I’m Pointing at the Moon, You’re Looking at My Finger: Janet Yellen on Post-Keynesian Economics

by Philip Pilkington

Here’s an interesting fact that I’ll bet many of you didn’t know: the current head of the Federal Reserve, Janet Yellen, wrote a short paper in 1980 examining the theories of the Post-Keynesians. You can find it here.

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The paper is very clear and logically articulated. But it also manifests quite a few sicknesses of the mind that, for example, the current pluralist movement among students will almost certainly encounter in the coming months and years. Yellen cannot really think outside the confines of what she understands to be economics. So, the analysis is mainly an exercise in trying to reduce Post-Keynesian theories to their neo-Keynesian counterparts. She is not so much trying to find insights in the literature as she is trying to prove similarities between some aspects of the literature and the more mainstream neo-Keynesian literature.

This is a rather typical tendency in mainstream economists that I have pointed to before. We might call it ‘identity thinking’. That is, trying to reduce heterogeneous insights about the real-world to something that one already knows. “But we already know that”; “But we can get the same result using our model by making this and this tweak”; these are the hallmarks of identity thinking. Identity thinking is an inherently conservative mode of thought that academics should be very, very guarded against adopting. It is a mode of thought that shuns new insights — typically repressing them by pretending that they are already known or taken into account. It is an a priorist, anti-empirical and ultimately anti-scientific mode of thinking.

Another hallmark of such criticisms is the complaint that the model being examined is not “closed” or that the various “closures” used are inconsistent. I find this enormously problematic and frankly a bit irritating. If you read any of the classical macroeconomic texts there is never any interest in “closing the model”. Rather the idea is to lay out various insights, whether in algebraic or linguistic form.

Yellen, and most other mainstreamers, prefer to fetishize the model itself. They think that economics is not a discipline through which we gain insights about the real-world but rather a game in which we try to “close the model” and then other economists can discuss these “closures”. This is genuinely an attempt to turn economics from a discipline that gives its practitioners real-world insights into something more so resembling a Sudoku puzzle. Faced with this sort of rhetoric heterodox economists should not engage. Rather they should point out clearly the absurdity of what is being done and question why it is being done.

This annoys mainstream economists to no end. When faced with a challenge to the restrictive games that they play they typically cannot engage. Yellen, for example, annoyed that the authors she discusses do not do standard dynamic analysis writes at the end of her essay,

With respect to stability and disequilibrium behavior, the Post-Keynesian model could differ significantly from the standard textbook case, at least under certain conditions. Just what these conditions are however, we do not yet know, because Post-Keynesians have argued that events take place in ‘historical’ rather than ‘logical’ time and therefor have been unwilling to conduct the standard dynamic analysis. (p19)

Actually this is no longer true, although I wish it were. These days many Post-Keynesians are indeed playing this game. And in my opinion they have trapped themselves in doing so. There is a significant danger here in extricating the insights of thought experiments away from actual application in the real world and toward building toy models with little or no actual meaning or relevance. From there it is just one step away from ‘testing’ these toy models against the data using econometrics. At that stage the goose is truly cooked. Pack up and go home.

Yellen’s paper is particularly fascinating when it comes to one issue however: namely, income distribution. She fully recognises that the implication of the Kaleckian-style models that Post-Keynesians often use is that income distribution is set through the power of capitalists to control the mark-up price and hence the real wage. She also recognises that this is due to the assumption of monopoly/mark-up pricing as a matter of fact and the move away from marginalist conceptions of perfect competition and smooth factor substitution effects. But she makes nothing of this clear divergence from mainstream theory; namely, the divergence that, in contrast to the mainstream analysis, the ‘normal’ state of affairs is one in which income is distributed in line with relative social power. Again, she seems unable to get any insight from this because she is so focused on the ins-and-outs of the model. The phrase “I’m pointing at the moon and you’re looking at my finger” comes to mind, as it so often does when addressing the inherently conservative mind of the typical mainstream economist.

When it comes to income distribution she also seems rather uninterested in the idea that different savings propensities among different income groups mean that different policies will have vastly different effects. This has massive implications but because it is not stressed in mainstream economics most policy economists seem not to appreciate this fact. Indeed, I found out recently that no government institution in the world has data that allows us to break down saving by income group and so this work had to be carried out independently by Barry Cynamon and Steven Fazzari. This means that institutions do not have information available using which you could estimate different spending multipliers for different income groups. Talk about a policy blindspot!

Yellen’s discussion of wage-led inflation is also myopic in the extreme. One thing that Post-Keynesian economics tries to show is that most inflation is likely to be wage-led. This is an empirical statement about the real world. The models just demonstrate how it might function. But Yellen is, again, totally focused on how the model might be “closed”. She writes,

In the Post-Keynesian model, higher money wage demands necessarily lead to higher prices without raising the real wage and so there is nothing to stop inflation once it occurs. Why inflation in these circumstances should not accelerate continuously I cannot understand. And since the real wage which is determined by the commodity market is only acceptable to labor by accident, it is hard to fathom why such an economy should not perpetually experience either inflation or deflation. (pp18-19)

Two things here. First of all, again notice the lack of interest in the statements made by Post-Keynesians economists as empirical statements. Again, the whole focus is on the model. And this is from the economist that now has the most influence over policy in the world! Secondly, Yellen “doesn’t get it”. But what is not to get? The model suggests that there are no price-equilibrating tendencies in real world capitalism which will usually be in a state of inflation or deflation. Well, that sounds about accurate to me! Zero inflation is the extreme exception, not the rule.

Yellen’s biases here are determined by her need to see the world as a self-equilibrating system. This is an a priori assumption on her part that is clearly not based on empirical experience of the real world and I gather that it is only after years of mainstream training that she has managed to assimilate it. These sorts of assumptions are ideology at its purest. The ideology that is fobbed off on the student is that capitalism is an inherently stable system. And once effectively indoctrinated they go into the world literally unable to comprehend an economist that says otherwise. Faced with the statement “capitalism might be inherently unstable” they reply “but how on earth do you close your model?”. Pointing at the moon; looking at my finger. Terrifying! Truly terrifying!

Most of the mainstream aren’t even aware of this. But every now and again this embarrassing fact bubbles up to the surface when the more honest and self-conscious among them engage in reflection. Thomas Piketty, for example, recently said,

“I was only too aware of the fact that I knew nothing about the world’s economic problems. To put it bluntly, the discipline of economics has to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences.”


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