The Keynesian Economists

Economics is faced with six fundamental questions: (i) will the society organized on the principles of exchange (market economy) stay composed or will it fall apart (the question of existence of equilibrium)?, (ii) will such an equilibrium be unique (a multiplicity of equilibria poses difficult and embarrassing questions)?, (iii) will such an equilibrium be robust (the question of stability of equilibrium)?, (iv) will such an economy (society) be efficient?, (v) will it grow or expand forever?, and (vi) will it be just? The classical economists, Adam Smith in particular, answered all these questions affirmatively using a characteristic methodology.

However, Karl Marx challenged the entire structure of faith in the merits of the market economy and shattered all optimism regarding the said order. The Neoclassicists, mostly using their own new (mathematical, marginalist, rationalistic, atomistic, hedonistic, etc) methodology set out to prove that answers to all those six questions were in the affirmative. They restructured the faith in the said order. In so doing, they had to distance themselves from the reality and they did not mind doing so.

Above all, the Neo-Classicists uncritically relied on the Say's law (supposition that the general gluts cannot exist) and believed that the economy will always and automatically hover around a stable equilibrium that guarantees an efficient use of resources, and, therefore, ups and downs in the economic activities are only temporary phenomena. It also implied that the markets needs no management, no control from outside. However, the Great Depression shattered their belief so forcefully that the Neo-Classical economics was reduced to a mere myth.

John Keynes pointed out that the self-correcting mechanism of the market economy is in no way assured. Market equilibrium could well be unstable. It can also rest trapped in an under-employment equilibrium and need not be efficient. He argued that private sector decisions sometimes lead to inefficient macroeconomic outcomes and therefore advocated active policy responses by the public sector, including monetary policy actions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle. Keynesian economists, thus, advocate a mixed economy - predominantly private sector, but with a large role of government and public sector - and served as the economic model during the latter part of the Great Depression, World War II, and the post-war economic expansion (1945-1973). It is pertinent to mention, however, that Keynes's work was part of a long-running debate within economics over the existence and nature of general gluts. While a number of the policies Keynes advocated (notably government deficit spending) and the theoretical ideas he proposed (effective demand, the multiplier, the paradox of thrift) were advanced by various authors in the 19th and early 20th century, Keynes's unique contribution was to provide a general theory of these, which proved acceptable to the political and economic establishments. The "multiplier" dates to work in the 1890s by the Australian economist Alfred De Lissa, the Danish economist Julius Wulff, and the German American economist Nicholas Johannsen. It was also discussed by Richard F. Kahn in 1931. Nicholas Johannsen also proposed a theory of effective demand in the 1890s. The paradox of thrift was stated in 1892 by John M. Robertson in his The Fallacy of Savings, in earlier forms by mercantilist economists since the 16th century, and similar sentiments date to antiquity. Today these ideas, regardless of provenance, are referred to in academia under the rubric of "Keynesian economics", due to Keynes's role in consolidating, elaborating, and popularizing them. Numerous concepts that are called "Keynesian" were developed earlier and independently of Keynes by the Stockholm school during the 1930s. Kalecki's models (1934) foreshadow the Keynesian model (as well as the later Neo-Keynesian models) of growth with cycles.

Keynesian economics was naturally uncomfortable to the protagonists of the free market economics. Some economists (notably, John R. Hicks and Paul A. Samuelson) soon internalised the Keynesian concepts into the Neo-Classical theoretical framework and, in a way, subverted the Keynesian economics. This led to a synthesis and thus grew a system of thoughts called the Neo-Keynesian economics. Soon it became a part of the establishment economics. Monetarism (Milton Friedman) was a very potent attack on Keynesianism. The academic credibility of Keynesian economics was also undermined by the Lucas critique and Hayek's Austrian School. Henry Hazlitt in his The Failure of the New Economics (1959) shows how he was unable to find in Keynes' General Theory (1936) a single doctrine that is both true and original. What is original in the book is not true; and what is true is not original. Hazlitt's The Critics of Keynesian Economics (ed., 1960) aptly compiles anti-Keynesian writings. So successful were these attacks that by 1980 Robert Lucas was saying economists would often take offence if described as Keynesians. Keynesian principles fared increasingly poorly on the practical side of economics and by 1979 they had been displaced by Monetarism as the primary influence on Anglo-American economic policy. However, Keynesianism revived in 2008 in face of the crisis.

The Keynesian Economists
John Maynard Keynes Abba P. Lerner
Paul A. Samuelson John R. Hicks
Joan Robinson Michal Kalecki
Paul Davidson Hyman Minsky
Luigi Pasinetti Robert Shiller
Sidney Weintraub Nicholas Kaldor
Geoff Harcourt Basil Moore



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