as crucial ana microeconomic explanations diverted at- lytical steps that have previously been tention from what the available macroeco- taken as platitudinous; hence in the ge nomic analysis could have said about the eral Theory, the marginal productivity of problem; it also led to the recommenda- capital became the marginal efficiency of tion of ad hoc remedies such as public capital; the desired ratio of money to in works that lacked any firm grounding in come, the k of the Cambridge tradition theory as generall y understood became a minor constituent of the new In this situation of general confusion theory of"liquidity preference; "and and obvious irrelevance of orthodox eco- ex post identity of savings and invest nomics to real problems, the way was ment, which previous theorists including open for a new theory that offered a con- Keynes himself had rightly recognized as vincing explanation of the nature of the unhelpful to dynamic analysis, became the problem and a set of policy prescriptions sine qua non of right reasoning based on that explanation. Such a theory, Third, the new theory had to have the however, would have to possess certain appropriate degree of difficulty to under- characteristics if it were to win intellec- stand. This is a complex problem in the tual acceptance and political success. In design of new theories. The new theory particular, it would have to come from had to be so difficult to understand that within yet offer liberation from the estab- senior academic colleagues would find it lished orthodoxy--for one must remember neither easy nor worth while to study, so that orthodoxy includes both an estab- that they would waste their efforts on pe