What Has Become of Keynesian Economics?

Review of Keynesian Studies Vol.1 Bradley W. Bateman What Has Become of Keynesian Economics? Bradley W. Bateman Abstract To see what has become of Keynesian economics in the twenty-first century, this essay looks at three of the different ways in which the work of John Maynard Keynes (1883-1946) revolutionized economics: economic theory, economic policy and economic ethics. Although Keynes encouraged the production of many variations on his basic model, we can clearly identify what Keynesian economics is. Following the global financial crisis of ten years ago, there have been two waves of Keynesian economic policy: first, fiscal stimulus packages designed to help avoid another Great Depression and, more recently, a second, smaller wave to address the damage done by the austerity policies that followed upon the stimulus packages enacted in 2008-09. While Keynesian economic policies are once again being applied in many countries, revealing that there is indeed a Keynesian ethic, little work is being done to develop fresh Keynesian economic theories. Keywords: Keynes, Keynesian economics, unemployment, economic ethics JEL Classification Numbers: D69, E12, E52, E62, J64 22 Review of Keynesian Studies Vol.1 Bradley W. Bateman I. Defining Keynesian Economics In order to discover what has happened to Keynesian economics, we must first consider the more fundamental question, “What is Keynesian economics?” It is now more than eighty years since Keynes published The General Theory (1936) and in that time there have been many off-shoots and variations that have grown from his root. There has been the neo-classical synthesis, sometimes called “bastard” Keynesianism; there have been both new Keynesianism and neo-Keynesianism; and there is, of course, post- Keynesianism. Thus, many people have tried to claim Keynes’s mantle. And for many of those who have staked such a claim, it is only possible that there is one true “Keynesian economics”: their own version. I would like to suggest, however, that the evolution of many different “Keynesian” theoretical models is exactly what Keynes endorsed.1 From the moment that he published The General Theory, Keynes encouraged others to explore different theoretical expressions of his fundamental insights about the nature of capitalism. He understood that the coin of the realm was minted at the frontier of theoretical development. Thus, when Roy Harrod and John Hicks began exploring how to re-frame his work in what we now call a general equilibrium framework, he gave his clear blessing to their work.2 Likewise, he encouraged the work of Joan Robinson and Abba Lerner. The simple truth is that Keynes never demanded that his followers use any one specific theoretical framework. All he expected was that their theoretical developments would illustrate his fundamental insights about how the economy works. The real question, then, in trying to define what is “Keynesian” is not what theoretical model is used. The real question is, what are the fundamental insights about the economy that the theorist has used in the analysis? Fortunately, we can capture Keynes’s most important insight in one sentence: A capitalist economy does not automatically produce full 1 See Backhouse and Bateman (2010) for a complete discussion of the support that Keynes gave to those who were developing alternative theoretical versions of his work in The General Theory. 2 Later in the essay, there is a consideration of an instance when a general equilibrium model is used in a non- Keynesian (or anti-Keynesian) fashion. 23 Review of Keynesian Studies Vol.1 Bradley W. Bateman employment. There are corollaries to this insight and assumptions that underlie it, but his basic insight is neither complicated, nor difficult to grasp.3 If one accepts the basic proposition that a work is Keynesian if it builds on Keynes’s insight that capitalist economies do not automatically function at full-employment, then the subject of our inquiry may take a somewhat different form than it would if we believed that Keynesian economics is defined by a particular theoretical framework and can only be Keynesian economics if it is presented in that framework. The question would not be, “What happened to the neoclassical synthesis?” or “What happened to the post-Keynesian model?”, but rather “What happened to the idea that a capitalist economy can have high levels of involuntary unemployment?” When we phrase Keynes’s basic insight in this form, it suggests that we look not only at theoretical frameworks for Keynesian economics but also consider Keynesian economics as a policy framework. For while it is not correct to say that any policy that offers a solution to unemployment is a Keynesian policy, it is correct to say that no policy can correctly be labeled Keynesian that does not include explicit means to fight unemployment.4 Thus, for example, it is not Keynesian to argue for the elimination of the minimum wage as a means to achieving full employment. Keynes explicitly (and repeatedly) argued that sticky wages (or wage rigidity) are not the cause of involuntary unemployment. Perhaps more to the point, he argued that trying to fight widespread unemployment with wage cuts was self-defeating and would only lead to a downward spiral of more unemployment.5 3 So, for instance, it is clearly the case that Keynes understood that a capitalist economy can also operate at a level of high employment and high inflation. He demonstrated this in his famous pamphlet “How to Pay for the War,” originally published in 1940, during the Second World War. Likewise, this was a symmetrical belief on Keynes’s part about capitalist economies in the sense that he understood that there was nothing natural in the system that would automatically cause an overheated economy to return to a “full employment” equilibrium. 4 Or by corollary, as per the previous footnote, one could say that a policy directed at fighting inflation caused by high levels of output could also be labelled a Keynesian policy. 5 See, for instance, one of the best-selling introductory economics textbooks in the United States, by Gregg Mankiw (2001). In the sole chapter on “unemployment”, only “long-run” unemployment is discussed. Three of the four causes listed for unemployment stem from workers demanding (or receiving) wages that are “too high”. In Mankiw’s economic ethics, workers and bad laws are, in the long run, responsible for unemployment. Elsewhere in the book, Mankiw does explain that there is a theory that suggests that fluctuating aggregate demand can cause (short-run) unemployment, but he carefully explains why it is not correct to think that policy can address this kind of unemployment. 24 Review of Keynesian Studies Vol.1 Bradley W. Bateman On the other hand, it is Keynesian to argue for a policy that increases government spending as a means to eliminate widespread unemployment. This follows from Keynes’s argument in The General Theory that large-scale, involuntary unemployment is caused by an insufficiency of aggregate demand. However, when we look at the range of economic policies that address unemployment in a Keynesian spirit, we find something much broader than the traditional caricature of activist fiscal policy and large government budget deficits. Keynes spent far more space in The General Theory, for instance, arguing in favor of low interest rates and an accommodative monetary policy than he did arguing for expansive fiscal policy. Taking account, then, of the fact that there may be many different legitimate types of Keynesian economic theory, as well as the fact that there is a wide range of economic policies that can legitimately be labeled Keynesian, we can now provide a working definition of Keynesian economics: Economics that is informed by an understanding that involuntary unemployment is a real feature of a capitalist economy is Keynesian economics. It follows from this definition that economic theory that shows how involuntary unemployment can happen as a result of insufficient aggregate demand is Keynesian economic theory; and further that economic policy that offers the means to mitigate involuntary unemployment is Keynesian economic policy. II. What Happened to Keynesian Policy? Keynes, of course, was not the first economist who saw that there was widespread unemployment in capitalist economies. Karl Marx had seen this, and even had a name for the phenomenon: the industrial reserve army. But Marx was never willing or able to differentiate the appearance of the industrial reserve army from the collapse of capitalism that he believed was imminent. For this reason, perhaps, there was never a Marxist economic policy for mitigating widespread unemployment; the industrial reserve army was (possibly) an element of the historical transition to a new form of economic organization. 25 Review of Keynesian Studies Vol.1 Bradley W. Bateman Like Marx, some earlier classical economists had also seen that widespread unemployment occurs regularly in capitalist economies. But they largely confined their interest in the phenomenon to its role in driving down the real wage in their long run models. There was, however, little concern with actual remedies for unemployment among the classical economists. On the other hand, there was considerable macroeconomic reasoning about the possibility of reducing unemployment prior to Keynes’s General Theory.6 The theorists who worked in this realm, however, such as Knut Wicksell, focused primarily on dampening the fluctuations in the aggregate price level; this dampening would, in turn, mitigate the fluctuations in employment. Accordingly, these theorists also tended to focus more on monetary policy than fiscal policy as a means of addressing the problem of widespread involuntary unemployment. In fact, Keynes was himself one of many monetary theorists who explored the theoretical underpinnings of monetary policy (A Treatise on Money [I][2], 1930) as well as the pragmatic issues surrounding its implementation (A Tract on Monetary Reform, 1923).

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