During Robert Murphy’s Keynes, Krugman, and the Crisis lecture, yesterday evening, one of the attendees asked what about John Maynard Keynes’ General Theory made it so popular amongst academics. Similarly, another student asks in ‘questions for the professor’ why there was not as large of a recoil against Keynes’ book as one might have expected. These are fairly popular questions, although finding a convincing answer is difficult. Here is my attempt at one.
The most compelling theory that I have come across is Peter Boettke’s, in “What Went Wrong with Economics” (Critical Review 11, no. 1 ). We have to understand the historical context of Keynes’ work. Keynes’ General Theory was an attack on classical economics, as espoused by Alfred Marshall (the creator of the economics tradition Keynes was trained in), Arthur Pigou, et alii. In this tradition we see the evolution of a progression towards scientific formalism in economics, in spirit of the work done by marginalist Léon Walras and other predecessors (for a more general discussion see Hayek’s The Counter-Revolution of Science). From this drive towards formalism we see its greatest manifestation in the post-Keynes monetarist school, in the works of the likes of Milton Friedman, Ronald Coase, George Stigler, and others (see my article “The Implications of an Imperfect World”).
Marshall’s tradition, unfortunately, pushed aside the much more accurate and realistic framework of the Austrian school, inaugurated by Menger and continued, at the time, in the works of Ludwig von Mises and Friedrich Hayek. Boettke argues that neither Mises nor Hayek truly understood the differences between them and the neoclassical school until after Keynes’ ascendancy — both considered themselves part of the mainstream. However, these differences became all too apparent during the Keynesian revolution and with Oscar Lange’s and Abba Lerner’s responses to Mises’ socialist calculation problem (which used the general equilibrium construct to show that central planners could allocate resources just as effectively as the market — it was this argument which prompted Hayek to develop his “knowledge problem”).
There were various responses contra Keynes after the publication of The General Theory. For instance, both Pigou and Frank Knight published scathing reviews. Some of these criticisms are republished in the Mises Institute’s The Critics of Keynesian Economics, edited by Henry Hazlitt. In a 1996 journal article (“Keynes’ General Theory: A Look at the Criss-Cross of Reviews”, Journal of Post Keynesian Economics 18, no. 4), Kurt Rothschild takes a look at the different (well known) reviews and how judgment of Keynes’ book changed over time. Evidence shows that criticism of Keynes was harshest earlier on, and the true acceptance of his work took place over time (although, just as well, one could argue that what was accepted was the neoclassical-Keynesian synthesis of Hicks, Samuelson, et alii, not The General Theory, per sé).
But, Keynes’ book was a persuasive attack on the Marshallian tradition. Writes Boettke, “Certainly Keynes made fundamental errors in economic reasoning, but in many other respects, he had penetrated classical British economics deeply and had left it in tatters.” This statement gives away a lot regarding the question of why Keynes’ economics became so popular. The Austrians had not put in sufficient work in distinguishing themselves from the neoclassicals, possibly because they saw these relatively minor differences as a much smaller battle than the broader differences between the mainstream and the socialist and Keynesian doctrines (not to lump the two together, mind you). In effect, there was not a persuasive and understood doctrine to oppose Keynes; the only well known one, Marshall’s, was effectively sunk by Keynes’ criticisms.
Another important aspect of the issue is the question of why Hayek did not review The General Theory. I think most people have rejected Hayek’s excuse (made during an interview with Keynesian [dis]coordination economist Axel Leijonhufvud) that he believed Keynes would have soon changed his mind. Bruce Caldwell’s explanation seems more plausible (see Caldwell’s introduction to Hayek’s Contra Keynes and Cambridge). Hayek was focused on finishing his work on The Pure Theory of Capital, which was a refinement and defense of what he had written in Prices and Production and related journal articles. Also, perhaps Hayek was tired of the academic debate, especially after having taken part in extensive debates with Piero Sraffa, Keynes (notably, Hayek’s review of Pure Theory of Money), Knight, and others. I believe Robert Murphy suggested that Hayek may have thought that Keynes’ popularity was merely a fad, thanks to the environment into which the book was published (the Great Depression).
Clearly though, there is more to Keynes’ ascendancy than the question of legitimizing interventionism. There may have been some of this going on, but it does not explain why Keynes received such widespread academic support.
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There has been some disagreement on how Austrians should re-assert the supremacy of their doctrine in the academic community. Should we integrate into the mainstream? Or, should we differentiate ourselves from the mainstream? I think that telling from the experience of 1920–40, the evidence seems to support differentiation over integration. Distinguishing between the very important differences is paramount to highlighting the principle strengths of the Austrian School, as compared to the major weaknesses of the neoclassical mainstream (which are more profound today than those which characterized it during the 1920s and 1930s).
Alternatively, perhaps the best solution is a “division of labor”, if you will, where those who are more interested in integrating with the mainstream can do so, leading those who they persuade to the more radical and stricter economics of those Austrians intent on (in my opinion, rightly) distancing themselves as much as possible from the errors of the mainstream.