Who's Afraid of John Maynard Keynes?

“Paul Davidson is the keeper of the Keynesian fame. Keynes lives (intellectu- ally), and Davidson is one of the reasons.” —Alan S. Blinder, Gordon S. Rentschler Memorial Professor of Economics and Public Afairs, Princeton University, USA Paul Davidson Who‘s Afraid of John Maynard Keynes? Challenging Economic Governance in an Age of Growing Inequality Paul Davidson Holly Chair of Excellence Emeritus University of Tennessee at Knoxville Knoxville, TN, USA

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In a 1936 book entitled Te General Teory of Employment Interest and Money, John Maynard Keynes developed a revolutionary general theory to explain the cause of the Great Depression and suggest what policies government can undertake to end the existence of persistent high levels of unemployment. Keynes wrote “this book is chiefy addressed to my fellow economists [to tell them that the orthodox classical theory was at] fault, in a lack of clearness and of generality in its premisses.”1 Keynes indicated that his general theory’s conclusions were “in contrast…with those of the classical theory…[where] the postulates of the classical theory are applicable to a special case…[that] happen[s] not to be…the economic society in which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience.”2 After the Second World War, economic textbooks devoted several chapters to a macroeconomic theory that was called “Keynesian” theory, although the microfoundations of this mainstream “Keynesian” theory was based on classical economic theory. Joan Robinson, a famous economist who was a student of Keynes in the 1930s called this mainstream “Keynesian” theory “Bastard Keynesianism” since it attempted to merge classical theory of individual decision-making in the marketplace with some macroeconomic terminology developed by Keynes. v vi Foreword

For more than four decades, in professional articles and books that I have written, I have been trying to convince mainstream economists in academia that what they have been teaching as “Keynesian” economics was not the general theory developed by John Maynard Keynes in his 1936 book. I have stressed that mainstream “Keynesian” macroeconom- ics has as its microfoundation classical theory—typically a mathematical form of classical theory called general equilibrium theory. Consequently, policy implications developed from this “Bastard Keynesianism” often produced, as Keynes said classical theory would, misleading and some- times disastrous results. Tis has become more obvious with the global fnancial crisis of 2007–2008 and the Great Recession that has lasted almost a decade since the onset of this global fnancial crisis. In 1994, I wrote a textbook that I addressed to my fellow economists and their students entitled Post Keynesian Macroeconomic Teory to contrast the technical aspects of classical-based “Keynesian” theory with the development of a Post Keynesian analysis that brings Keynes’s origi- nal general theory up-to-date in explaining the operation of modern money using, market-oriented economies. Although this textbook has gone through two editions and continues to sell, I found that mainstream economists, including government economic advisors, central bankers, and economists at many fnancial enterprises were not ready to accept this Keynes-Post Keynesian analysis. Instead, they still use some variant of the false “Bastard Keynesian” theory. Te result has been that many government economic policies have not solved the economic problems we have experienced and some policies often have made things appear to be worse. Moreover, as I note in Chap. 2 of this book, in Congressional testi- mony, mainstream economist Former Federal Reserve Chairman Alan Greenspan stated he was shocked in disbelief when the global fnancial crisis occurred in 2007 and this event has caused the entire “intellectual edifce” of mainstream macroeconomic theory to “collapse.” When I read that Queen Elizabeth of Great Britain had asked economists at the London School of Economics why nobody had seen the development of the global fnancial crisis and then I read the foolish answer the queen received, I thought the time was ripe to write a book aimed at my fellow economists to explain, in some technical detail, Foreword vii how Keynes-Post Keynesian theory provided a factual explanation of the cause of the global fnancial crisis. My book would also provide evi- dence that, several years before the crisis, I had warned, in print, of the coming of a fnancial crisis. Tis book was entitled Post Keynesian Teory and Policy3 and was published in 2015 by Edward Elgar. Some of the material in this book was included in that volume and I am grateful to Edward Elgar for allowing me to reproduce it here. In the campaign for nomination for President of the USA, I noted that the potential Presidential candidates failed to provide the public with any correct policies that would solve the global economic problems that we are facing. I decided to rewrite the message of my Post Keynesian Teory and Policy in a new book that is stripped of its most technical jargon. I indicated that I believed that many highly intelligent readers of economic writings that uses technical verbiage regarding models, theories, equations, etc. fnd such texts uninvitingly dismal and obtuse. I wanted to present the Post Keynesian policy message in a simple language that the average intelligent layperson can understand rather than providing an explanation in the vocabulary of the professional economist. I sug- gested that the title for this new book should be Who’s Afraid of john Maynard Keynes? My hope for this new book was by providing these ideas in a simple exposition, I could educate the voting population to understand the economic problems our economy faces. Tey could then demand that those running for political ofce provide economic policies that (a) address directly these understandable economic problems and (b) were capable of developing policies in an understandable man- ner to assure a prosperous full employment economy.

Knoxville, USA Paul Davidson

Notes

1. J.M. Keynes, Te General Teory of Employment interest and Money, (Macmillan, London, 1936) p. V. 2. Op. cit., p. 3. 3. P. Davidson, Post Keyneian Teory and Policy (Edwad Elgar, Cheltenham, 2005). Contents

1 Introduction: Who Saw the Coming of the Global Financial Crisis of 2007–2008? 1

2 Alternative Explanations of How the Capitalist Economy in Which We Live Operates 7

3 Understanding the Role of Money and Money Contracts in a Market Economy 19

4 Unemployment: Why Can’t People Who Want to Work Find Jobs? 39

5 Creating a Prosperous Full Employment Economy 55

6 Can We Prevent Infation and Still Achieve Full Employment? 63

7 Te Role of Financial Markets and Liquidity 81

ix x Contents

8 Globalization and International Trade Efects on Employment and Prosperity 97

9 Are Free Trade Agreements Always Benefcial? 127

10 President Trump’s Anti-free Trade Agreements Policy 141

11 What Economic Policies Can a Democracy Adopt to Assure We Live in a Prosperous, Civilized Capitalist System? 145

Index 155