Future of Macroeconomics: Restoring Generality Post-Keynes

What future for Macroeconomics after Keynes ? A road map to restore the generality of the General Theory Teodoro Dario Togati University of Turin (Italy)

Introduction Introduction This paper deals with two issues: 1. why Keynes lost his generality battle 2. what to do to make Macroeconomics after the manner of Keynes (MAK), as in Victoria s book, general again I will use metaphors: witch s brews, Dracula, orange juices and Einstein The fundamental question I will ask, referring to GT, is Shall I compare thee to a witch brew or an orange?

1. W 1. WHY? HY? GT has been absorbed into the Walrasian axiomatic paradigm due to reformulation of its key concepts by micro- foundations approaches: -lack of aggregate demand seen as shock to stable system -uncertainty as risk, money as confetti -expectations as rational expectations -involuntary unemployment as natural rate -multiple equilibria and animal spirits as consistent with g.e.

So So why why did did it it happen happen? ? In the light of the axiomatic approach GT appears as a witch s brew (Blanchard 2000) but also post-Keynesians recognize that Keynes was not clear about his own strategy (e.g. Dow 2013) in modern terms, he did not articulate his research programme

Keyness Keynes s mistake mistake he did elaborate a macro model summarized in ch.18 (formalized by O'Donnell and Rogers 2016) but did not elaborate his vision or meta-model of the economy as a separate entity with respect to his model in the GT these two dimensions overlap, in contrast with what happens in the current orthodoxy

A A matter matter of of ontology ontology I I this lack of precision was not due to Keynes s laziness but to the fact he had to face Pigou, not Debreu major consequence: Keynes was not clear about the ontology of macro defining the key drivers of the economy he shared Marshall s ontology following his adoption of terms like maximization, equilibrium, rationality

A A matter matter of of ontology ontology II II Keynes believed that for his revolution methodological and analytical innovations (e.g. the introduction of money and expectations) were enough but was not conscious of potential ambiguity of such terms the end of Keynes s generality claim occurred when such terms started to be re-interpreted in neo-Walrasian microfoundations

Dracula Dracula indeed, if you address a neo-Walrasian audience by using such terms in an unqualified manner (as Keynes did) is really like putting Dracula in charge of the blood bank.

First First conclusion conclusion: : orange orange vs vs orange orange juice juice ultimate meaning of the lost generality battle is ontological The GT is like an orange grown on Marshallian soil for the axiomatic approach orange as such is inedible; so it has squeezed out the pure individualistic juice of the orange by replacing Keynes s realistic view of individuals with atomistic foundations

DO: transgenic transgenic agricolture agricolture ? ? 2 WHAT TO 2 WHAT TO DO: I am not suggesting to discard Keynes s concepts; however, to re-win the generality battle it is not enough to stress their Marshallian soil we should do some transgenic agricolture: subject them to an alternative reformulation, aimed at clarifying their hidden ontology my suggestion is to develop MAKby providing a meta- model based on a macro-foundations perspective

Why Why a a macrofoundations macrofoundations perspective perspective? ? the Keynesian approach still has potential, e.g. in analysis of stagnation issue, badly dealt with by standard macro but addressing this issue calls for a more dynamic approach than Keynes s that focuses on instantaneous equilibrium and fails to discuss changes in the key propensities a macrofoundations perspective is needed to do this

Conventions Conventions: reality or : reality or illusion illusion? ? to analyze changes in the key propensities we must go beyond familiar analysis of conventions; it is not sufficient to stress : A) that uncertainty cannot be reduced to risk B) that uncertainty justifies people s reliance on conventions, which replace individual judgement we should also consider conventions as emergent social factors having a real existence and persistence vs Akerlof and Shiller s view of conventions as illusions

Collective Collective perceptions perceptions and Einstein and Einstein Keynes failed to state aggregates as irreducible objects: he relied upon psychological states, reversible and reducible to individualist terms (e.g. pessimism and optimism) we should focus instead on persistent, irreversible aggregate properties such as collective perceptions (e.g. of markets, value, time) these perceptions change in relation to various historical and institutional contexts, as in Einsteini s relativity

Collective Collective perceptions perceptions and the GR and the GR discussing their change is possible if we focus not just on generic features of conventions (like tendency to believe that tomorrow is like today) but also on their historical and institutional dimensions the recent GR also due to changes in key propensities brought about by financialisation and technological change that influence agents perception of time and value, i.e. stimulate short-termism and speculation, in such a way as to undermine propensity to invest

Final Final conclusion conclusion: : There is a message of hope for orange lovers This kind of stability analysis appears as a new way to restore generality of MAK versus standard theory that just assumes internal stability or takes it as a matter of faith I have provided a first contribution along these lines in Togati 2015.