Institutionalism and the “Common Man” Through the Lens of Philip Klein: Business Cycles, the Public Sector, and Keynes’s Economics

Abstract:

This article reviews and assesses Philip Klein’s work on business cycles and macroeconomics, the public sector, and the economics of John Maynard Keynes. The article makes several findings. First, Klein built on the pioneering efforts of Wesley Mitchell to advance the development of cycle indicators and to outline an eclectic theory of cycles that remains useful for synthesizing a broad literature. Second, Klein’s essays on macroeconomics contain enduring discussions of the malleability of the “natural” rate of unemployment and the value of a behavioral approach to expectations. Third, he refocused the institutionalist attention on the public sector by introducing “higher efficiency” and other concepts to help explain how government policy plays a role in economic life. Fourth, Klein emphasized the role of fiscal policy in moderating business cycles. Fifth, his work points in the direction of today’s post-Keynesian institutionalism, both by stressing that Keynes was “profoundly institutionalist” in his approach and by arguing that conjoining Keynes and institutionalism would provide a stronger foundation for macroeconomic theory and policy.

Keywords::

• business cycles
• Keynes
• Klein
• post-Keynesian institutionalism
• public sector

JEL Classification Codes::

• B25
• B31
• E32
• H11

Notes

¹ For Gordon’s own appreciation of key aspects of institutionalism, see Gordon (1963, 1976).

² For a discussion of the Age of Keynes and its aftermath, see Peterson (1987).

³ Mitchell was not the only major institutionalist affiliated with the early years of the NBER. Between 1920 (when NBER was founded) and 1928, John R. Commons served on the NBER board of directors. In contrast to the NBER, the CIBCR was established much later, in 1979 at Rutgers University. Four years later, it moved to Columbia University. In 1996, CIBCR evolved into an independent research group, called Economic Cycle Research Institute (ECRI).

⁴ According to Anirvan Banerji, co-founder and research director of ECRI, Klein and Moore began their project on international economic indicators in the early 1970s (Banerji and Dua 2011, 9). Klein also published other studies related to business cycles in the 1960s and 1970s (see, for example, Klein 1965, 1976; Klein and Gordon 1971).

⁵ In addition to the theories listed in Table 1, Klein also mentioned other theories that focus on agriculture and the weather, but he did not link these theories to his reliable indicators.

⁶ In addition to serving as associate editor of the International Journal of Forecasting and co-author of a textbook on cycles and forecasting (Niemira and Klein 1994), Klein participated regularly in the conferences of the Centrer for International Research on Economic Tendency Surveys, a community of scholars that analyze business cycles and their effects on economic and social issues.

⁷ Today, summary reports on indicator indexes are published as news releases by ECRI and by the Conference Board.

⁸ Some ECRI research suggests that economic indicators can be used by individuals and organizations to reduce risk in stock market investments (see, for example, Moore, Boehm and Banerji 1994). However, Klein never focused on such applications. (For a further critical, but sympathetic assessment of the work by Klein and Moore on indicators, see Cornford 1989).

⁹ Sherman (2001) offers a masterful presentation of Mitchell’s cycle theory.

¹⁰ It is clear that Klein was aware of the focus on profits at the heart of Mitchell’s theory of cycles (see, for example, Klein 1994, 248-249), but he just did not pursue that line of analysis beyond his work on indicators.

¹¹ Klein’s article did not elaborate on the policies needed to tackle unemployment and inflation, but other institutionalists have called for a variety of initiatives, including public-service employment, training and apprenticeship programs, and income policy. (See, for example, Briggs [1987] and Peterson [1987], who published their works shortly before Klein delivered an early version of his article on the natural rate of unemployment. Also, see Klein [2003, 75], who mentions Peterson’s perspective on incomes policies.)

¹² Studying surveys of entrepreneurs within the European Economic Commission, Klein found that turns in expected price changes followed actual price changes. He concluded: “What this suggests, of course, is in line with what we have found to be true of many types of survey questions. The respondents extrapolate the past — in this case, they think prices will change in whatever way corresponds to their movement in the recent past … While expectations are critical variables, in the case of selling prices the influence appears to run from actual price changes to expected price changes, not the other way around” (Klein 1994, 98). Klein did not discuss indicators of entrepreneurs’ expectations regarding profits and investment.

¹³ Klein (1994, 195) distinguished “efficiency” from “higher efficiency” by describing the former as “narrow efficiency,” which refers to “quantitative outputs per unit of inputs” (see also Klein 1994, 189-190).

¹⁴ National socioeconomic statistics (sometimes called development indicators) also provide portrait of the value floor (see Klein 2000).

¹⁵ Klein (1994, 125-178) did devote two articles to economic power, but on the subject of public policy a main point in these articles is just that “economic power distorts the allocative process from what it would be otherwise” (Klein 1994, 169).

¹⁶ For more on institutional analysis and the comparative case method, see Glen Atkinson and Ted Oleson (1996), in addition to Whalen (2013a).

¹⁷ As Myrdal (1969, 55-56) wrote, there is no such thing as “objective” social research. The closest that researchers can come to objectivity is to “expose their valuations to full light” and to make their premises “conscious, specific, and explicit.”

¹⁸ Relying on the words of Gruchy, Klein (1980, 47) described holistic economics as the study of the economic system “as an evolving, unified whole or synthesis, in light of which the system’s parts take on their full meaning.”

¹⁹ Readers familiar with Joan Robinson’s Richard T. Ely Lecture will immediately recognize the parallels in Klein’s distinction between Keynesian and institutional economics and Robinson’s distinction between what she called the first and second crises of economic theory (Robinson 1972).

²⁰ In a footnote to his article for the Gruchy festschrift, Klein (1980, 57, n. 16) wrote: “Gruchy has viewed Keynes in essentially the same way.”

²¹ In his 2003 article, Klein’s discussion of Keynes’s institutionalist approach is similar to the one found in his 1986 article. In particular, the 2003 essay emphasizes that Keynes, like the institutionalists, focused “on the economy as it actually is, with the express purpose of illuminating market failures so that public policy could be brought to bear on overcoming them” (Klein 2003, 49).

²² Klein’s 1998 article mentions in passing that Philip Arestis and Alfred Eichner also recognized the compatibility of Keynes and institutionalism, but much more recently than J. Fagg Foster (Klein 1998, 51). Other works by Klein also note (but give little attention to the fact) that Wallace Peterson saw important connections between these two strands of economics (Klein 1980, 48; 1994, 35).

²³ Klein (2006, 362-368) did, however, outline many postulates of “heterodox economics” in his final book. These postulates derived from the book’s critique of mainstream economics and were solidly grounded in his institutionalist perspective.

²⁴ See also Wray (2007) who examines the common ground of a “monetary economy” in Veblen’s Theory of Business Enterprise and Keynes’s General Theory.

²⁵ Minsky’s contributions appear prominently in four of the seven articles that make up the special issue on post-Keynesian and institutional political economy and published in 2013 by the European Journal of Economics and Economic Policies: Intervention. The institutionalist and Keynesian dimensions of Minsky’s work are also featured prominently in articles by Dillard (1987) and Peterson (1987), but I find no references to Minsky’s work in Klein’s publications. (For two contributions to PKI that are mentioned by Klein, see Arestis and Eichner 1988; Peterson 1977).

²⁶ In Keynes’s case, the underlying dualism centered on a distinction between finance, or speculation, and industry (Dillard 1948).

²⁷ Also pointing toward today’s PKI are Klein’s works on macroeconomics which, as discussed above, stress a behavioral approach to expectations and human behavior. His articles hint at the need to incorporate into economics an awareness of conventions, heuristics, herding, contagion, loss aversion, and the like. Indeed, these elements are increasingly finding their way into macroeconomics (see, for example, Baddeley 2014) and are contributing to the construction of PKI (see, for example, Whalen 2011).

²⁸ Two notes are warranted here. One is that I find Klein’s position on fiscal policy broadly consistent with the views of those contemporary institutionalist and post-Keynesians who find inspiration in the functional finance literature (for more on that literature and its relationship to institutionalism and post-Keynesianism, see Nesiba 2013). The other is that, although I have been unable to find any discussions by Klein on the fact that the budget of the U.S. government does not distinguish between operating and capital (or public investment) expenditures, I see no reason why giving greater attention to capital budgeting — an idea that sometimes appears in the PKI literature — would be incompatible with Klein’s approach to fiscal policy (for more on federal budgeting and the absence of a capital budget, see Whalen 1995).

²⁹ Klein’s public-works suggestion has been part of institutional economics for a long time (see, for example, Copeland 1967). It is also compatible with the contemporary institutionalist and post-Keynesian notion of government as an employer of last resort (see, for example, Whalen 2011).

Additional information

Notes on contributors

Charles J. Whalen

Charles J. Whalen is a visiting scholar at the Baldy Center for Law and Social Policy of the State University of New York at Buffalo. He thanks Glen Atkinson, Matt Goldberg, John Henry, Kim Kowalewski, Christopher Brown, and an anonymous referee for their comments on an early draft of this article.