Keynes and the General Theory after 75 Years
O'Donnell, Rod, History of Economics Review
Abstract: On the 75th anniversary of the publication of The General Theory, this paper explores the framework of Keynes's thought as a whole, his development of a realistic and insightful analysis of a monetary production economy, and the practical conclusions that these entail. Ranging across philosophy, economics and politics, it comments on the approach needed to understand his distinctive thinking, some of the central elements of his analytical framework, the fate of the Keynesian revolution, his emphasis on reason and humanity, and his hope that individual greed and acquisition might be replaced in the future by non-economic, goodness-enhancing activities. The paper also argues that it is not sufficient to read The General Theory in isolation as a self-contained work if one wants to understand its pioneering nature fully. Three questions are posed by way of conclusion--why is Keynes so different from, more difficult to understand, and yet more appealing than, many modern economists?
The General Theory of Employment, Interest and Money was published on 4 February 1936. The following 75 years, taken as a whole, constituted a turbulent period for macroeconomic theorising and policy-making. The Keynesian 'revolution' occupied the immediate post-war decades but was characterised by a Neoclassical version of Keynesianism rather than Keynes's own ideas. Although the significant changes in economic thinking that occurred were viewed as a revolution, there never was a Keynesian revolution in any deep or genuine sense. (1) Nevertheless the 'revolution', such as it was, provoked a 'counter-revolution' which began in the late 1960s with two phases. The Monetarist phase emphasised orthodox microfoundations and monetary policy but retained a short-run/long-run distinction, while the second phase of so-called Rational Expectations extended these foundations in an artificial and seemingly clever way which abolished the distinction and posited instantaneous adjustment and policy impotence. The response of the mainstream to this was the 'New Neoclassical Synthesis' or New Keynesianism (a more sophisticated version of the earlier Neoclassical Synthesis) which reinforced, rather than halted, the further distancing of modern macroeconomics from Keynes's intended revolution. (2) The one cluster of economists who soldiered on in the background to continue the development and extension of his original framework was the Post Keynesian school. (3) Over recent decades, however, agreement in the mainstream on macroeconomic theory and policy appeared to be so strong that a period of consensus ('Washington' or otherwise) was declared. Marvin Goodfriend (2007, pp. 59-61) outlined the 'new consensus' on monetary policy and the 'theoretical consensus' in its underpinning macro models, including the core reliance on rational expectations theory. The following year, Olivier Blanchard (2008, p. 1) announced, as a result of a 'largely shared vision', that the 'state of macro is good'. But the global financial crisis was already underway by this stage, and heading towards a wider economic crisis with even more devastating consequences. Some influential voices called for a 'return to Keynes' in macroeconomic theory and policy, for economics to explore alternative frameworks and theories, and for economists to be more aware of the ethical aspects of their practice. (4) Unfazed by the implications of these dramatic empirical events, many of those wedded to the orthodox consensus continue as if the state of macroeconomics (and finance theory) remains good.
However, if we are properly to return to Keynes in the sense of his own ideas rather than simplistic, compromised or caricatured versions, we need to understand the actual framework of his thought and his manner of theorising. Only then can we properly evaluate their relevance and modify them as necessary to suit current circumstances. While it is claimed here that Keynes made very important advances which the majority of the economics profession has ignored, it would be silly to contend that his thinking is beyond extension, improvement or correction. …