The Keynesian Revolution and the monetarist Counter-Revolution OR。 Harry G. Johnson The American Economic Review, Vol 61, No. 2, Papers and Proceedings of the Eighty-Third Annual Meeting of the American Economic Association(May, 1971), pp. 1-14 Stable url: ttp: //inks. istor orgsici?sici0002-8282%28197105%2961%3A2%3C1%3ATKRATM%3E2.0. C0%3B2-P The American Economic Review is currently published by American EconomIc Association Your use of the jStoR archive indicates your acceptance of jSTOR's Terms and Conditions of Use, available at http:/lwww.istororg/about/terms.htmlJstOr'sTermsandConditionsofUseprovidesinpartthatunlessyouhaveobtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JStOR archive only for your personal, non-commercial use Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission JSTOR is an independent not-for-profit organization dedicated to and preserving a digital archive of scholarly journals. For more information regarding JSTOR, please contact support(@jstor.org http://www.jstor.org Fri mar1601:38:352007
The Keynesian Revolution and the Monetarist Counter-Revolution Harry G. Johnson The American Economic Review, Vol. 61, No. 2, Papers and Proceedings of the Eighty-Third Annual Meeting of the American Economic Association. (May, 1971), pp. 1-14. Stable URL: http://links.jstor.org/sici?sici=0002-8282%28197105%2961%3A2%3C1%3ATKRATM%3E2.0.CO%3B2-P The American Economic Review is currently published by American Economic Association. Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/about/terms.html. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/journals/aea.html. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is an independent not-for-profit organization dedicated to and preserving a digital archive of scholarly journals. For more information regarding JSTOR, please contact support@jstor.org. http://www.jstor.org Fri Mar 16 01:38:35 2007
RICHARD T ELY LECTURE The Keynesian Revolution and the Monetarist Counter-Revolution By HARRY G. JoHNSON The London school of Economics and Political Science and The University of Chicago When James Tobin and I agreed on the difficult to transfer from its origins in poli subject of this lecture last spring, it ap tics to other fields of social science. Its es peared to be a highly topical subject that sence is unexpected speed of change, and would command widespread interest this requires a judgment of speed in the among the membership of this Associa- context of a longer perspective of histori tion. Unfortunately, as so often happens cal change, the choice of which is likely to with forward planning for academic pur- be debatable in the extreme. leaving the poses, others have also been alert to tor judgmental issue aside for the moment cality, and have undermined our forward one could characterize the history of our lanning by getting in earlier with their subject in terms of version of the theme. Thus Milton Fried- tions very broadly u: began with what man himself gave a widely publicized lec- Economics as we know it began with what ture on"The Counter-Revolution in Mon- might be called the "Smithian Revo- etary Theory"last September in London, lution"against the established body of which lecture has recently been published doctrines generically described as"mer by the institute of Economic Affairs, [4]: cantilism, "a revolution which changed Karl Brunner has recently circulated a ideas on the nature and sources of the typically scholarly paper on"The'Mone- wealth of nations and the policies required tarist Revolution In Monetary Theory' to promote the growth of what we now [1]; and undoubtedly many others have call"affluence. "The Ricardian revolution been writing and publishing on the same turned the attention of economists from subject. My treatment of this beginning. concern with national wealth and it to-be-well-worn theme today will, I hope, growth to the distribution of income still retain some novelty, inasmuch as i among social classes and the interactions shall be primarily concerned, not with the of growth and income distribution. The scientific issues in dispute in the monetar- marginalist revolution of the 1870's essen- ist counter-revolution against the Keyne- tially introduced a new and superior ana- ian revolution, but with the social and in- lytical technology for dealing with ricar tellectual conditions that make a revolu- do's distribution problem, in the process tion or counter-revolution possible in our gradually depriving Ricardian economic profession. This lecture is therefore an ex- of its social content; hence, the results of cursion--amateurish. i must confess-- that revolution have been described as into the economics and sociology of intel- neo-Ricardian or more commonly neo- lectual change classical economics As is well known from the field of eco- Contemporary economics is based on nomic history, the concept of revolution is this development and on at least four dis-
AMERICAN ECONOMIC ASSOCIATION cernible "revolutions"' that occurred in cant counter-revolution in the develop- the late 1920 s and in the 1930's. One was ment of our subject. In venturing this the imperfect-monopolistic competition judgment, however, I should note that the revolution, which challenged the validity disrepute into which the theories of imper- of the assumption of perfect competition fect and monopolistic competition have built following the marginalist revolution, trial competition, in the period since the and particularly the conclusions about the second world war could be described as elfare effects of competition to which the result of an intellectual counter-revo- that theory led. This revolution has more lution, based on a combination of faith in or less fizzled out, though its fossilized the preexisting theory of competition and remnants continue to plague both students devotion to the empirical revolution; and and their instructors in elementary also that, if one is prepared to disregard courses. Another was the empirical or the political labels that people choose to econometric revolution, with its insistence attach to themselves, the left-wing student initially on the measurement of economic and faculty demand for a politically and relationships and, subsequently and more socially relevant"radical"economics and ambitiously, on the testing of economic protest against emphasis on mathematical hypotheses-though the "testing of hy- and econometric quantification can be potheses "is frequently merely a euphe- classed as counter-revolutionary, inas- mism for obtaining plausible numbers to much as it seeks to revert to the pre-mar provide ceremonial adequacy for a theory ginalist-revolution concern with the eco- The third was the general equilibrium rev- among social classes. olution, based on the introduction by As i have already mentioned, the chief Hicks and Allen of the continental Walra- problem in identifying revolutions and sian-Paretoan approach into the anglo- counter-revolutions and distinguishing Saxon tradition in replacement of the them from slower and more comprehensi then-dominant Marshallian partial-equi- ble and rational processes of change in librium approach. Finally, and most economic thought is to arrive at a judg sweeping in its effects, there was the ment of the relative speed of change and Keynesian Revolution in monetary the- the degree to which the speed is justifi able. From this point of view, some of By contrast with the abundance of rev- what i have just now described as revolu olutions, counter-revolutions are hard to tions were not really revolutionary-no- find in the development of economic tably the Smithian and marginalist revolu thought. About the closest one can come tions, the imperfect-monopolistic compe- to a counter-revolution in the history of tition revolution, and the general equilib economic thought is to interpret the devel- rium and empirical revolutions. The Smith- opment of the Austrian theory of value as ian and marginalist revolutions spread a counter-revolution against the socialist, relatively slowly, through the force of and especially the Marxist, tradition of their scientific superiority and intellectual economic theorizing; and that aspect of appeal and the process of natural wastage the work of the Austrian school was a side of their opponents. The imperfect-mon issue in the marginalist revolution. The opolistic competition revolution was the d result of puzzling by inds porary times is probably the first signifi- a problem that Marshall had stated but
RICHARD T ELY LECTURE had been unable to solve satisfactorily. cording to which purely scientific consid- the existence of downward-sloping cost erations and not political considerations curves for individual firms. The general are presumed to motivate scientific work equilibrium revolution was a result of the but I can claim the protection of the"as delayed appreciation by economists of the if"methodology against any implication leed for a better command of mathemati- of a slur on individual character or a deni cal techniques, the delay being occasioned gration of scientific work. by the long association of the subject with From this point of view, obviously, the philosophy in the English academic tradi- first problem is to identify the elements in tion and its continuing association with the situation at the time of the general law in the continental tradition. And the Theory that accounted for its rapid accep- empirical revolution depended on the de- tance and propagation among professional velopment of the techniques of statistical economists. Such elements are of two inference--most of the historically great types, one relating to the objective social economists were quantitatively oriented, situation in which the new theory was pro- or at least paid lip service to the need for duced, the other relating to the scientific quantitative work, but lacked the requi- characteristics of the new theory itself site tools to carry out such work them As regards the objective social situa selves. For real intellectual revolutions, tion, by far the most helpful circumstance we are left with three major examples: the for the rapid propagation of a new and Ricardian revolution, the reasons for revolutionary theory is the existence of an whose rapid propagation were examined established orthodoxy which is clearly in- some twenty years ago by s. G. Check- consistent with the most salient facts of land [2], the Keynesian revolution, and reality, and yet is sufficiently confident of the monetarist counter -rev olution.These its intellectual power to attempt to explain last two are the subject of my lecture to. those facts, and in its efforts to do, so ex- poses its incompetence in a ludicrous fash My concern, specifically, is with the ion (on this see [8]). Orthodoxy is,of reasons for the speed of propagation of course, always vulnerable to radical chal the monetarist counter-revolution; but I lenge: the essence of an orthodoxy of any cannot approach this subject without ref- kind is to reduce the subtle and sophist- erence to the reasons for the speed of cated thoughts of great men to a set of propagation of the Keynesian revolution, simple principles and straightforward slo since the two are interrelated. Indeed, i gans that more mediocre brains can think find it useful in posing and treating the they understand well enough to live by problem to adopt the "as if"approach of but for that very reason orthodoxy is most positive economics, as expounded by the vulnerable to challenge when its principles chief protagonist of the monetarist and slogans are demonstrably in confiict counter-revolution, Milton Friedman, and with the facts of everyday experience to ask e I wished to start a So it was in the 1930,'s, and particularly counter-revolution against the keynesian in the 1930 s in britain, which had al revolution in monetary theory, how would ready experienced a decade of mass unem i go about it-and specifically, what could ployment associated with industrial I learn about the technique from the revo- senescence and an overvalued exchange lution itself? To pose the question in this rate, mass unemployment which the pre- ray is, of course, to fly in the face of cur- vailing orthodoxy could neither explain rently accepted professional ethics, ac- nor cope with. This, it may be noted was
AMERICAN ECONOMIC ASSOCIATION in large part the fault of the economists lished conservative orthodoxy and an es themselves. There existed already a body tablished self-termed"radical"orthodoxy of monetary analysis that was quite capa- and, since each recognizes and accommo- ble of explaining both Britains and the in- dates the other's arguments, there is no dustrial world,s unemployment problems real hope of progress being achieved by a as a consequence of monetary mismanage- switch from one position to the other. ment. But, hypnotized by the notion that To be more specific, a revolutionary oney is merely a veil cast over real phe- theory had to depend for its success on nomena--the homogeneity postulate of five main characteristics--here I must ad contemporary monetary theory-the mit that I am conducting my analysis in economists of the time attempted to ex- the blinding light of hindsight. First, it slain what were essentially monetary phe- had to attack the central proposition of nomena by real causes. Eminent British conservative orthodoxy-the assumed or economists sought to explain mass unem- inferred tendency of the economy to ployment as a consequence of the satia- employment--with a new but academi tion of real human wants, a satiation that cally acceptable analysis that reversed the should have produced a general reduction proposition. This Keynes did with the in working hours but unfortunately and help of Kahns concept of the multiplier inexplicably operated instead differen- and his own invention of the propensity to tially to reduce the working hours of a consume. Second, the theory had to ap stantial part of the population to abso- pear to be new, yet absorb as much as lute zero. Other economists viewed the de- possible of the valid or at least not readily pression as a punishment justly visited disputable components of existing orthodox upon enterprises and individuals for past theory. In this process, it helps greatly y sins of speculation and erroneous micro- to give old concepts new and confusing economic decision-taking. The concern for names, and to emphasize as crucial ana microeconomic explanations diverted at- lytical steps that have previously been tention from what the available macroeco- taken as platitudinous; hence in the ge nomic analysis could have said about the eral Theory, the marginal productivity of problem; it also led to the recommenda- capital became the marginal efficiency of tion of ad hoc remedies such as public capital; the desired ratio of money to in works that lacked any firm grounding in come, the k of the Cambridge tradition theory as generall y understood became a minor constituent of the new In this situation of general confusion theory of"liquidity preference; "and and obvious irrelevance of orthodox eco- ex post identity of savings and invest nomics to real problems, the way was ment, which previous theorists including open for a new theory that offered a con- Keynes himself had rightly recognized as vincing explanation of the nature of the unhelpful to dynamic analysis, became the problem and a set of policy prescriptions sine qua non of right reasoning based on that explanation. Such a theory, Third, the new theory had to have the however, would have to possess certain appropriate degree of difficulty to under- characteristics if it were to win intellec- stand. This is a complex problem in the tual acceptance and political success. In design of new theories. The new theory particular, it would have to come from had to be so difficult to understand that within yet offer liberation from the estab- senior academic colleagues would find it lished orthodoxy--for one must remember neither easy nor worth while to study, so that orthodoxy includes both an estab- that they would waste their efforts on pe
RICHARD T. ELY LECTURE pheral theoretical issues, and so offer tremely difficult to apply skillfully in a themselves as easy marks for criticism broader analytical and social context. The and dismissal by their younger and hun- new methodological challenge was coming grier colleagues. At the same time the from the explicitly mathematical new theory had to appear both difficult equilibrium approach of Hicks and Allen enough to challenge the intellectual inter- an approach whose empirically and histor- est of younger colleagues and students, ically almost empty generality was of lit- but actually easy enough for them to mas- tle general appeal. The General Theory ter adequately with a sufficient investment found a middle ground in an aggregated of intellectual endeavour. These objec- general-equilibrium system which was not tives Keynes's General Theory managed too difficult or complicated to work with to achieve: it neatly shelved the old and though it demanded a substantial step for- established scholars, like Pigou and Rob- ward in mathematical competence--and ertson, enabled the more enterprising mid- which offered a high degree of apparent dIe-and lower-middle-aged like Hansen, empirical relevance to those who took the Hicks, and Joan robinson to jump on and trouble to understand it drive the bandwagon, and permitted a Finally, the General Theory offered an whole generation of students(as Samuel- important empirical relationship for the son has recorded )to escape from the slow emerging tribe of econometricians to mea- and soul-destroying process of acquiring sure--the consumption function, a far wisdom by osmosis from their elders and more challenging relationship than the de- the literature into an intellectual realm in mand for sugar, a relationship for which which youthful iconoclasm could quickly the development of national income statis earn its just reward (in its own eyes at tics provided the raw material needed for least) by the demolition of the intellectual estimation, and which could be estimated pretensions of its academic seniors and with surprising success given the limita- predecessors. Economics, delightfully, tion of the available data to approxi could be reconstructed from scratch on mately a single business cycle the basis of a little Keynesian understand- In my judgment, these factors ac ing and a lofty contempt for the existing counted for the success of the Keynesian literature--and so it was revolution on the one hand the existence Fourth, the new theory had to offer to of an important social and economic prob- the more gifted and less opportunistic lem with which the prevailing orthodoxy scholars a new methodology more appeal- was unable to cope on the other hand, ing than those currently available. In this a variety of characteristics that appealed respect, Keynes was lucky both in having to the younger generation of that period a receptive audience available, and to hit -notably the claim of the new theory to somewhere conveniently between the old superior social relevance and intellectual and the newly emerging styles of eco- distinction, its incorporation in a novel nomic theorizing. The prevailing method- and confusing fashion of the valid ele- ological orthodoxy was that of Marshall- ments of traditional theory, the opportun a partial-equilibrium approach set within ity it offered to bypass the system of aca a clear appreciation of the two complex demic seniority by challenging senior col problems of general equilibrium and of leagues with a new and self-announ historical change, and hence both unsatis- superior scientific approach, the presenta actory at the simple level of partial-equi tion of a new methodology that made gen alysis taken by itself, and ex- eral-equilibrium theory both manageable
AMERICAN ECONOMIC ASSOCIATION and socially relevant, and the advance- much more optimistic view of the resil- ment of a new empirical relationship chal- ience of capitalism. The corollary of the lenging for econometricians to estimate. Keynesian view of the primacy of the un The very success of the Keynesian rev- employment problem has been a pro- olution, however, ensured that it would in nounced tendency to play down the ad its turn become the established orthodoxy, verse economic consequences of infation, and as such be as vulnerable as the old to and to assume that if only the unemploy revolutionary attack--which would neces- ment consequences of anti-inflationary sarily have to be a counter-revolutionary policies were properly understood, society attack. Keynes himself, as Leijonhufvud's would cheerfully agree to adopt and im monumental reinterpretation his plement an incomes policy instead thought [9] has reminded us, had a sea- A second factor in the transformation soned and subtle mind, conscious both of of Keynesianism into an orthodoxy has the flow of economic history and of the been that people who made their aca role of theory as an adjunct to policy- demic reputations and earned their pre making in a given set of historical circum- sent status on the basis of an early and stances. His followers--which means the enthusiastic conversion to Keynesianism profession at large- elaborated hishis- in the late 1930, s and early 1940s have tory- bound analysis into a timeless and continued to trade on their foresight, to spaceless set of universal principles, sac- the academic detriment of their juniors, rificing in the process much of his sub- who have never had the same chance to tlety, and so established Keynesianism as jump onto the front-and not the rear- an orthodoxy ripe for counter-attack of an academic bandwagon. This factor al factors in this trans- has been far more effective in paving the aerification worthy of note. The first, way for a monetarist counter-revolution robably most important, has been in the United States, where institutional the conviction of Keynesians that the competition prevents centralized control mass unemployment of the 1930's repre- of professional advancement, than in the sents the normal state of capitalist society United Kingdom, where Oxbridge contin -more accurately of capitalist society ues to dominate the academic scene. unaided by Keynesian management-and A third factor has been that, while the that unemployment is always the most Keynesian revolution in its time offered a urgent social problem. This view was ele- tremendous liberation to the energies of vated into a dogma in the United States young economists in the fields of pure under the leadership of Alvin Hansen, theorizing about concepts, the construc- whose theory of secular stagnation was tion of macroeconomic general-equilib he subject of his Presidential Address to rium models, and the estimation of eco- this Association [6]. While that theory nometric models of the economy, these ac- has been quietly forgotten, or frugal tivities have run into diminishing returns converted into a theory applicable to the so rapidly that they have ceased to be underdeveloped countries, vestiges of it appealing to young and ambitious econo- linger on in the thinking of American mists Keynesians. The view that unemployment The result has been that--beginning is the overriding social problem also ling- perhaps sometime in the mid-1950s- ers on among British Keynesians such as Keynesianism has become itself an estab- Joan Robinson, Roy Harrod, and Thomas lished orthodoxy, ripe for attack in ex Balogh, though I should note that Nicho- actly the same way as what Keynes chose las Kaldor has for many years taken a to call"classical economics" and to attack
RICHARD T ELY LECTURE in the 1930s. It has had the same two that orthodox theory cannot solve-is to vulnerable characteristics: inability to concentrate on the issue of infation, the prescribe for what has come to be consid- issue that Keynesian theory was least well ocial problem--inflation, in designed to deal with. The trouble with contrast to the unemployment of Keynes's that answer has been that, under the time-and a dependence on the authority fluence of both experienced infation and and prestige of senior scholars which is Keynesian theory, the public has for the oppressive to the young. Also, ironically most part not been much concerned about enough in view of Keynes's own long con- the economic evils of inflation, and so has cern with the influence of money on the not regarded infation as an important economy, it has suffered from the same test of the intellectual strength of Key- major defect as the orthodoxy Keynes at- nesian orthodoxy. The history of the tacked-the attempt to explain essentially monetarist counter- revolution has, in fact, monetary phenomena in terms of a mix- been characterized by a series of mostly ture of real theory and ad-hoc-ery, and vain efforts to convince the profession and specifically to explain inflation in terms of the public(a) that inflation is an im real effective demand and the Phillips portant question and (b)that monetarism curve. The fact that Keynesian economics can provide an explanation and a policy has stumbled into the same pitfall as the whereas Keynesianism cannot. Proposi- "classical"orthodoxy it succeeded is, per- tion(b)is eminently plausible; but it can haps, an indication of the difficulty of only get a hearing if proposition(a) is monetary theory as contrasted with value accepted first; and, aside from a brief in- theory as well as of the perils of abandon- terlude in the late 1950,s, the public has ing monetary theory in favor of what ap become convinced of proposition(a)only pears seductively to be more reasonable very recently. It is no accident that the common sense. appearance of monetarism as a strong in- If, in accordance with the"as if"meth- tellectual movement has had to wait until odology of positive economics that i the aftermath of the escalation of the war dopted earlier in this lecture, one posed in Viet Nam in 1965. It is even less of an the question of how to mount a counter- accident that its current success has de revolution against Keynesian orthodoxy, pended on a prior Keynesian claim to and considered the question in the light of and acceptance of, responsibility for ef the factors that contributed to the success forts to stop inflation by Keynesian fiscal of the Keynesian revolution, one would, means, under the auspices of the "New I think, be driven inescapably to two sets Economics. "Monetarism has until the past few years been in the position of in- The first would be the need to find an vesting a great deal of intellectual ability nportant social problem that the estab- in analyzing problems and producing solu lished orthodoxy is incapable of dealing tions that no one else has considered with, even though it tries its best and worth the effort involved. It has eventu claims to be successful. The second would ally become a public force less by its own be the need to develop a counter-revolu- efforts than as a consequence of the "New tionary theory that had the requisite char- Economics"overreaching itself when it acteristics to be academically and profes- was riding high in the formation of na- sionally successful in replacing the pre- tional economic policy. The"New Eco- vious revolutionary theory. nomics"was favored by the opportunity The obvious answer to the first problem to sell Keynesian policies to meet a Key -finding an important social problem nesian problem; it encountered disaster
AMERICAN ECONOMIC ASSOCIATION when it tried to sell reverse Keynesian of inflation as a worldwide problem-that policies to meet a non-Keynesian problem. monetarism has been taken seriously by And the monetarist counter-revolution has demic and public opinion in other been cashing in on that mistake of intel- countries lectual strategy. Practical social relevance apart, the Nevertheless, on this score of social relevance. the monetarist counter-revolu- whether revolutionary or counter-revolu tion has had certain factors working in its tionary, depends on its fitting appropri favor which have enabled it to survive ately into the intellectual climate of its and prosper despite the absence of an time. Here we may apply what has al overwhelmingly obvious inadequacy of ready been said about the reasons for the the established Keynesian orthodoxy, for successful rapid propagation of the Key- most of the postwar peri he has been nesian revolution to the "as if"question that, with the growing professionalization of how to proceed to mount a quantity of economics and the expansion of aca- theory counter-revolution. There were, I demic support of interest in it, it has be- trust you will remember, five elements in be deemed scientifically interesting and and I shall take them in turm h revolution ome increasingly possible for an issue to the success of the Keynesian worthy of investigation even if the general The first was a central attack, on theo- public display visible interest in it. retically persuasive grounds, on the cen Another has been the rise of the United tral proposition of the orthodoxy of the which has made the exploration of issues tion, that proposition was the automatic of no direct relevance to the economic tendency of the economy to full employ interests of the United States nevertheless ment In the case of the counter-revolu worth pursuing as potentially matters tion, the obvious point of attack, in a of the national interest in the world econo- world characterized by high employment my. Both the hyper-inflations in Europe and inflationary tendencies, was the vul and elsewhere that followed the two world gar Keynesian orthodox position that wars, and the strong inflations that have "money does not matter. As James characterized Latin American economic Tobin has pointed out, there is a world of history, have lent themselves to investiga- difference between two alternatives to this tion with the aid of the quantity theory as proposition, namely, one, "money does matters of potential relevance to U.S. too matter, " and, two, "money is all that economic policy. But, as already men- matters. But this difference was easily tioned, while these foreign experiences and conveniently blurred, to the benefit of have provided fodder for monetarism, and the counter-revolution, by seizing on the in the course of time support for the con- extreme Keynesian position that money tention that monetarism rests on a far does not matter at all as the essence of the wider base of empirical investigation than prevailing orthodoxy. Keynesianism, the real counter-revolu- The second aspect of Keynesian success ionary thrust of monetarism has only de- was the production of an apparently new veloped since inflation became a major theory that nevertheless absorbed all that problem for the United States itself. was valid in the existing theory while so Further, it is only since that event- far as possible giving these valid concepts which, given the world importance of the confusing new names. This was the tech United States, has meant the emergence nique followed-again I would emphasize
RICHARd T ELY LECTURE the "as if"character of my interpretation of scarce research money available only -in Friedman's classic restatement of the to senior economists and of turning young quantity theory of money [3]. The re- economists into intellectual mechanics stated quantity theory is, as Patinkin has whose function was to tighten one bolt recently pointed out, essentially a gen- only on a vast statistical assembly line eralization of Keynes's theory of liquidity the end product of which would contain preference on the basis of a more sophist- nothing that could be visibly identified cated analysis of the nature of wealth and their own work. In place of this app the relation of wealth to income. Novelty the counter-revolution set up the and the requisite intellectual confusion ology of positive economics, the were provided by the substitution of the of which is not to pursue descriptive real concept of" permanent incomee"for that ism as represented by the largest possible of wealth, and the dragging acros system of general equilibrium equations trail of the red herring of human but to select the crucial relationships that that was emerging from other work permit one to predict something large conducted at Chicago at that time. Never- from something small, regardless of the theless, the restatement of the quantity intervening chain of causation. This meth theory of money did include one impor- odology obviously offered liberation to the tant and genuinely novel element, drawn small-scale intellectual, since it freed his not from Keynes but from his predeces- mind from dependence on the large-scale sors in monetary theory, which was highly research team and the large and expensive relevant to the problem of inflation and computer program. distingu The fifth criterion for success was the theorists from Keynesians; this consisted advancement of a new and important em- in its emphasis on the Fisherian distinc- pirical relationship, suitable for deter tion between the real and the money rate mined estimation by the budding econo of interest and on the expected rate of metrician. That relationship was found in price inflation or deflation as determining the demand function for money the sta the difference between the two bility of which was claimed to be the es For the reasons just given, the restate- sence of the traditional quantity theory of ment of the quantity theory provided a money. Presentation of the stable demand new theory meeting the third criterion for function for money as the essence of the success,a degree of difficulty of under- quantity theory offered a close parallel to standing just sufficient to deter the old the Keynesian consumption function of and to challenge and reward the young, the 1930,sa statistical relationship sim and hence to reopen the avenues of pro- ple to understand theoretically and not fessional opportunity for the ambitious. too hard to estimate statistically, which The fourth criterion for success was a promised, nonetheless, to contribute im ew and appealing methodology. here the portantly to the resolution of central the counter-revolutionary theory could appeal oretical issues. Moreover, since intelligent against the tendency of Keynesian eco- and gifted young men and women will nomics to proliferate into larger and yet persevere until they succeed in finding larger models of the economic system, statistical validation of an allegedly im a tendency which sacrificed theoretical in- portant theoretical relationship and will ights to the cause of descriptive realism then interpret their results as evidence and which had the incidental but impor- favor of the theory that originally sug tant detractions of demanding large sums gested the relationship their efforts will
