Lucas, Keynes, Animal Spirits, Co-ordination and the Recent Crisis

Abstract

This paper begins by examining Robert E. Lucas’s views on the relationship of macro-economics to real world economic phenomena, and on Keynes’s place in its history, suggesting that these stem from a particular and debatable understanding of how the sub-discipline has evolved. It then considers some implications for today’s awkward economic facts of aspects of Keynes’ General Theory, its speculations about the role of psychology and social conventions in the economic decisions of individual agents recently highlighted by Akerlof and Shiller (Animal Spirits. Princeton, N.J.: Princeton University Press, 2009) under the label “animal spirits”, as well as its insights into the influence of the monetary system on the coordination of these decisions, along lines later extended by Clower (The Keynesian counter-revolution – A theoretical appraisal. In F. H. Hahn, F. R. P Brechling (Eds.), The Theory of Interest Rates. London: Macmillan, 1965) and Leijonhufvud (On Keynesian economics and the economics of Keynes, Oxford: Oxford University Press, 1968). It concludes that the questions about co-ordination that Keynes addressed, not to mention some of his answers, are well worth revisiting.