Explaining the Prejudice that Keynesian Economics Is Obsessed with the Short Run

Follow them to their source and you’ll usually find that big rivers have many feeder streams.  The myth that Keynes was fixated on the short run has at least two, I think.

The first was the perception that Keynes wanted to shift resources from investment into consumption.  You can see this already in 1931 in the famous story about Hayek’s foray behind enemy lines at Cambridge (here quoting Joan Robinson as cited by Brad DeLong):

While the controversy about public works was developing, Professor Robbins sent to Vienna for a member of the Austrian school to provide a counter attraction to Keynes. I very well remember Hayek's visit to Cambridge on his way to the London School. He expounded his theory and covered a black board with his triangles. The whole argument, as we could see later, consisted in confusing the current rate of investment with the total stock of capital goods, but we could not make it out at the time. The general tendency seemed to be to show that the slump was caused by [excessive] consumption. R. F. Kahn, who was at that time involved in explaining that the multiplier guaranteed that saving equals investment, asked in a puzzled tone, "Is it your view that if I went out tomorrow and bought a new overcoat, that would increase unemployment?"' "Yes," said Hayek, "but," pointing to his triangles on the board, "it would take a very long mathematical argument to explain why."

The notion is that too much consumption sets in motion a process that results in too little investment and therefore (in Hayek’s formulation) too little employment in the long run.  Aside from the logical fallacies it entails, it has an intuitive basis in a Puritan view of how capitalism works.  (Smart people would not think themselves into fallacies like Hayek’s unless they were predisposed to believe them on some deeper level.)  The irreplaceable virtue of the capitalist is that he (and it was a he) restrains himself from consumption, and that this heroic abstention is the foundation for the growth in prosperity.  Keynesian policies are condemned for their refusal to abstain—indeed for their devotion to consumption in the here and now.  Surely this failure to take the long view will be punished somehow.

The second source of the myth of the eternal Keynesian short run comes from the debate between Samuelsonian Keynesians and new classical economists in the 1970s.  The classicals argued that in a properly specified general equilibrium model there could not be persistent shortfalls of effective demand, nor government policies that could “outsmart” economic agents and bring them to a collective outcome better than they could obtain themselves by their own wits in the marketplace.  Over the course of a decade or so a sort of Yalta emerged: Neo-Keynesians argued that frictions (especially sticky prices) could produce Keynes-type effects in the short run, but they ceded the long run to the new classicals, while the classicals (most of them) handed over the short run to the Neo-Keynesians.  Now almost every macroeconomics textbook gives you short run models that look sort of Keynesian and long run models that look sort of classical.

When these two streams come together they produce a mighty roar.  Yet it has to be said that (1) neither Keynes nor the tribe of Keynesians is emotionally or philosophically predisposed to favor the present over the future, and (2) there is no general distinction between the short and long runs in “real” Keynesian theory.  An economy can remain stuck in an underemployment equilibrium for years and years, as it did during the Great Depression and as it is in the process of doing today.  This comes at the cost of not only today’s living standards but foregone investments we should be making for the future.  When you put it this way it’s obvious.  It takes a combination of emotional investment in the concept of self-denial-and-reward and a peculiar truce among late 20th century macroeconomic modelers to render it invisible.