The Keynesian Recovery

Although modem macro-economic analysis has almost immortalized Keynes's IS-LM framework, it has largely ignored the central message of the General Theory. This is attributable, at least in part, to Keynes's failure to provide a clear concept of market organization as an alternative to the Walrasian auction paradigm. Recent developments, however, in the theory of search and transaction-externalities may ultimately provide that missing concept. Also, work on indeterminacy in rational-expectations models may direct the profession's attention away from wage-stickiness and back towards the intertemporal co-ordination problems that Keynes saw as lying at the root of unemployment. La reprise keynesienne. Meme si l'analyse macroeconomique moderne a presque immortalis6 le cadre d'analyse IS-LM de Keynes, elle a en gros ignore le message central contenu dans sa Theorie generale. Cela est attribuable au moins en partie au fait que Keynes n'a pas propose une notion claire d'organisation du marche qui puisse remplacer le paradigme de l'encan A la Walras. Cependant, certains developpements recents dans la theorie des cofuts de la recherche d'un emploi, des cofuts de transaction et des effets extemes que ce phenomene entraine, pourraient fournir un des ces jours le chainon manquant. I1 se pourrait aussi que les travaux sur l'indetermination dans les modeles d'anticipations rationnelles puissent aider a faire que l'attention des membres de la profession economiste cesse d'etre braquee sur les problemes de rigidit6 des salaires pour se fixer de nouveau sur les problemes de coordination intertemporelle qui etaient pour Keynes au coeur du probleme du chomage. It is an honour to be giving the Harold Innis Memorial lecture for 1986. I'm especially happy to be giving it in 1986 because this is the fiftieth anniversary of Keynes's General Theory of Employment, Interest and Money, and I'd like to take this occasion to speak on the subject of the influence Keynes's central The 1986 Harold Innis Memorial Lecture, presented at the Canadian Economics Association Meetings in Winnipeg, 29 May 1986. Robert Clower, David Laidler, Michael Parkin and Douglas Purvis provided useful comments on the original lecture. Canadian Journal of Economics Revue canadienne d'Economique, xix, No. 4 November novembre 1986. Printed in Canada Imprime au Canada 0008-4085 / 86 / 626-641 $1.50 ? Canadian Economics Association This content downloaded from 157.55. 39.244 on Fri, 17 Jun 2016 05:48:33 UTC All use subject to http://about.jstor. org/terms The Keynesian recovery 627 message in the General Theory has had on contemporary macro-economics, and the influence it is likely to have in coming years. If I had been asked to address this subject five or ten years ago I would have made the lecture very short. Although the Keynesian IS-LM apparatus was still the main organizing device of all intermediate macro textbooks, and of most policy-oriented economists, Keynesian theoretical ideas had virtually disappeared from the leading journals, having been displaced by unKeynesian ideas such as perfect wage-flexibility, perfect foresight, the absence of involuntary unemployment, the Pareto-optimality of business-cycle fluctuations, and so forth. Keynesian policy advice had become downright disreputable in some academic circles and was clearly on the defensive everywhere. As for the status of Keynesian ideas in society at large, Keynes once expressed the wish that some day 'economists could get themselves thought of as humble, competent people, on a level with dentists' (1930, 332). By 1979 Keynesian economists had become thought of the way I used to think of my dentist when I was ten years old, with a mouth full of cavities, and he could see no reason for using novocaine not humble or, competent, but a menace to society who was all the more dangerous because of his belief that he knew better than others what was good for them and because he now had his hands on some of the crucial policy instruments. Since 1979 the public status of Keynesian ideas has fallen even further. The madmen in authority are now distilling their frenzy from other defunct economists. But I see signs of some recovery in the status of those ideas within the discipline of economics, signs that at least they aren't yet completely dead. What I'd like to argue is that there is an important aspect of Keynes's central message that was never incorporated into the mainstream of macro-economic theory, that the failure to incorporate this aspect is largely responsible for the decline of Keynesian theoretical ideas, but that some recent theoretical developments offer hope that that failure may finally be rectified.