How exactly did Keynes survive?

What is clear is that when it came to the crunch, as policy-makers searched for ways to save the financial world, the tools they used were stock-standard traditional Keynes. In many respects, it was as if the frontier of macroeconomics had not changed from the Neoclassical synthesis of the 1950s. The pump is being primed and liquidity is being injected into markets — by both traditional means and nationalisation. Keynes himself must be bouncing up and down with joy in his grave.

I must admit, there are times where I think that I was the last one out on reading Keynes and, in the mainstream, being schooled in post-Keynesian thought. When I arrived at graduate school at Stanford 18 years ago, none of my classmates had read the General Theory — let alone actually studied it — and I am sure they have not picked it up since then. Macroeconomics would talk about discretionary policy and that it could have benefits but it was very theoretical and it was just not clear it was the stuff of serious policy anymore.

The last two months have proved that not to be the case. The amazing thing is not that we are all apparently Keynesians but that there were some Keynesians around in positions of power to actually have that influence. But they must have been there.

I only write this by way of curiousity. Perhaps some historian who looks at this moment in history will be able to track the flow of ideas.

4 thoughts on “How exactly did Keynes survive?”

  1. It is not that Keynes survived but what else are they going to do? It appears to be one panic reaction after another. The system is not behaving as the models predict so they see a symptom and try to fix the symptom and not worry about the consequences. The banks have stopped lending and so there is less money money movement so let us give a few billion that happened to be available to the people who will spend it the quickest? What mechanisms do we have to distribute it and to whom can we distribute without there being too much of a political backlash? Local councils, pensioners look like good candidates because we have mechanisms to easily distribute the money.

    These may well be the most appropriate things to do but no one has the faintest idea whether they will work. My guess is that they will probably do little harm and some good but surely we can do better. I would think it better to throw some money at renewable energy industry infrastructure because we will at least see fewer greenhouse gases.

    The Hollow Men have material for several episodes. The PM’s department sends out an edict to all departments – “Think of ways to spend money that will bring in votes”. Departments are in shock. They know how to spend money because they always ask for more than they need knowing they will be cut back – but to be asked to spend money that will attract votes – remembering the other unwritten criteria that “it should be plaqueable” Meaning you get more long term political value if your local member (or the PM) can open it and leave a plaque so as to remind people at the next election.

    I guess the PM’s best hope is that climate change brings a few more storms to Queensland. A good Sydney hailstorm would be handy. Perhaps the Department Responsible for the Environment can suggest that CSIRO spend money on cloud seeding – you never know it might bring hail. That also brings a lot of photo opportunities.

    Howard has done the gun buy back but with all the stabbings perhaps there is an opportunity there/

    Communications must be in a panic. Perhaps Telstra will not take the $5billion to spend on infrastructure. Think of a sweetener. Maybe a donation to Sol’s Republican Party is in order because it might make George be nicer to Kev and Sol will be appreciative.

    The attorney general should quietly hint to Austrac to ease off on the money laundering because those guys have a lot of money and want to get it into circulation. Let us delay the next tranche of AML/CTF legislation?

    Education can do its bit and ask for two computers for every child – one for home – but maybe an IPhone would get the young vote? Two years to an election so every student between 16 and 18 gets an Iphone but with weekly messages from the government telling them who gave it to them.

    The possibilities are many


  2. I think it was Alex Millmow who pointed out in the early 1990s that at least until the end of the 1970s Australian economists were trained as Keynesians.

    Millmow was at the time refuting the central thesis of Michael Pusey’s poorly-considered “Economic Rationalism in Canberra”.

    Pusey believed that all the Canberra econocrats had swalled rational expectations theory in uni. Millmow’s sharp observation was that Pusey’s timeline was wrong. None of the 1980s Australian econocrats were schooled in rational expectations theory. They were all Keynesian-trained. Then they went out in to the world to be confronted by the fact that Keynes’ analysis didn’t solve the problems that arose in the mid-1970s.

    But Keynes has a lot to say about the problems that confront us now, and people like Ken Henry learnt plenty of Keynes at uni 30 years ago.


  3. I think you are absolutely right Professor Gans. The vast majority of economists are Keynesians. Even those neo-classical economists who see themselves as monetarists adopt a Keynesian framework. During recessions, Keynesians want counter-cyclical fiscal spending. Monetarists prefer monetary policy instead. Hardly anybody wants neither.

    There are very few people who want to liquidate the malinvestments, cut taxes, cut government spending, restrain inflation, and allow the market to correct itself.

    If you know history, then you’ll know that this is almost exactly how it was before the Great Depression I. Right now, Barack Obama looks to be the next Roosevelt – a bad sign, because many studies have argued that Roosevelt prolonged the Great Depression. I fear we are in for a Great Depression II, or at least a severe stagflation.

    The best book to understand what’s happening now is Murray Rothbard’s America’s Great Depression. It’s available for free at Don’t laugh – the key insight of the Austrians has already been accepted by the mainstream: How many people deny that Greenspan kept interest rates too low, and that this contributed to the bubble?

    In times like these, I encourage everyone to stop turning up their nose at alternative viewpoints.


  4. Well, but all the guys in charge were still (mostly) educated before you, weren’t they? And I’ve come across a couple of people who have properly read The General Theory who are a bit younger than me, even though I cannot claim to have read it properly, myself.

    I think what’s more interesting is watching some of the (slightly) older generation – not all of whom would describe themselves as Keynesian by any stretch – spewing vitriol at real business cycle/microfoundations macro. Fun!


Comments are closed.

%d bloggers like this: