Diane Coyle finds Minsky, but misses Keynes

In a very valuable and important blog (‘mainstream macro and Minsky the maverick’), Diane Coyle challenges “political classes” over their unwillingness to “address the finance problem”, and likewise the mainstream of the economics profession to grasp properly the same questions. She understands “the reluctance of people who did pre-2008 macro to ditch their human capital”, but basically suggests that’s what economists need to do: to abandon their model as redundant. 

This is strong stuff. The challenge comes at the end of a discussion of Randall Wray’s new book about Hyman Minsky (Why Minsky Matters: An introduction to the Work of a Maverick Economist, 2015, Princeton University Press).

Minsky is a (deceased) post-Keynesian economist, whose work – ignored by the profession while he was alive – has been revived and celebrated in the wake of the financial crisis. Coyle is the latest of a number of relatively high-profile figures to recognise his importance.

My plea is that Coyle reconsiders her attitude to Keynes himself.

She seems to accept the idea that mainstream macroeconomics has neglected finance. Then she seems to accept Wray’s argument that Minsky belonged to a tradition of scholarship (so called ‘post-Keynesian’) that rejected the mainstream interpretation of Keynes. And that this interpretation

“essentially bowdlerised Keynes by ignoring his emphasis on investment, finance and uncertainty”.

For decades the economics profession has refused to engage with the argument that Keynes has been wrongly interpreted. This change on the part of a leading figure in the debate about the future of economics is very welcome.

But the following statement is very problematic:

Debates about what Keynes ‘really’ meant in The General Theory are not all that interesting – and by the by a good reason for emphasising the importance of maths as well as words in economics. The mathematical notation is a way of enforcing logical consistency and expressing arguments with precision; the words can then explain more clearly, and introduce reality while keeping it rooted in logic and clarity. 

It is inconsistent to recognise Wray’s argument, but then reject Keynes on the grounds that he cannot be expressed in mathematical terms. I haven’t read Wray’s book, but the post-Keynesian position is that Keynes cannot be interpreted in mathematical terms (or more precisely as a set of simultaneous equations).

And Keynes’s own position was clear-cut:

It is a great fault of symbolic pseudo-mathematical methods of formalising a system of economic analysis, such as we shall set down in section vi of this chapter, that they expressly assume strict independence between the factors involved and lose all their cogency and authority if this hypothesis is disallowed; whereas, in ordinary discourse, where we are not blindly manipulating but know all the time what we are doing and what the words mean, we can keep 'at the back of our heads' the necessary reserves and qualifications and the adjustments which we shall have to make later on, in a way in which we cannot keep complicated partial differentials 'at the back' of several pages of algebra which assume that they all vanish. Too large a proportion of recent 'mathematical' economics are merely concoctions, as imprecise as the initial assumptions they rest on, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols. (General Theory, 1936, p. 297)

Now Keynes was no trivial figure. How can it not be “interesting” that one of the greatest economists of the twentieth century was misrepresented by the academic economics profession, and this misrepresentation has been denied ever since?  How can what he actually said not be interesting, once we recognise that what we thought he said was wrong? How can his work not be interesting if it treats finance and the shortcoming of conventional macroeconomics is that it doesn’t treat finance?

Notwithstanding the great importance of their contributions, Wray and Minsky should not necessarily have the final word.

For instance, I don’t think that Keynes saw crisis was inevitable; he saw crisis as the inevitable consequence of a dysfunctional financial system, a financial system aimed at the interests of the rentier not the producer. It might be the case that under an operational financial system a market (or mixed) economy would behave in the optimal manner of the textbook.

Keynes’s fundamental concern was with Coyle’s “finance question”. He warned against the imposition of the gold standard after the First World War; he was instrumental in devising policies to resolve the consequent depression; he devised domestic and international policies to prevent depression happening in the post-Second World War world. In recognition of his immense public service, his life was celebrated in a memorial service in Westminster Abbey, an honour afforded to few ‘commoners’ let alone economists.  It would be a great thing if Coyle’s contribution helped to begin a wider rehabilitation of this great but gravely disrespected figure.