Lachmann on Keynes

'If we look at it simply as a theoretical model, the Keynesian system is sound enough. It is consistent in the sense that, if we grant the premises, the conclusions will follow: the "level of incomes and employment" will be determined by the well-known determinants. The real issue is precisely whether the premises can be granted: to what extent they reflect reality. In Schumpeter's words, The realism of Keynes's "vision," not the logical consistency of his system is at issue.' -- Capital, Expectations, and the Market Process, p. 135

This, of course, is completely contra the people who claim that Keynes's system is illogical, self-contradictory, etc. The very first time I had to teach Keynes, and actually had to study him, I realized that not only was he consistent, there is also a beauty and elegance to his model. Of course, that says nothing about how closely it corresponds to reality.

The people who claim that Keynes's system is illogical actually mean one of two things, I suspect:

1) It went over my head, so the system must not make sense.
2) I don't like the policy conclusions he reaches, so the system must not make sense.


  1. I have to agree. It's pretty great.

  2. I had heard from several people--even fans--that the GT was incomprehensible. I started reading it (for my dissertation), waiting for it to get hard, but that never happened.

    In a related story, people (even fans) warned me that The Creature From Jekyll Island had nutty stuff in it, but it seemed pretty straightforward to me...

  3. How soon before an Austrian says this post makes no sense?

  4. I don't like the policy conclusions he reaches, so the system must not make sense

    But do models, economic or otherwise, contain policy conclusions? I mean, I could understand how a particular model of human behavior can tell me that force and authoritarian government can make the trains run on time, but I don't see how I can consider that to be a conclusion, at least in the sense I'm thinking of.

    1. "But do models, economic or otherwise, contain policy conclusions?"

      No, they don't. But sometimes people think they do.

  5. Gene,

    I'm still learning about keynesian economics, austrian stuff, etc but I think I agree with you (and Lachmann) - everything is in the premises. But could you express what are these Keynesian premises? I think that even in such basic territory most keynesians don't agree with each other.

    1. Bernardo, I shall try to give A version:

      1) Aggregate demand need not equal aggregate supply.

      2) The investment portion of aggregate demand is volatile, and depends upon investor's "animal spirits" more than "fundamentals."

      3) On the other hand, the marginal propensity to consume out of income is fairly stable.

      4) Thus, when investment plunges, aggregate demand is likely to fall far short of aggregate supply.

      5) The economy is likely to adjust to this situation through producers cutting back on production rather than price adjustments, so that the economy spirals down into a recession.