On the Future of Keynesian Economics: Struggling to Sustain a Dimming Light

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JUDGING BY THE EVOLUTION OF KEYNESIAN ECONOMICS, we may conclude that its future will entail a significant struggle on the part of the adherents to sustain its dimming light. Keynesian economics took over macroeconomic analysis with lightening speed following the publication of Keynes's General Theory in 1936. Keynes himself intended his work to cause a revolution in economic thought, and took steps to make sure that the book got the most exposure possible. He publicized the fact that he was writing a revolutionary book and also subsidized its price to sell for only five shillings (the equivalent of $2 U.S.), instead of the 15 shillings several reviewers of the book expected it at least to cost (Backhouse 1999). Reviewed in at least 40 publications, from newspapers to literary and professional journals, in its first year of publication, the book's message that Keynes had discovered the cause and cures for persistent unemployment quickly reached a wide audience. By the 1960s, communicating Keynes's macroeconomics through formalized models--equations and diagrams--had become the standard fare in universities across the world, following especially the work of J. R. Hicks (1937), Franco Modigliani (1944), Paul Samuelson (1948), Alvin Hansen (1949, 1953), and Don Patinkin (1965).

The 1970s saw a significant erosion of the Keynesian dominance of macroeconomics following the experience of significant inflation and economic recession, particularly among the industrialized countries hitherto believed to be more suitable for the application of Keynesian aggregate demand management policies to both stabilize and ensure economic growth. The failure of such policies greatly aided the emergence of monetarism in the 1970s, while the new classical and supply-side economics further challenged the remnants of Keynesianism in the 1980s. Keynesian macroeconomics at the turn of the 21st century has lost most of its influence on public policy making, although it is now represented by three different strands in academia: (1) the neoclassical Keynesianism of the Hicks-Hansen-Samuelson lineage, (2) the post-Keynesianism of the Kahn-Robinson-Harcourt tradition, and (3) the new Keynesianism espoused by the younger generation of mainly American Keynesians.

The persistence of neoclassical Keynesianism seems to be due primarily to the ease with which its formalization of Keynes's arguments in mathematical models can be taught in the classroom (the IS-LM model and the income-expenditure diagrams), although the monetarists and new classical economists also employ the same models to criticize the Keynesian conclusions. (1) The equilibrating processes inherent in the neoclassical Keynesian models and their apparent lack of emphasis on income inequality and the need to pursue redistributive policies as a means of promoting economic growth seem to have been the principal reasons for the development of post-Keynesianism (Davidson 1991). (2) On the other hand, the new Keynesians seek to provide microfoundations for Keynes's conclusions in response to criticisms of the neoclassical Keynesian models (Mankiw 1993, 1997). (3) Some Keynesians now appear to accept the importance of savings for economic growth as well as the role of excessive money creation in causing inflation in conditions of unemployment, thereby continuing to suggest the relevance of Keynesian economics (e.g., Mankiw 1997; Frank and Bernanke 2002; DeLong 2002). These are significant deviations from Keynes's own views, which regard savings as a negative force in the growth process and inflation as arising from excessive aggregate demand in a situation of full employment, as I explain below. Meanwhile, published research since the early 1990s has further exposed several of the fundamental errors upon which the Keynesian revolution was founded. What is most doubtful is whether Keynesianism in any of its forms can survive the exposure of such fundamental errors. …