Both the economist Abba Lerner and the sociologist Daniel Bell can be seen in this 1944 exchange of letters to have considered themselves still at that time, to differing degrees of orthodoxy, of the Marxian persuasion. What caught my eye, in light of current macroeconomics debates, was Bell’s identification of “the confidence fairy” in Keynesian economics. Lerner’s response is that human psychology is something that Keynes rightly identified has a place in macroeconomic models. Lerner’s key conclusion: “If the theory of how the individual parts behave does not fit in with the theory of how the totality behaves that is evidence that at least one of the theories is wrong.”
In August 1938 Abba Lerner drove from Colorado Springs to Mexico City to meet Leon Trotsky. Lerner’s description of that encounter was transcribed earlier in Economics in the Rear-View Mirror.
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Letter from Daniel Bell to Abba Lerner
[presumably July or August, 1944]
49 East Ninth Street
New York 3, N.Y.
Dear Abba:
I was reading through Joan Robinson’s Introduction to the Theory of Employment, recently to check some thoughts on Keynesian economics and one point has stuck in my mind nagging me on. So I pass it along to you in the hope of clarification.
In the emphasis that the whole Keynesian school places on the role of demand, savings and investment, it seems that the cornerstone of the structure is actually a psychological explanation of depression and unemployment. For the theory seems to hinge on the decisions of entrepreneurs to invest based on a calculation of profit. On the one hand people save, so there is a decline in demand for consumption goods on the other business concerns fear to expand because of declining demand for capital goods by consumption goods industries. The use of word[s] such as fears, calculation etc are quite irritating. A Marxian theory, largely abstract and dealing in terms of ratios of constant and variable capital and declining rate of profit, seems more satisfying because of the total and more meaningful picture of a complete situation it provides.
Anyway, I’m interested in clearing up this issue of a psychological underpinning to Keynesian economics. If so, why all we need is a good publicity firm to convince the people to cheer up and spend and our worries are solved.
Apart from the frivolity, I’d appreciate your reactions.
sincerely,
[signed]
Dan Bell
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210 W 16, NY 11, NY
August 6th 1944
Dear Dan,
You write that you are irritated by the emphasis on psychology in the Keynesian theory of employment. The use of words like fears, calculations etc annoy you and you find that in this regard the Keynesian approach is less satisfactory than the Marxian which [is]“largely abstract and dealing in terms of the ratios of constant and variable capital and declining rate of profit, seems to be more satisfying because of the total and more meaningful picture of a complete situation it provides.”
So you [are] interested in clearing up the issue of a psychological underpinning to Keynesian economics. “If so,” you write, “why all we need is a good publicity firm to convince the people to cheer up and spend and our worries are solved.”
I react quite the other way. I can see no objection to psychology nor does it seem to me to be an illegitimate underpinning to a theory to have psychological elements. On the contrary any theory that purports to explain what happens to human society without having to pay any attention to the way the people in it behave would seem to [me] prima-facie a swindle. It is of course very pretty and aesthetic to have a plan that describes the working of any economy as if it had nothing to do with the way human being[s] behave — which is psychology — but appears to deduce it from a simple manipulation of mathematical ratios. The Marxian theory does this and to that extent it is false and the detailed analysis of the falsity of the argument has been abundantly demonstrated even in cases where the conclusions happen to be true.
The same tendency to accept a simple mathematical law without going behind it to see how it fits in with the fact that what we are describing is the total behavior of millions of people is quite common in economic and probably in other studies too. One that is very similar to the Marxian preoccupation with ratios is to be found in the proposition called “the acceleration principle” out of which economists have built theories of the business cycle, more complex and aesthetically more satisfying than the Marxian theory, but which have been discarded as soon as it was pointed out the apparently simple mathematical proposition concerning the effects of changes in the ratios of current consumption to replacement were only true because of an implicit assumption about the expectations of business men about the continuation of the current level or trend of consumption. I refer to the theories of the Business cycle by Harrod.
Of course it will not do to dismiss the Keynesian theory by saying that all we need is to persuade people to spend by appropriate advertising. Functional Finance is only an application of other means, which are much more powerful than advertising, to bring about the proper level of spending. As long as we have an economy, capitalist or socialist, in which what is produced is somehow related to the public’s money demand for the output, we can regulate the level of activity by working on the demand.
There are very strict limits as to what can be done in this direction by advertising or propaganda or ballyhoo. Individual citizens might perhaps to some extent be persuaded to increase their spending at the expense of their saving, though even this is very doubtful. At the present time saving by individuals is due much more to the inability to buy what they want than to the appeals to buy bonds even though these are backed by the touching appeal that by so doing we can win the war, save the lives of our loved ones in the army, and make a good profit at the same time. As regards investment by business men the effects of ballyhoo are even more doubtful, for even if they should temporarily be effective, the results in unprofitable investments would very soon become apparent and no advertising can for long hope to overcome this influence.
The basic point that interests me in your letter is the willingness you show to accept a theory if it is so simple that there is no room for bringing in the fact of human behavior even when that is indeed the thing we are trying to explain. It shows a willingness to believe in the crudest of magic provided it is called scientific and objective and overrides all objections by a declaration that it is “abstract” and refuses to listen [to] its error in every detail by declaring that it aims to provide a picture of the complete situation. The principle is that it does not matter if every element in it is false as long as the total picture it gives has some attractiveness if only because it paints a picture we would like to believe to be true.
Of course if the Keynesian theory were based upon some special theory of psychology, which otherwise we have little use for, or if it invented a peculiar psychology ad hoc, you would have a legitimate basis for objection. But all the psychology used here consists of well known and undisputed propositions such as that when people earn more they will on the whole spend more and also save more, and that business men are more likely to invest when business is good than when business is bad.
Some very conscientious economists have made very careful attempts to prove these propositions by statistics, and with some success. I do not think I am too dogmatic in declaring that in the light of our everyday experience we could legitimately assume these propositions to be true even in the absence of these carful studies. And if the propositions about spending etc are not fitted into a theory like the Marxian theory (to a great extent I think they can be so fitted in) the latter is unsatisfactory. I get the feeling I remember having when I was an undergraduate in economics and a much more orthodox Marxist than I am now. I then had the ambition of showing how the behavior of the individuals fitted in the Marxian generalities of the laws of motion of the society as a whole. If the theory of how the individual parts behave does not fit in with the theory of how the totality behaves that is evidence that at least one of the theories is wrong.
This seems a little long-winded, but I hope my attitude will be apparent. If this is not clear perhaps we can meet sometime and talk it out.
Greetings to Nora
Yours sincerely,
Abba P. Lerner.
Source: Library of Congress. Abba P. Lerner Papers. Box 6, Folder 8 “’B’ miscellany”.
Image Source: Publicity photo of Abba Lerner from Beth Emet’s announcement of speakers in its 1958 Forum (that included besides Dr. Abba Lerner, the Rev. Martin Luther King, Jr. as well as the actor Theodore Bikel) in Library of Congress. Abba P. Lerner Papers. Box 6, Folder 8 “’B’ miscellany”.