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.

John Stuart Mill explaining what is wrong with Keynesian theory

I have just posted an article on “Mill’s Defence of Say’s Law and Refutation of Keynes” as part of the Liberty Fund discussion on “Reassessing the Political Economy of John Stuart Mill”. If you are interested in knowing how far economic theory has gone wrong since the Keynesian Revolution, you ought to have a look at this thread which includes not just me, but also Richard Ebeling, Nicholas Capaldi and Sandra Peart. However, my latest post is due to the editor at the Liberty Fund picking up an offhand comment of mine and asking me to expand. Why this did not occur to me on my own, I cannot say, but this is the first time in which I have written a condensed version of what is wrong with Keynesian macro using Mill’s Principles as the basis for understanding pre-Keynesian theory. This is the final para but I do encourage you to read it all.

Reading the three sections of the Principles together we find Mill arguing:

  • recessions do occur and when they do the effect on the labor market is prolonged and devastating;
  • recessions are not caused by oversaving and demand deficiency;
  • recessions cannot be brought to an end by trying to increase aggregate demand.

That is as complete a rejection of Keynesian economics as one is likely to find, and it was stated in 1848. These propositions and their supporting arguments were with near unanimity accepted by the entire mainstream of the economics profession through until the publication of The General Theory in 1936. Since then they have almost entirely disappeared resulting in a loss in our ability to understand the nature of recessions or what needs to be done to bring recessions to a timely end.

Mill is not hard to understand unless you have learned Keynesian macro first. And then it is very difficult indeed. But if your interest is in understanding things such as why the stimulus was such a catastrophe, I cannot think where better to go to find out than from Mill. And if you are interested in Mill, then you should read this Liberty Fund discussion first.

The mystery of the Keynesian Revolution

Here is another book just published about the Keynes, this one, Reinterpreting The Keynesian Revolution by Robert Cord. This is what it’s about.

Various explanations have been put forward as to why the Keynesian Revolution in economics in the 1930s and 1940s took place. Some of these point to the temporal relevance of John Maynard Keynes’s The General Theory of Employment, Interest, and Money (1936), appearing, as it did, just a handful of years after the onset of the Great Depression, whilst others highlight the importance of more anecdotal evidence, such as Keynes’s close relations with the Cambridge ‘Circus’, a group of able, young Cambridge economists who dissected and assisted Keynes in developing crucial ideas in the years leading up to the General Theory.

However, no systematic effort has been made to bring together these and other factors to examine them from a sociology of science perspective. This book fills this gap by taking its cue from a well-established tradition of work from history of science studies devoted to identifying the intellectual, technical, institutional, psychological and financial factors which help to explain why certain research schools are successful and why others fail. This approach, it turns out, provides a coherent account of why the revolution in macroeconomics was ‘Keynesian’ and why, on a related note, Keynes was able to see off contemporary competitor theorists, notably Friedrich von Hayek and Michal Kalecki.

There are many reasons why it happened, but there is this for starters: if you say to kids that the best way to grow up strong and healthy is to eat lots of chocolate cake you will need to do very little convincing. You will actually ruin their health, but they won’t know that until they have tried it for themselves.

My own contribution to this issue of why Keynes with this theory at that time is to point out that Keynes was reading Malthus’s letters to Ricardo at the bottom of the Great Depression at the end of 1932 while preparing his “Essay on Malthus” for his Essays in Biography that was published at the start of 1933. And there, in the midst of Malthus’s letters, he discovered the general glut debate of the 1820s and Malthus’s arguments attributing recessions and unemployment to demand deficiency. So obvious is this sequence that it remains the most mysterious of all of the mysteries I have encountered in my dealing with Keynes and the Keynesians that not only do they not accept that reading Malthus had any effect on Keynes’s thinking, they will not even consider it as a possibility. But that’s how it happened, and the more evidence I have the more resolutely it is ignored. If you want to look at the sociology of science in relation to Keynes, that is where I would start.

Classical economic theory and the modern world

A post in two sections.

Section I

The March issue of Quadrant has an article of mine which has just been put up online. In the magazine itself the title is, The Dangerous Return of Keynesian Economics – Five Years On. What it is five years on from is an article of mine that found its way into the March 2009 issue which dealt with that very dangerous return of Keynesian economics in the form of the worldwide stimulus that economies across the world were beginning to apply. The original title was The Dangerous Return to Keynesian Economics for which this was the single most important passage:

Just as the causes of this downturn cannot be charted through a Keynesian demand deficiency model, neither can the solution. The world’s economies are not suffering from a lack of demand and the right policy response is not a demand stimulus. Increased public sector spending will only add to the market confusions that already exist.

What is potentially catastrophic would be to try to spend our way to recovery. The recession that will follow will be deep, prolonged and potentially take years to overcome.

That this outcome was absolutely assured in my own mind is, of course, not the same as it being absolute assured in reality. And indeed, it is not too much to say that 99% of the economic opinion of the world went quite the other way. The best example of this attitude may be seen in this comment made to me by Senator Doug Cameron during my appearance before the Senate Economic References Committee in September 2009.

Why have the IMF, the OECD, the ILO, the treasuries of every advanced economy, the Treasury in Australia, the business economists around the world, why have they got it so wrong and yet you in your ivory tower at RMIT have got it so right?

This is, of course, a question I ask myself but also one for which I have an answer. The odd part is that no one else asks this question although it is the question that ought to go to the heart of the matter. Which takes me to the second part of this post.

Section II

The economics I use I did not invent but am near enough unique in applying it to economic questions in the modern world. This is the economic theories of the cycle as developed by classical economists which was the theory accepted universally across the profession prior to the coming of the Keynesian Revolution in 1936. So to see things as I see things about the nature of this theory, let me take you to the opening part of a form I have just sent to my publisher on how to advertise the second edition of my Free Market Economics. It was a book whose first edition I wrote at white heat over the twelve weeks of the first semester in 2009, from March to May, to explain in more detail why the stimulus would with certainty fail, as fail it did.

1. Please describe the book in non-technical layman’s terms (in no more than 150 words). Include brief details of the book’s main objectives and conclusions.

Have you ever wondered why no public sector stimulus has ever worked? You are holding in your hands a book that is unique in our times. It is a text on economic principles based on the economics before Keynesian theory became dominant in macroeconomics and equilibrium analysis became standard in micro. It looks at economics from the perspective of an entrepreneur making decisions in a world where the future is unknown, innovation occurs at virtually every moment, and the future is being created before it can be understood.

Of particular significance, this book assumes Keynesian theory is flawed and policies built around attempting to increase aggregate demand by increasing non-value-adding public spending can never succeed but will only make conditions worse. The theories discussed are the theories that dominated economic discourse prior to the Keynesian Revolution and are thus grounded in the economics of some of the greatest economists who have ever lived.

It is, of course, possible that I might have been right for the wrong reasons, but it might also be the case that I was right for the right reasons. I go on about Say’s Law, John Stuart Mill and classical theory, but you know, when have they ever let me down? The world, so far as the evidence shows, works exactly like their theory says it does. And it’s not even that I picked this downturn as a one-off instance, but I also picked the upturn that followed the massive cuts to public spending after the Costello budget in 1996. Who else did that then? What theory is there other than the classical theory of the cycle that could even explain it let alone predict it? And there is no other text anywhere in the world written more recently than the 1920s that can tell you what that theory is other than mine.

You could, of course, buy the first edition right now or you can wait until the much improved second edition is published in July or August.