Cash in Advance, Microfoundations in Retreat

Axel Leijonhufvud’s On Keynesian Economics and the Economics of Keynes told of the strange transformations that macroeconomists can apply to a theory as they develop it. While the profession adopted the analytical tools of the General Theory, simultaneously it abandoned many of its central economic ideas. Thus Keynes’ theory, which began as an attack on conventional ways of thinking, was turned into a special case of conventional equilibrium analysis. The proposition of ‘classical’ economics to which Keynes objected most fervently, namely that ‘apparent unemployment (apart from the admitted exceptions) must be due at bottom to a refusal by the unemployed factors to accept a reward which corresponds to their marginal productivity’ (p. 16), somehow became the distinguishing characteristic of Keynesian economics. And although Keynes had been an outspoken advocate of activist monetary policy, his ideas ended up being used to defend the proposition that monetary policy was unimportant. The tale is made even stranger by the fact that these outright negations of Keynes’ central ideas were put forth not by his opponents but by his putative apostles.