When does Keynesian Economics work

A Critique of Keynesian Economics

1. John Maynard Keynes (1883-1946)

John Maynard Keynes was a man of many parts: one of the great intellectual innovators of our century, and a prominent political figure of the interwar period; generator of a revolution in economic theory, and a major architect of the postwar international monetary order; publicist and literary craftsman, and adviser to presidents and prime ministers; forceful critic and equally forceful advocate of economic policies, and patron of the arts; stock-market speculator, and member of the Bloomsbury Group.

2. The Keynesian Heritage in Economics

What difference has the General Theory made? How do economics and economic policy differ from what they would have been if Keynes had never lived?

3. Keynes’s Intellectual Legacy

To discuss the intellectual legacy of Keynes requires some consideration of his methodology and approach to policy.

4. Keynes and the Classics

The full title of my recent book is On Keynesian Economics and the Economics of Keynes - A Study in Monetary Theory. It may indicate to you that I am not a man of few words. Accordingly, I have been invited to summarize it. The invitation, I hope, means that it is felt that the book hits a few nails on the head ’. The invitation specifically to summarize, I fear, means that it is also felt that it contains a distressing lot of fumbling about for the hammer. So, in the time available to me here, I will have to wield my hammer with more abandon. If this leads me to overstating my case on some points, I must refer you to my book for a better documented and, hopefully, more well-balanced treatment.

5. Keynes versus the ‘Keynesians’ ...?

Three different sources of weakness and inadequacy may be distinguished in the process of decline and crisis of a once successful, or 'orthodox', system of theory, 'paradigm' or 'research program' in economics, such as that of English Classical Political Economy or 'the Ricardo-Mill economics', as Jevons called it, or, a hundred years later, Keynesian economics.

6. Expectations and the Economy

Virtually all economic behavior and decisions depend on the decision-maker’s expectations about the future. Yet the future is unknowable, the expectations subjective; what then can an economist say constructively about them? The answer seemed to be until quite recently: not a lot. The classical economists typically assumed either that expected future prices, and so on, were the same as current prices, or that they bore some mechanical relation to them (for example, changing by x per cent more of less). Ironically perhaps (in view of ultimate developments), it was in fact Keynes himself who first put expectations in the center of the economic stage with a sort of theory attached: expectations of future profit and of future interest rates are crucial to Keynes's theory of boom and slump, which still dominates modem business cycle thinking. Booms would occur when profit expectations were high and interest-rate expectations low; and vice versa for slumps. But Keynes could do little better in theorising about these expectations than to attribute profit expectations to the "animal spirits" of businessmen and interest-rate expectations to stock-market prejudice. This is, quite transparently, an evasion. Hamlet, the Prince of the drama, is a deus ex machina, wheeled on and off inexplicably, even arbitrarily - decidedly not a ‘general’ theory.

7. The Fallacy of the Mixed Economy

In 1974, Professor Friedrich Hayek was (jointly) awarded the Nobel Prize in Economics.1 Hayek is nowadays accepted as the leader of the so-called Austrian School of Economics ’. Over the last three years there has been an increasing number of references, in the press and the economics literature, to this school of thought. The influential American magazine Business Week, for example, has run two feature articles on the implications of Austrian ideas for macroeconomic policy. There have been several sessions on leading Austrians at professional economics meetings in the USA and, more recently, in Britain. A series of introductory weekend seminars in London and major American cities has attracted over a thousand participants. Exponents of the Austrian approach have themselves been on lecture tours to many universities, and a series of reprints and original papers in Austrian economics is now under way, sponsored by the Institute for Humane Studies.

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