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Pasinetti & the Cambridge Keynesians

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This document discusses the challenges of intellectual history and analyzing the origins and development of economic theories. It focuses on Luigi Pasinetti's book analyzing the Cambridge Keynesians. Pasinetti argues that Keynes recognized his theory required rejecting the neoclassical exchange paradigm in favor of a production paradigm. However, Keynes did not object to models blending the approaches, like IS-LM. Pasinetti wants to portray Keynes as intuiting a radical break from orthodoxy, but Keynes accepted reconciliations of his theory with marginalism. The document questions Pasinetti's interpretation of Keynes and the Cambridge Keynesians.

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Gary Mongiovi St John’s University
The challenges of intellectual history Isaiah Berlin: we often hold a multiplicity of values, which may in some respects be in conflict with one another. The same is likely true of the analytical commitments of economists:  rigor  conformity with empirical reality  clarity  practical policy implications These are desirable properties in a theory or model; but they entail obvious trade-offs they entail are evident.
The challenges of intellectual history The ideas of economists usually evolve in nuanced ways that are not always transparent to the parties involved, let alone to historians trying, generations later, to reconstruct the emergence and development of a new theory.
The challenges of intellectual history If the originators of an idea themselves recognized that their argument contained unresolved puzzles, the task of the intellectual historian is especially complicated. For then the question of what a writer meant is unavoidably bound up with speculation about what sort of solution would be consistent with the views of someone who can no longer speak for himself . Think of Ricardo, Marx and the labor theory of value.
The challenges of intellectual history Finally, the retrospective recollections of economists are not always reliable. We know from recent advances in cognitive science that memory is not a photographically precise reproduction of objective reality, but a complex process of reconstruction which aims at harmonizing an individual’s experiences and perceptions with the vast network of associations that constitute his mind.
Recently published spate of books that aim to cast light on the origins and development of Keynesian and Post- Keynesian economics. John King: A History of Post Keynesian Economics since 1936 Daniele Besomi (Ed.): The Collected Interwar Papers and Correspondence of Roy. G. Harrod, Vols I−III Nahid Aslanbegui & Guy Oakes: The Provocative Joan Robinson M. C. Marcuzzo & A. Rosselli (Eds): Economists in Cambridge: A Study through their Correspondence, 1907−1946 Luigi L. Pasinetti: Keynes and the Cambridge Keynesians
I will focus on Pasinetti’s intriguing book, and in particular on two aspects of it: His conceptualization of the Keynesian paradigm. His discussion of how the personalities of the Cambridge Keynesians affected their ability to perpetuate their legacy.
Pasinetti on the Cambridge Keynesians The Keynesians saw their work as a radical break with Marshallian orthodoxy. It is certainly true that the Keynesians spoke of the Keynesian theory as revolutionary, as is often the case with purveyors of new ideas. But the precise sense in which Keynes and his circle understood it to be revolutionary is not entirely obvious. When we look at how they positioned the theory of effective demand, we find that they did not think it radically incompatible with most of what we find in Marshallian orthodoxy circa 1930, except of course for what the latter has to say about the labor market.
The Cambridge Keynesians & IS-LM The Keynesians raised no objections to the IS-LM model until a quarter of a century after the publication of the General Theory. John King has noted that Joan Robinson was utilized IS-LM reasoning herself in her early post-GT writings. The blistering attacks on IS-LM that we now routinely associate with Post-Keynesianism began to surface in the early 1970s—that is, only after Milton Friedman and the monetarists had co-opted the IS-LM model to undermine the theoretical rationale for Keynesian demand management policies. Before that IS-LM was almost universally accepted as a useful way of capturing the essential elements of Keynes’s theory. Robinson, in her Essay on Marxian Economics (1942) clearly advocates a break from orthodoxy—though here she does not appear to mean the IS-LM Keynesians, but the anti-Keynesians.
The Cambridge Keynesians would not see for some time that Keynes’s theory required a new theory of distribution, one entirely distinct from the marginal productivity theory.
Keynes, it is worth reminding ourselves, was not so much of a revolutionary that he could make peace with Marx. When Keynes learned from Austin Robinson in November 1943 that Gerald Shove had drafted a critical review of Robinson’s book on Marx, Keynes, despite his affection and respect for Joan Robinson, was eager to have the piece for the Economic Journal, as though he were keen to have anything that bashed Marx.
Pasinetti’s interpretation of the GT Pasinetti: the message of the GT cannot be reduced to the effective demand mechanism, that is, to the idea that the level of aggregate output adjusts to bring saving and investment into line with one another. The theory involved a radical or revolutionary paradigm shift.
Pasinetti draws upon Kuhn’s Structure of Scientific Revolutions to distinguish between two paradigms in economics: The exchange paradigm, which he associates with neoclassical economics: its most developed form is Walrasian general equilibrium theory The production paradigm which was the outlook of the classical economists and Marx—and of Keynes.
The exchange paradigm = static The production paradigm = dynamic I don’t find this blunt dichotomy persuasive. For a start, the classicals and the neoclassicals alike understood perfectly well that both production & exchange are inseparable and indispensible activities in any actual market economy.
Garegnani’s distinction between marginalist theories and surplus theories It may be more useful to think in terms of Pirangelo Garegnani’s distinction grounded in the different accounts of distribution we find in the marginalist & classical- surplus theories. Marginalist theories: distribution is the outcome of a market-clearing process involving the interaction of price- elastic factor supply & demand functions. Classical theories: the division of the social product is determined through the opposition of class interest in particular historical and institutional conditions.
Pasinetti: Keynes recognized that his theory of output & employment required a rejection of the Marshallian exchange paradigm: “Keynes, thanks to his peculiarly strong powers of intuition, realized more fully than the young economists around him … how deep the break with orthodox economics was going to be. Keynes, perhaps more profoundly than the younger pupils around him, intuitively realized that the subject of their discussions concerning the output adjustment mechanism was merely the tip of the iceberg. The principle of effective demand … goes much deeper indeed than any specific detail concerning any market adjustment mechanism. It was being laid on the foundations of a “production scheme” that made it so revolutionary.” (Pasinetti, pp. 23−24)
Pasinetti: Keynes was working within the production paradigm of the classicals. This is perhaps too bold a claim. It does not jibe with Keynes’s visceral abhorrence of Ricardo & Marx. Pasinetti acknowledges that the assimilation of the effective demand mechanism into orthodox economics via the IS-LM model met little resistance from the Cambridge Keynesians (p. 30).
Prior to the publication of the GT Keynes himself reacted strongly against attempts by Harrod & Robertson to reconcile his theory with neoclassical theory. But he voiced no serious objections to the IS-LM formulations put forth after the book’s publication. Pasinetti has no real answer to this puzzle, he suggests, rather weakly, that “Perhaps Keynes was too busy having to fight on too many fronts for the affirmation of his theory, so that it is understandable that he paid less attention to the attempts of [Harrod, Meade and Hicks]. He may also have been misled by the fact that they were in any case trying to find ways (even if he did not approve of them entirely) to express his theory. … No doubt he underestimated the potentialities of Hicks’s IS-LM model. And so did his closest pupils—especially Joan Robinson and Richard Kahn. Both of them did later react, very strongly to Hicks’s formulation, but it was too late to alert Keynes to the danger.” Too late indeed: they did not realize the danger themselves until 25 years later.
Pasinetti wants to have it both ways: On the one hand, he contends that Keynes’s intuition was powerful enough to enable him to grasp that his effective demand mechanism needed to rest on foundations that are radically different from those of neoclassical economics—though there is no textual evidence for this claim. Yet, on the other hand, Keynes’s intuition failed to recognize the fundamental incompatibility between his theory of aggregate output and the marginalist elements at the core of the IS-LM system. It is difficult to see how these two claims can be reconciled.
It appears that Keynes resisted arguments that explicitly characterized his theory as a variation on the orthodox theory of his day. But he seemed not to object to models that blended the two approaches if the effective demand mechanism was recognized as a groundbreaking innovation.
Sequential versus simultaneous determination of variables Chick (1983) and Pasinetti (1974): The General Theory is characterized by a sequential determination of variables, as opposed to the method of simultaneous determination used in neoclassical analysis. Pasinetti and Chick argue that this feature of Keynes’s model is fundamental to the derivation of those results which are typically described as Keynesian. The transformation of “Keynes’s causally ordered relations into a system of simultaneous relations” (Pasinetti, 1974, p. 46) constitutes a misleading interpretation that distorts the book’s message.
But a sequential interpretation rests upon an obvious mis- specification of Keynes’s model. This can be seen most clearly in Pasinetti's treatment, which reduces the model to the following four equations: M = L(i) I = I(i) C = C(Y) C+I = Y

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Pasinetti & the Cambridge Keynesians

  • 2. The challenges of intellectual history Isaiah Berlin: we often hold a multiplicity of values, which may in some respects be in conflict with one another. The same is likely true of the analytical commitments of economists:  rigor  conformity with empirical reality  clarity  practical policy implications These are desirable properties in a theory or model; but they entail obvious trade-offs they entail are evident.
  • 3. The challenges of intellectual history The ideas of economists usually evolve in nuanced ways that are not always transparent to the parties involved, let alone to historians trying, generations later, to reconstruct the emergence and development of a new theory.
  • 4. The challenges of intellectual history If the originators of an idea themselves recognized that their argument contained unresolved puzzles, the task of the intellectual historian is especially complicated. For then the question of what a writer meant is unavoidably bound up with speculation about what sort of solution would be consistent with the views of someone who can no longer speak for himself . Think of Ricardo, Marx and the labor theory of value.
  • 5. The challenges of intellectual history Finally, the retrospective recollections of economists are not always reliable. We know from recent advances in cognitive science that memory is not a photographically precise reproduction of objective reality, but a complex process of reconstruction which aims at harmonizing an individual’s experiences and perceptions with the vast network of associations that constitute his mind.
  • 6. Recently published spate of books that aim to cast light on the origins and development of Keynesian and Post- Keynesian economics. John King: A History of Post Keynesian Economics since 1936 Daniele Besomi (Ed.): The Collected Interwar Papers and Correspondence of Roy. G. Harrod, Vols I−III Nahid Aslanbegui & Guy Oakes: The Provocative Joan Robinson M. C. Marcuzzo & A. Rosselli (Eds): Economists in Cambridge: A Study through their Correspondence, 1907−1946 Luigi L. Pasinetti: Keynes and the Cambridge Keynesians
  • 7. I will focus on Pasinetti’s intriguing book, and in particular on two aspects of it: His conceptualization of the Keynesian paradigm. His discussion of how the personalities of the Cambridge Keynesians affected their ability to perpetuate their legacy.
  • 8. Pasinetti on the Cambridge Keynesians The Keynesians saw their work as a radical break with Marshallian orthodoxy. It is certainly true that the Keynesians spoke of the Keynesian theory as revolutionary, as is often the case with purveyors of new ideas. But the precise sense in which Keynes and his circle understood it to be revolutionary is not entirely obvious. When we look at how they positioned the theory of effective demand, we find that they did not think it radically incompatible with most of what we find in Marshallian orthodoxy circa 1930, except of course for what the latter has to say about the labor market.
  • 9. The Cambridge Keynesians & IS-LM The Keynesians raised no objections to the IS-LM model until a quarter of a century after the publication of the General Theory. John King has noted that Joan Robinson was utilized IS-LM reasoning herself in her early post-GT writings. The blistering attacks on IS-LM that we now routinely associate with Post-Keynesianism began to surface in the early 1970s—that is, only after Milton Friedman and the monetarists had co-opted the IS-LM model to undermine the theoretical rationale for Keynesian demand management policies. Before that IS-LM was almost universally accepted as a useful way of capturing the essential elements of Keynes’s theory. Robinson, in her Essay on Marxian Economics (1942) clearly advocates a break from orthodoxy—though here she does not appear to mean the IS-LM Keynesians, but the anti-Keynesians.
  • 10. The Cambridge Keynesians would not see for some time that Keynes’s theory required a new theory of distribution, one entirely distinct from the marginal productivity theory.
  • 11. Keynes, it is worth reminding ourselves, was not so much of a revolutionary that he could make peace with Marx. When Keynes learned from Austin Robinson in November 1943 that Gerald Shove had drafted a critical review of Robinson’s book on Marx, Keynes, despite his affection and respect for Joan Robinson, was eager to have the piece for the Economic Journal, as though he were keen to have anything that bashed Marx.
  • 12. Pasinetti’s interpretation of the GT Pasinetti: the message of the GT cannot be reduced to the effective demand mechanism, that is, to the idea that the level of aggregate output adjusts to bring saving and investment into line with one another. The theory involved a radical or revolutionary paradigm shift.
  • 13. Pasinetti draws upon Kuhn’s Structure of Scientific Revolutions to distinguish between two paradigms in economics: The exchange paradigm, which he associates with neoclassical economics: its most developed form is Walrasian general equilibrium theory The production paradigm which was the outlook of the classical economists and Marx—and of Keynes.
  • 14. The exchange paradigm = static The production paradigm = dynamic I don’t find this blunt dichotomy persuasive. For a start, the classicals and the neoclassicals alike understood perfectly well that both production & exchange are inseparable and indispensible activities in any actual market economy.
  • 15. Garegnani’s distinction between marginalist theories and surplus theories It may be more useful to think in terms of Pirangelo Garegnani’s distinction grounded in the different accounts of distribution we find in the marginalist & classical- surplus theories. Marginalist theories: distribution is the outcome of a market-clearing process involving the interaction of price- elastic factor supply & demand functions. Classical theories: the division of the social product is determined through the opposition of class interest in particular historical and institutional conditions.
  • 16. Pasinetti: Keynes recognized that his theory of output & employment required a rejection of the Marshallian exchange paradigm: “Keynes, thanks to his peculiarly strong powers of intuition, realized more fully than the young economists around him … how deep the break with orthodox economics was going to be. Keynes, perhaps more profoundly than the younger pupils around him, intuitively realized that the subject of their discussions concerning the output adjustment mechanism was merely the tip of the iceberg. The principle of effective demand … goes much deeper indeed than any specific detail concerning any market adjustment mechanism. It was being laid on the foundations of a “production scheme” that made it so revolutionary.” (Pasinetti, pp. 23−24)
  • 17. Pasinetti: Keynes was working within the production paradigm of the classicals. This is perhaps too bold a claim. It does not jibe with Keynes’s visceral abhorrence of Ricardo & Marx. Pasinetti acknowledges that the assimilation of the effective demand mechanism into orthodox economics via the IS-LM model met little resistance from the Cambridge Keynesians (p. 30).
  • 18. Prior to the publication of the GT Keynes himself reacted strongly against attempts by Harrod & Robertson to reconcile his theory with neoclassical theory. But he voiced no serious objections to the IS-LM formulations put forth after the book’s publication. Pasinetti has no real answer to this puzzle, he suggests, rather weakly, that “Perhaps Keynes was too busy having to fight on too many fronts for the affirmation of his theory, so that it is understandable that he paid less attention to the attempts of [Harrod, Meade and Hicks]. He may also have been misled by the fact that they were in any case trying to find ways (even if he did not approve of them entirely) to express his theory. … No doubt he underestimated the potentialities of Hicks’s IS-LM model. And so did his closest pupils—especially Joan Robinson and Richard Kahn. Both of them did later react, very strongly to Hicks’s formulation, but it was too late to alert Keynes to the danger.” Too late indeed: they did not realize the danger themselves until 25 years later.
  • 19. Pasinetti wants to have it both ways: On the one hand, he contends that Keynes’s intuition was powerful enough to enable him to grasp that his effective demand mechanism needed to rest on foundations that are radically different from those of neoclassical economics—though there is no textual evidence for this claim. Yet, on the other hand, Keynes’s intuition failed to recognize the fundamental incompatibility between his theory of aggregate output and the marginalist elements at the core of the IS-LM system. It is difficult to see how these two claims can be reconciled.
  • 20. It appears that Keynes resisted arguments that explicitly characterized his theory as a variation on the orthodox theory of his day. But he seemed not to object to models that blended the two approaches if the effective demand mechanism was recognized as a groundbreaking innovation.
  • 21. Sequential versus simultaneous determination of variables Chick (1983) and Pasinetti (1974): The General Theory is characterized by a sequential determination of variables, as opposed to the method of simultaneous determination used in neoclassical analysis. Pasinetti and Chick argue that this feature of Keynes’s model is fundamental to the derivation of those results which are typically described as Keynesian. The transformation of “Keynes’s causally ordered relations into a system of simultaneous relations” (Pasinetti, 1974, p. 46) constitutes a misleading interpretation that distorts the book’s message.
  • 22. But a sequential interpretation rests upon an obvious mis- specification of Keynes’s model. This can be seen most clearly in Pasinetti's treatment, which reduces the model to the following four equations: M = L(i) I = I(i) C = C(Y) C+I = Y