Fabricating the Keynesian Revolution: Studies of the Inter-war Literature on Money, the Cycle, and Unemployment

Published by EH.NET (June 1, 2000)

David Laidler, Fabricating the Keynesian Revolution: Studies of the

Inter-war Literature on Money, the Cycle, and Unemployment. New York and

Cambridge: Cambridge University Press, 1999, xvi + 380 pp. $74.95 (cloth) ISBN:

0-521-64173-X, $27.95 (paper) ISBN: 0-521-64596-4.

Reviewed for EH.NET by J. Daniel Hammond, Department of Economics, Wake Forest

University.

David Laidler’s thesis is just as the title suggests. The Keynesian revolution

was a fabrication. By this Laidler means that the putative revolution was

neither uniquely Keynesian nor revolutionary. The most transforming development

of post-1936 economics was the synthesis embodied in the IS-LM model. The

model, while generally and properly associated with Keynes’s General

Theory and the “revolution” that followed, owed more to John Hicks, James

Meade, Roy Harrod, Brian Reddaway, and Alvin Hansen than to Keynes. Though the

General Theory contained an informal version of the model, the ideas

that the model was subsequently used to organize were themselves neither

particularly Keynesian nor novel.

If there was not a uniquely Keynesian revolution, why organize the book around

the idea of such an event? Obviously, one reason Laidler did so is because the

book is an exercise in myth debunking. The term “Keynesian revolution” is part

of the common parlance among economists, and carries the message that J. M.

Keynes fomented a revolution with the General Theory. No less a source

than Keynes testified to this. Laidler quotes Keynes from a 1935 letter to

George Bernard Shaw: “I believe myself to be writing a book on economic theory

which will largely revolutionise – not, I suppose, at once but in the course of

the next ten years – the way the world thinks about economic problems” (p. 3).

In the decade following publication of the General Theory there was

disagreement over the particulars of the revolution but little doubt that there

had been a revolution and that it was Keynesian.

However, Laidler’s message is also that something new and substantial was

fabricated from inter-war economics, for which Keynes and his followers were

largely responsible. This was a consensus on how to deal analytically and

practically with problems of macroeconomic instability. In this sense

“fabricate” means “to make” rather than “to make up.” The consensus was

embodied in the formal structure and interpretation of the IS-LM model. IS-LM

provided a convenient, easy-to-learn, and rich vehicle for organizing and

comparing ideas. Much of Laidler’s book is an account of the inter-war material

from which this consensus was made. Laidler shows how in the framing consensus

within the formal structure of the IS-LM model portions of inter-war economics

were preserved and portions were lost.

The book is organized around several themes in the inter-war literature. The

first theme is Wicksell’s influence on the divergent ideas in Austrian and

Swedish cycle theory. The second is the British literature of the period, with

Marshall’s heavy influence. The third theme is geographically based — the

diverse American inter-war literature including Irving Fisher’s quantity

theory, the needs-of-trade monetary policy view that was influential at the

Federal Reserve, empirical business cycle research, and underconsumptionism.

The fifth and central theme is Keynes’s General Theory and reactions to

it by older and younger economists. Laidler’s division of Keynes’s critics into

older and younger groups provides a clear view of what was new and what was

old, what was kept and what was shed, in the “Keynesian revolution.”

The IS-LM model was not just a formalization of the General Theory. It

was both more and less than this. It summarized, for instance, Wicksellian

inter-temporal coordination issues and Marshallian quantity theory ideas that

were not original to the General Theory. And it omitted key ideas from

the inter-war period that Keynes emphasized in his book, such as the roles of

uncertainty and expectations.

Fabricating the Keynesian Revolution is an effective complement to

Laidler’s The Golden Age of the Quantity Theory (Princeton University

Press, 1991). Between the two, he has provided an in-depth account of the

development of monetary and macroeconomic theory from 1870 through the 1930s.

The books share the same historiographic approach, detailed and nuanced tracing

of the development and interplay of ideas from their sources. One difference in

their content is that this book has less emphasis on the interaction of

institutions and ideas. But the two books share the same central theme, that

economic ideas evolve gradually and without so much drama as is often presumed.

The evolution of economic doctrine is complicated, with ideas being created,

being lost, and being found. Laidler provided a preview of this book’s thesis

in The Golden Age. So readers who are familiar with The Golden

Age will not be surprised by Fabricating the Keynesian Revolution.

They will, however, be amply rewarded for reading it.

Dan Hammond is author of Theory and Measurement: Causality Issues in Milton

Friedman’s Monetary Economics (Cambridge University Press, 1996).