Harry G. Johnson as a Chronicler of the Keynesian Revolution

American Journal of Economics and Sociology, The,  July, 2001  

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Johnson (1958) did not explore such dynamic considerations, but only invoked them to support the widely accepted compromise, later remarked by Leijonhufvud (1968), that Keynesian economics was of great, even revolutionary, practical importance for policy making, but depended crucially on assuming rigidity of money wages. Introducing an arbitrary assumption of nominal rigidity into the classical model was no revolution in economic theory, so the practically important was theoretically trivial. Asimakopulos (1978:S7) notes that "Johnson's equilibrium approach to the General Theory is indicated by his acceptance of the 'real-balance-effect' proof (Patinkin, 1965) that Keynes's underemployment equilibrium depends on rigid wages (Johnson, 1961, 9-12)." Kalecki (1944), in a comment on Pigou (1943), noted that the real balance effect affected only outside money, not bank deposits backed by bank loans, because a change in the real value of such inside money would make only transfer wealth between borrowers and lender s, not change net wealth. While Asimakopulos (ibid., p. S7) believed that "Keynes did not comment on the 'usefulness' of the real-balance effect," Keynes's correspondence as editor of the Economic Journal (not yet published when Johnson and Asimakopulos wrote) shows that Keynes remarked to Kalecki that the real balance effect also did not apply to government debt, as the market value of government represented the present value of future liabilities to taxpayers. Keynes also noted the contradictory effects of deflation, lowering the opportunity cost of holding money and, by increasing the real value of inside debt, increasing risk of bankruptcy (so raising risk premia) and transferring wealth away from those with the highest propensity to spend (see Dimand 1991). Harry Johnson's belief that the real balance effect eliminated the possibility of underemployment equilibrium with flexible nominal wages was, unknown to him, an argument already faced and rejected by Keynes and Kalecki.

IV

The General Theory after 25 Years

HARRY JOHNSON'S INVITED LECTURE to the American Economic Association in December 1961, marking the 25th anniversary of Keynes's General Theory, was a forerunner of the Association's Richard T. Ely Lectures. In that lecture, Johnson again spoke sympathetically of the Keynesian Project, but explored difficulties with The General Theory, more and deeper difficulties than he had found when delivering "Monetary Theory and Keynesian Economics." While upholding Keynesian economics as an appropriate guide for policy making (if only it paid more attention to monetary conditions), Johnson stressed its grounding in the earlier Cambridge economics of Alfred Marshall, and attributed its theoretical limitations to Marshallian partial-equilibrium analysis, as distinct from the general equilibrium analysis that Johnson had come to adopt (largely through his work in international trade theory). In contrast to his earlier evaluations of the Keynesian revolution and the subsequent Cambridge controversies, Johnson now felt that the presentation of Keynes's theory was shaped and perhaps distorted by "Keynes the born propagandist, with his instinct for dramatizing his ideas, and his Cassandra complex, fortified as polemicists often are by a certain obtuseness in understanding the arguments of his adversaries" (1962b:128).