How Keynesian economics came to dominate told by Keynesians

The papers from the History of Economics section at the US Conference of Economists during the session on “Keynesianism: Its Rise, Fall, and Transformation in Europe and North America”. So long as Y=C+I+G is central to how macro is taught at all levels of study, the notion that there has been any kind of a fall is ludicrous. No economists taught Keynesian macro ever finds their way to understanding how an economy actually works. These were the papers presented.

Keynesianism in France

Goulven Rubin

University Paris 1 Panthéon-Sorbonne


According to Pierre Rosanvallon (1987), Keynesianism arrived very late in France but its triumph was complete. It offered a common language to a very large group of senior officers and engineers working in public administration and nationalized firms. It reconciled the French tradition of Colbertism with the necessity of a modern State. Richard Arena (2000) insists also on the fact that Keynesian ideas spread in a hostile context and initially outside universities and academia where typically French economic traditions dominated. The situation in universities started to change in the 1970s and 1980s when curricula in French universities began to incorporate macroeconomic courses based on IS-LM and with the development of disequilibrium economics. The paper retraces the unfolding of this historical process and insists on the variety of heterodox interpretations of Keynes that flourished in the French context like the works of Bernard Schmitt and the circuitists.

Keynesianism in Germany

Harald Hagemann
University of Hohenheim


Keynes had been a central point of reference in debates on economic theory and policy in Germany ever since his Economic Consequences of the Peace (1919), as, e.g., in the controversial debates on the wage-employment relationship at the end of the Weimar Republic. No wonder that the first foreign-language translation of the General Theory was published in German. With the great resonance Keynes had in Germany in the interwar period it is no surprise that from the early 1950s onwards neoclassical synthesis Keynesianism became the dominant approach at West German universities. More astonishing is the fact that with Erich Schneider at Kiel, a former student of Schumpeter played a key role in this process. In economic policy, however, Keynesianism gained a rather late entry in the recession of 1967 and only lasted until 1974-75.

Keynesianism in Canada

Robert W. Dimand
Brock University


Canada was one of the first countries to commit to a Keynesian goal of maintaining high and steady levels of employment after World War II with the 1945 White Paper. Keynes’s former students A. F. Wynne Plumptre and Robert Bryce were prominent in the Federal Government, notably the Department of Finance, in the quarter century after the war, but others, notably Mabel Timlin, author of Keynesian Economics (1942), also helped spread Keynesian ideas among Canadian economists. William A. Mackintosh, both as an academic and a wartime temporary civil servant, was a central figure, drafting the 1945 White Paper and seconding Keynes’s motion to accept the final act of the Bretton Woods conference. Bank of Canada Governor Gerald Bouey’s 1975 embrace of monetary aggregate targeting signaled the decline of Keynesian influence on Canadian public policy.

Keynesianism in the United States

Mathew Forstater
University of Missouri-Kansas City


Two issues are at the heart of Keynesian economics in the United States, one theoretical and the other practical. The theoretical issue regards whether Keynes’s demonstration in the General Theory of Employment, Interest and Money that there can be involuntary unemployment in macroeconomic equilibrium requires an assumption that wages, prices and/or interest rates are “sticky” (inflexible) downward, or some other market imperfection. The practical issue is related to the theoretical one. Keynesians have tended to be pragmatic when it comes to economic policy, preferring to use fiscal and monetary policies to pursue macro goals of full employment, price stability, and stable economic growth rather than focusing on efforts to remove the imperfections, which would permit market forces to work out the short-term Keynesian troubles. The most recent mainstream incarnation, so-called “New Keynesian” economics, has all but abandoned the important remaining economic and political legacies of the tradition.

If the SHOE fits

There has been a kind of hammer and tongs discussion at the Societies for the History of Economics (SHOE) website that began when I posted that the President of France had stated in support of a more “austerity”-oriented economic policy that, L’offre crée même la demande. Or in English, that supply really does create demand, a principle known in English as Say’s Law. Every economist is taught from the first day of macro that Say’s Law is wrong and that a Keynesian stimulus is the answer to recession. Sounded better five years ago but today, who would suggest more public spending even though our economies remain as dismally placed as they are. But part of what I found so charming is that the suggestion is made that I am near enough the only economist in the world who thinks “the strong version” of Say’s Law is true. How weird is that! But of course, that doesn’t mean that I think that I’m wrong, specially since all the evidence is so one way.

The SHOE website is filled with interesting discussion over a vast range of economic issues. You definitely do not have to be an economist either to join or to listen in on the discussion. You can register here. Meantime, this is my latest post on how I see the role of the history of economic thought.

I am rather charmed by Barkley Rosser’s last post, to wit:

So, my final comment will be directed very directly at Steve Kates and James Ahiakpor. Can you guys not figure out that you have totally and utterly lost this debate? Nobody here agrees with you, nobody. You have lost, period. Sure, you can get the occasional Per Berglund to sort of attempt to help you out by questioning details of the critiques of your arguments, but even those folks in the end do not come down on agreeing with your defense of a strong version of Say’s Law. Deal with it, please. We have all had more than enough.

I am more than aware that so far as numbers go, we are on the wrong side of the ledger. When I began to argue in public against the stimulus back in 2009, there were attempts made by that solid mainstream to have me sacked from my university appointment. There are risks in taking such positions. What protects me now from such attacks is the unbelievably dismal outcomes from the stimulus. You may not understand what I’m saying. But there is no doubt that, so far as the way our economies have performed, I have little reason to think anything other than that Mill was right, that the “strong version of Say’s Law” is valid, and classical economists knew what they were talking about. The modern Keynesian fashion, on the other hand, has little to show for it. Does evidence count for nothing?

But I come onto this thread firstly to thank our moderator for his willingness to let the previous thread on L’offre crée même la demande continue to its end. But there is more to it than that. I wrote my book on Defending the History of Economic Thought, not just to explain why making the effort to understand the economic theory of the past is an extremely good way to deepen an economist’s understanding of economic theory, but also to argue that HET is the place where economic theory goes to regenerate itself. This is the one and only place that economists from every one of the traditions in economic theory come to look in on what is being said by others.

There are mainstream journals, but also Austrian, Neo-Keynesian, Post-Keynesian, Institutionalist, Marxist and others, and if you are not part of whatever tradition that journal represents, it is unbelievably difficult to get published. HET has broken this tradition down, at least to some extent. It may well be that no one can follow what I or James or Per are trying to say, although we can follow each other with near perfect clarity. But where else are you going to even hear it at all?

The History of Economic Thought is by all accounts dying yet it is the most intellectually alive area in the whole of economic theory. It teems with ideas and there are economists from every tradition who are willing to fight it out before an audience of upwards of a thousand of their peers who can follow these discussions as they like. There is seldom a thread I don’t learn from and I typically read them through.

And there is no doubt that HET is under threat of extinction. There are people at the top of our hierarchies, and I am talking about our hierarchies within HET, who would willingly take this study into the History and Philosophy of Science and leave economics behind. There are also mainstream theorists who would be glad to see the end of us and our constant criticisms of established textbook economics.

But there are also people, like myself and others who come to this site, who just find it fascinating to listen in on alternative ways of thinking about economic issues. That is what HET is for. Rather than restrict this area to burrowing into particular issues related to economists who are no longer mentioned in our textbooks, it should also be a place where ancient economists are resurrected and their ideas discussed. And I don’t just mean on this site but across the entire expanse of the history of economic thought.

The journal, History of Economics and Policy, is a paradigm of just what is needed. Perhaps not for all of us, but certainly for some of us. This is not the end of HET but in my view is its salvation. Here is a link to its archive.

It is what every HET journal should become more like. Some traditional material but also some which see the relevance of past theory to our present problems.

And in furtherance of this post, I might just mention this news item, Canada charts comfortable course to 2015 budget surplus. If you are a Keynesian, your reaction would be, how terrible! If, however, you have been following the news for the past five years, you can see what a triumph it is. The strong version of Say’s Law remains an absolute necessity if you are to understand how an economy works and why public spending and deficits are the disasters they have so obviously proven to be.

Is the history of economics economics?

There is a review of my just published Defending the History of Economic Thought on the History of Economics website written by Marie Duggan. She didn’t quite get it but she got much of what matters. But I cannot help myself so have written this response:

I am grateful for Marie Duggan’s timely review of my Defending the History of Economic Thought and while I don’t think she quite conveys the urgency that went into its writing I think she conveys much of what the book is about. But if I may, I would like to supplement what she wrote.

The central question addressed by the book is this: should the history of economic thought be classified as part of economics? That is, when someone is undertaking research into some aspect of HET, is their work part of the study of economics or is it something else?

Here is the supposed parallel. When someone studies the history of physics, they are not classified as physicists. When someone studies the history of chemistry, they are not classified as chemists. So the argument has been, that when someone studies or writes on the history of economics, they are not economists, but are perhaps philosophers of science or historians. Therefore the history of economic thought should be removed from the economics classification and be placed somewhere else amongst the humanities for example.

Does this matter? I posted a note a few months back on the OECD’s redesign of its Frascati Manual which must seem to most people on this site as of absolutely no relevance to them in any way. In the manual at present, economics is classified as a social science while the history of economics is classified as part of the humanities. That is, the two areas are completely distinct with no overlap of any significance. Does that sound right to you? It doesn’t to me.

We here in Australia wrote a submission to the OECD, a submission which was endorsed by a number of other societies. We have in this way established a position that will need to be taken into account by those who are redesigning the manual and which will also provide the basis for a response if the new manual continues with the same structural division found at present.

I therefore wrote the book to explain just how precarious the History of Economic Thought is. The review only discusses our lobbying efforts with the Australian Bureau in 2007. It surprisingly ignores the more important of these lobbying efforts which was with the European Research Council in 2011. In Australia we were able to persuade the ABS not to make the change. In Europe, the change was made. The ERC removed HET from the economics classification. The effort was therefore devoted to asking the ERC to reverse a decision that had already been made which was ultimately successful.

This is from the original ERC decision. The concern referred to – our concern – is that HET would be removed from the economics classification:

“Addressing your concern, “history of economics” is divided between SH1 and SH6 (“The study of the human past: archaeology, history and memory”).”

If you would like to know what happened both before and after that decision, you will have to read the book. But if you think that you, as a historian of economic thought, are an economist undertaking economics work, try explaining that to your head of department when the official classification has you listed as working in an area described as “the study of the human past: archaeology, history and memory” (and in Australia the classification would have been, “History, Archaeology, Religion and Philosophy”). And to the extent that you could get funding for your work, these would be the panels you would need to apply to.

These, moreover, are not battles won. These are battles we remain in the midst of. Right now, even as I write, there is an attempt being made here in Australia to reclassify History of Political Economy from its current position as an A*-journal, which is our highest classification, to B-level, which is our third tier. The Journal of the History of Economic Thought has already gone from an A to B. This is not happenstance, this is deliberate and there are economists who favour this change. But the effect is obvious. There is a restricted academic reward in pursuing the study of HET. Do something else instead. You are wasting your time with these historical studies of dead economists of the past.

The reviewer says that I have invented straw men opponents of HET. Would that were the case. The history of economic thought has enemies. If HET is removed from the economics classification, it won’t be by accident.

The intent of the book was therefore to explain, as I had done in submissions to the ABS and ERC, why historians of economics are intimately involved in the development of economic theory. It’s not a subject undertaken by or read by non-economists. This is a specialist area in which economists write for other economists. We as economists orient ourselves and our theories through its historical development. That’s why the book is unlike any other on the subject. Most discussions on why study HET are about why individual economists might benefit individually. This book is about why economic theory is improved where economists know their subject’s history and where there are historians of economics to bring economists of the past into contemporary debates.

Most importantly, what the reviewer noted was this: “if colleagues or deans start taking potshots at HET (or any subfield that you hold dear), take a deep breath, and read Chapter 5 for some sound tactical advice.” The book is about alerting historians of economic thought to our present dangers and providing just the tactical advice she discusses. We are at the cliff’s edge. This book is written both to alert historians of economics about the dangers we face and to provide some suggestions on how we deal with this very great problem.

And while this is slightly off topic, my own favourite chapter of the book, but the reviewer’s least favourite, was on how to teach the history of economic thought. Where she writes, “Kates suggests a student in HET compare Mankiw’s 2013 textbook with one written a hundred years ago (Taylor 1913)”, my point was not that they be compared – I wouldn’t read Mankiw or any modern text in an HET class – but that students be asked to read actual mainstream introductory texts of previous eras, such as Taylor (1913) or McCullogh (1825) or even Samuelson (1948). If you would like to get an accurate sense of how economists in the past thought about economic issues I cannot think of a better way to do it.