It is clear that this fascinating and instructive correspondence on the effect of Keynes?s General Theory is winding down, but I will come back this one time to note the implications of what James Ahiakpor had so well described. And this is the fact that pre-Keynesian economists had regularly and repeatedly sought public spending during the low points of recession and hardly needed Keynes to make such recommendations. It therefore ought to be clear that whatever made the General Theory novel in its time had nothing to do with the recommendation for public spending as such. 

What made the classics different was that all such recommendations had been premised on the supposition that the spending would be value adding and temporary. It was also recognised that although the good it would do was limited, at least there would be some evening out of the effect of the cycle on unemployment. But the concept underlying such actions was supply driven. 

How different from the classical analysis was the Keynesian. The problem was over-saving so that any spending at all would do. As Keynes wrote: ??To dig holes in the ground?, paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services? (GT: 220). 

In Keynesian models, from that day to this, it is spending of itself that causes the economy to grow. What this G consists of is anyone?s guess, but whether it is a power station, a school or expenditure on raking leaves in a park, it all comes to the same thing. Public spending of whatever form leads to faster growth and employment and is necessary to offset those leakages from the circular flow of spending. My dismay that we teach such stuff knows no bounds. 

But when I look at modern textbook treatment that uses such pallid Keynesian tosh I am utterly dumbfounded. Let me take just one example from the few thousand I have seen over the years. This is from the fifth edition of Bernanke (and Able: 2005). Ben Bernanke is, of course, the Chairman of the Federal Reserve, and on page 302 he has a diagram of a falling AD against a vertical LRAS (that is, he is portraying the standard long-run model). And this is what he writes: 

     ?Eventually, price adjustment causes the economy to move to the new long-run equilibrium point at H, where output returns to its full-employment level, Y, and the price level falls to P2.? 

A fall in aggregate demand leads to a fall in the price level! Which world are we talking about? This is about a fall in the price level, not in the rate of inflation. Do we really want to teach such things to our students since absolutely no one who has lived in the world for the past sixty or so years has ever, other than on the rarest of occasions, seen an actual fall in a price level. Do we want the Fed or other parts of our macroeconomies to be run by people who think in these terms? 

But even beyond this, as Pat Gunning has so nicely pointed out, even if there were some residual sense in using such models, they cover up more than they reveal. Nothing about how an economy knits together is shown, nor are the structural changes that must occur as the economy moves from one position to another, made even rudimentarily clear. 

I, of course, go that extra step (and for all I know Pat does as well) and think that macro as it is currently taught is systematically false. It not only can seldom provide an understanding of what is actually going on, but will more often than not mislead anyone who uses the theory about the nature of the economic problems they face and the steps they need to take to remedy what is wrong. 

Classical macroeconomics did exist and was called the theory of the cycle. It was essentially microeconomics writ large and the two divisions of economic theory, which we have devised following Keynes, at that time neatly fit into each other without concerns about the micro-foundations of business cycle theory. The Keynesian Revolution, whose effects appear to be more pervasive and insidious today than they have eems to me to make it all but impossible to understand in any serious detail the workings of economies. 

There was a time when I believed that the hold that Keynesian theory has on economics was diminishing and would eventually disappear within a reasonably short period of time. I no longer think it even remotely possible. Nevertheless, it is worth reminding economists of two things. 

Firstly, that so long as economists use shifts in aggregate demand as part of their base framework they are Keynesians, irrespective of whatever else they may believe. That is what Keynes sought to introduce into economic theory and on this he was without question wholly and totally successful. 

Secondly, that there was a time before Keynes when shifts in aggregate demand were not only not part of any mainstream explanation of recessions but were specifically and explicitly rejected. What those models were and how they worked have slipped out of the conscious knowledge of economists, but they did exist and they may still have something of value to offer even now.

Steven Kates