Review of Keynesian Studies Vol.1 Bradley W. Bateman

What Has Become of Keynesian ?

Bradley W. Bateman

Abstract

To see what has become of in the twenty-first century, this essay looks at three of the different ways in which the work of (1883-1946) revolutionized economics: economic theory, 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 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, , economic ethics JEL Classification Numbers: D69, E12, E52, E62, J64

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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 and 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 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.

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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 ?” 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 as a means to achieving full employment. Keynes explicitly (and repeatedly) argued that sticky (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 . 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 are, in the long run, responsible for unemployment. Elsewhere in the book, Mankiw does explain that there is a theory that suggests that fluctuating can cause (short-run) unemployment, but he carefully explains why it is not correct to think that policy can address this kind of unemployment.

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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 and large government budget deficits. Keynes spent far more space in The General Theory, for instance, arguing in favor of low rates and an accommodative 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 who saw that there was widespread unemployment in capitalist economies. 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.

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Like Marx, some earlier classical 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 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 [I][2], 1930) as well as the pragmatic issues surrounding its implementation (A Tract on Monetary Reform, 1923). Thus, the theoretical and policy exploration of the cycle before The General Theory was rich and varied, including work by Keynes himself. Keynes’s accomplishment in his magnum opus was to provide the first coherent analytical model of how aggregate employment could fluctuate and what caused it to fluctuate. First, he built a model of how aggregate employment is determined; then, he animated the fluctuations of the trade cycle by explaining how changing expectations of rippled through the model, driving employment up and down. For Keynes, the trade cycle was a series of short-run equilibria that had no tendency to any fixed long run position. After all, “In the long run, we are all dead.”7 Prior to his model, there was no analytical means to demonstrate how unemployment fluctuated over the course of the trade cycle. Explanations of the trade cycle that depended on fluctuating expectations and changes in business confidence had been common, however, in the nineteenth century. Mary Paley Marshall and (1879), for instance, were drawing on a long tradition in British economic thought when they proposed that

6 See Laidler (1999) for an excellent treatment of the economics of unemployment before The General Theory. 7 Keynes (1923).

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confidence was an important part of what drove the trade cycle.8 Keynes drew from this spring in British economic thought, formalizing a theoretical mechanism by which changes in business confidence operated to create unemployment.9 With a formal model of how employment is determined at the aggregate level, it would then seem that coherent policy proposals might flow naturally from this theory. But to assume that this is how “Keynesian” economic policy first appeared would be to make a fundamental error in historical analysis. There is very definitely a tradition of “Keynesian policy” within the economics profession, but as Peter Hall (1988) has shown, much of what eventually came to be thought of as “Keynesian economic policy” was widely used before The General Theory was published and was not, in fact, inspired by Keynes’s work. Economists often assume that economic policy follows from economic theory, but as Hall demonstrates, this is often not true. The assumption that policy follows from theory is, perhaps, especially keen among those who study Keynes because to become engaged in serious study of his life and work is to be engaged in watching his long struggle to build theories that he believed could affect economic policymaking for the better. Keynes fought against economic theories that he believed hurt people and developed new theories to take their place. It was a noble fight and one that Keynesian scholars greatly respect. But the fact remains that much of what we think of as Keynesian policy was first proposed without any reference to his work and only took on the label “Keynesian” retrospectively as his model of aggregate demand swept the field in the early days of econometric estimation.10 But now, eighty years later, the world looks even more complex and less clear cut. Economic policy frequently arises from political compromise or political expediency, rather than from the suggestions drawn from economic theory. There are moments such as the aftermath of the global financial crisis in 2008-09 when policymakers justify their actions by reference to economic theory, but these moments are the exception, rather than the rule. It is

8 Perhaps the best formulation of the nineteenth-century British theory of how business confidence drives the by a Cambridge economist is to be seen in Lavington (1922). Lavington was Keynes’s student. 9 Occasionally, historians with scant knowledge of the history of economic ideas have suggested that Keynes is responsible for introducing expectations and confidence into economics. This is simply not the case. 10 In no way does the ex post labelling of demand management policies as Keynesian diminish Keynes’s stature or mean that it is not truly “Keynesian” policy. As noted at length above, the label Keynesian does not mean “first proposed by Keynes”. Rather, it means that the policy is designed to address the existence of involuntary unemployment.

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much more realistic at most times to picture formal, economic theorizing and actual economic policy working as two separate domains. Policymakers use names, whether Friedman’s, Hayek’s, or Keynes’s, to rationalize policies that serve their , but not necessarily because they accept the validity of the economic theories whose names they borrow for authority. Very few prime ministers, not even very many finance ministers, know or understand the empirical and theoretical debates within the economic profession. Rather, they look for policies that serve their political agendas and allow them to sustain electoral coalitions. I make this point not to denigrate economic theory, but rather to help explain why I have made such a strong distinction between Keynesian policies and Keynesian theory. Any good Keynesian economic theory would provide good policy recommendations for alleviating large scale unemployment. Nonetheless, understanding what has happened to Keynesian economic theory and Keynesian economic policy over the last eighty years requires two quite different narratives. They are not exactly the same story. If we were, however, to limit the term Keynesian economic policy to policies recommended by Keynes in The General Theory, or that he offered after its publication, we would have a fairly robust, but somewhat unexpected, set of monetary and fiscal policies. It is worth pausing a moment to consider some of Keynes’s own policy recommendations in, and after, The General Theory. As regards fiscal policy, Keynes himself was not a proponent of activist fiscal policies and deficit financing. In fact, Keynes took great care to differentiate the government’s “ordinary” budget from its capital budget and argued that he did not believe that the ordinary budget should be in deficit. He argued, instead, that the capital budget should be used counter-cyclically to minimize the fluctuations in business confidence and thereby minimize the oscillations in employment. If businessmen expected that infrastructure projects would be rolled out when the economy turned down, they would not pull back as drastically on new investment; likewise, if they expected that infrastructure expenditure would be slowed when the economy was performing at full employment, they would not invest as much near the top of the cycle.

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Thus, Keynes argued that a national investment authority should be established to rank order infrastructure projects so that they could be launched as needed without political machinations. He famously quipped that the people carrying out this work should be seen like dentists, non-controversial experts to whom the public could turn for what they needed to maintain good economic health. Thus, Keynes’s own ideal of fiscal policy, the way he saw best to tame animal spirits and mitigate the fluctuations in employment, was through preventative means, not reactionary, ex post interventions in the economy. As mentioned above, however, in The General Theory Keynes spent more time advocating monetary policy than he did fiscal policy. In particular, he advocated that interest rates be lowered and held low in order to sustain private investment at the highest level possible. Through his own work as an , Keynes had come to believe by 1936 that interest rates were determined by expectations in the bond markets, and so he believed that if bond traders had confidence that the monetary authorities would keep rates low over a long time horizon they would, in fact, act to help make this come about. In this sense, good monetary policy was a self-fulfilling prophesy; in Keynes’s mind, the Bank of England could help keep employment fluctuating around a relatively high level by developing and sustaining a credible belief among bond traders that they would keep interest rates low.11 Seen through these two narrow lenses of the fiscal and monetary policies that Keynes himself advocated after 1936, we would say that we currently see quite a bit of Keynesian monetary policy, but little Keynesian fiscal policy.12 It has been quite common since the financial crisis in 2008-09 for central banks around the world to keep short-term interest rates low, and even in some cases to create negative short-term rates. Furthermore, they have committed themselves to such large-scale expansion of their balance sheets (i.e., quantitative easing) that the low rates they have set in the overnight lending markets have been matched by low long-term rates in the world’s bond markets. While some of the techniques are new, the intent and execution of the policy is “truly” Keynesian.

11 For a discussion of how Keynes’s work as a policy adviser and investor influenced the development of his concept of expectations in the bond , see Bateman (1996). See also Westall (1992) for a detailed treatment of Keynes’s work as the manager of The Provincial Insurance Company’s bond portfolio. 12 The most robust use of Keynesian fiscal policy in the OECD at the time this essay was being written (spring 2019) would probably be the United States, where extremely large tax cuts have been implemented to generate stimulus to the economy. More on this below.

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So, what has become of Keynes’s own fiscal policy ideas? Not much. When governments around the world responded to the global financial crisis ten years ago with big infrastructure projects, they did so reactively, not proactively. One looks in vain for a country that has an expert corps of infrastructure specialists (a National Investment Authority, as it were) who had a list of important projects lined up and ready to roll out quickly. But, of course, Keynes’s idea of a national investment plan to help raise and stabilize the level of private investment has never been widely understood, hence never implemented. Instead, we have a textbook caricature of “Keynesian” fiscal policy as being activist (reactive) deficit expenditure undertaken to avoid economic collapse. Hence, in the immediate aftermath of the global financial crisis, the world was flooded with headlines reading, “The Return of the Master” and “Keynes’s Revenge”. Although I have argued that this type of fiscal policy is not what Keynes advocated, it must be allowed that it is Keynesian policy by the broad definition offered above. That is, it is economic policy aimed at reducing involuntary employment. We might then ask, “What has happened to this more traditionally understood type of Keynesian fiscal policy?” The answers are instructive and somewhat unexpected. The first part of the answer is not unexpected. Although the immensity of the financial crisis initially caught the libertarian market advocates flat-footed, as they watched one national government after another undertake large deficits, they were nonetheless quick to respond in early 2009. As Dieter Plehwe (2017) has shown, the main umbrella organization of these economists, the Mont Pelerin Society, developed a well-organized response to the world-wide use of fiscal stimulus, by arguing that austerity had become urgently necessary, even before recovery was fully achieved. National debt as a percentage of gross domestic product was increasing rapidly, they argued, and this trend had to be stopped. This message was dutifully absorbed at the OECD, IMF and around the world by finance ministries. Severe austerity was imposed, from Britain and Germany to the United States, Greece, and Italy.13

13 Perhaps the best account of the global pull-back from fiscal stimulus is in Barry Eichengreen (2015).

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The speed and force with which the Mont Pelerin policy recommendation was implemented was impressive, if expected. But its implementation was also an unexpected coup of sorts for neoliberals: the immense government deficits had, after all gone in large part to re-capitalize private sector banks whereas the austerity would be implemented by cutting the welfare state. Thus, while they might honestly dislike or distrust large government, the financial crisis had given the neoliberals the pretext to reduce their bête noire, the welfare state. “Never waste a crisis,” was a rallying cry that one often heard from the left as the financial crisis had unfolded in its early months and they had seen the possibility to expand the role of the state; but the right had had the same idea that the crisis should not be wasted. By 2011, austerity had been imposed across most of the OECD, and the neoliberals had won this battle. Capitalism was shored up through fiscal policy by bailing out the banks from the mistakes they had made in risk management; and this came with the added bonus that the welfare state was trimmed as a result. But perhaps the most unexpected turn of all was yet to come. As austerity was implemented and Keynesian demand management policies were curtailed in 2010 and 2011, populist backlash began to grow in many of the same countries where austerity was imposed. There was widespread anger that welfare benefits were being cut while banks had been bailed out without any serious repercussions for the leaders who were responsible for what had happened. At the same time, populist sentiment was further inflamed by the xenophobia and anti-immigrant feelings that often arise during times of high unemployment. Right-wing nationalists began to do well in many elections and eventually took power, for example, in America, Italy, and Poland. As evidenced by their anti-immigration policies, these right-wing governments have proven to be illiberal in many respects, and so one can only wonder whether the libertarian free market advocates regret the part they played in helping to create the resentment that has followed from the austerity policies they recommended. But anti-immigrant policies and disrespect for the rule of are not the only thing that has turned out contrary to their hopes, for many of the right-wing governments have turned quite explicitly to activist demand policies to stimulate their economies. Through both tax cuts and expenditure increases,

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nationalist governments have sought to stimulate their economies and lower unemployment. Thus, austerity has also played a part in helping resurrect demand management policies. So we can ask, again, “What has happened to Keynesian fiscal policy?” And one simple and provocative answer is that it has become a part of the tool kit of authoritarian, right- wing political parties around the globe. That is certainly the case in North America and Europe, where populist politicians working under the banner of “nationalism” are arguing for the use of fiscal policy to stimulate their economies. This evolution in the use of Keynesian demand management undoubtedly feels like an affront to many on the left. After all, Keynes is an icon for those who believe that the state has a positive role to play in a capitalist economy and, thus, that it is an important tool of social democracy.14 Whether it is the social democratic parties in Europe or the Democratic Party in the United States, Keynes has served as an authority for justification of active demand management (whether on the fiscal or monetary side) and the welfare state. How could this icon of the left be the source of policy ideas for right-wing authoritarians?15 This deep irony is only surprising, of course, to those who do not know the history of economic ideas well. Demand management had been used by fascist governments in the Interwar years without any reference to Keynes. In fact, as some of the cases highlighted by Peter Hall (1988) have shown, several fascist governments developed active fiscal policies to stimulate their economies in the 1930s. Thus, demand management to alleviate unemployment has never been, per se, the sole possession of left-wing parties. Nor did Keynes think that his ideas could serve only left-wing ends. One of the most damning episodes in the history of The General Theory’s publication was the forward to the German translation (in 1936), in which Keynes offered that his ideas might be useful to totalitarian states. Robert Skidelsky (1995) called this suggestion from Keynes “unfortunately worded”. Donald Moggridge (1992) has called it “shameful and puzzling.” Keynes’s introduction to the German edition of The General Theory raises many interesting questions, not the least of which is ethical. Was his outreach to the Nazis reprehensible? Did it in any way represent support for their larger ends? Or was it simply a

14 See Tony Judt (2010) for a series of essays linking Keynes to the left. 15 See Marcuzzo (2010) for an excellent short summary of Keynes’s relationship with the William Beveridge, and hence of his role in the establishment of the postwar welfare state in Britain.

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vainglorious expression of his belief that he had achieved something great by creating “the general theory of economics”, equivalent in some way to Einstein’s “general theory of relativity”? Was he trying to establish his bona fides as the person who had finally discovered the philosopher’s stone that applied to all economies, regardless of the political system that it functioned under? Keynes never wrote again about the episode, and so we have little to work with in trying to further understand his motives.16 Certainly, we know that he was not sympathetic to the Nazi program, but the difficult question remains why he should have suggested his ideas for their use, at all.

III. A Foray into Keynesian Economic Ethics

The quandaries created by the introduction to the German translation of The General Theory provide an interesting opportunity to consider the economic ethic that underpins, or drives, Keynes’s great work. In some sense, of course, an essay such as this one is hardly the place to undertake an exploration of the entirety of Keynes’s ethical beliefs. Keynes had, after all, started his professional career writing on the philosophy of probability and he had cut his teeth at Cambridge as an undergraduate engaged in several years of intense study of ethical philosophy. Indeed, his study of probability sprang from his efforts to challenge arguments that the great Cambridge philosopher G. E. Moore had made about ethical behavior in cases in which the outcome of one’s actions is uncertain.17 But there are even more complicating circumstances in trying to completely specify Keynes’s ethics: Keynes was a life-long Liberal and wrote clearly and articulately about those beliefs.18 In his last decade, he wrote a well-known essay that was published

16 Moggridge (1992) also raises the question of whether Keynes approved the translation of the German introduction. There is apparently no extant of the original English version, who did the translation, or that Keynes saw the translation before it appeared. 17 For an explanation of Moore’s early influence on Keynes, see Bateman (1996). See also Carabelli (1988), O’Donnell (1989), Davis (1994), and Coates (1996) for discussions of Keynes’s ethics. 18 For Keynes’s writing about liberalism, see his three essays, “Am I a Liberal?,” “Liberalism and Labour,” and “The End of Laissez-Faire”. All three are reprinted in his Essays in Persuasion (1931).

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posthumously as “My Early Beliefs” in which he surveyed his intellectual formation, including his ethical beliefs, and how they had shaped his mature thinking. But for our purposes, we can focus on a more narrow field of his ethical thinking, his economic ethics. It is quite simple to state the first principle of those economic ethics in a way that is symmetrical with our definitions of Keynesian economic theory and Keynesian economic policy: involuntary unemployment is a fact of capitalist society and there is a moral responsibility to mitigate it where possible. One can actually find a nascent form of this ethic in his early best-seller, The Economic Consequences of the Peace (1920). There Keynes argued fervently against policies that he believed would cause widespread unemployment in Germany. Why this concern? There were at least two reasons: first, the unemployment was unfair to those who played no role in its cause and would be harmful to their welfare; and, second, it could lead to a loss of legitimacy of the social system and spawn illiberal dictatorship. His thinking fifteen years later had not changed fundamentally. His popular essays in the 1930s argue against unemployment because it is unfair, harmful, and dangerous. Seen from this perspective, the trajectory of Keynes’s theoretical work across the 1920s and 1930s is an effort to find a means to fulfill the moral duty to mitigate unemployment. Whether seen through the lens of fighting the inflation that crippled Europe after the First World War, or trying to dampen the business cycle through appropriate monetary policy, the arc of his work culminates in a theoretical model that can explain the cause of mass unemployment, demonstrate that it is not self-correcting, and, finally, identify the means to combat it. Understood in this simple sense, Keynesian economic ethics are the principle that animates anything that can legitimately be called Keynesian economics, Keynesian economic theory, or Keynesian economic policy. Either you see that involuntary unemployment can exist in a capitalist economy and believe that it is important to mitigate it. Or you do not. For most of those who do not believe that it exists, the reason is that the observable unemployment is voluntary: they believe that people do not want to work at all, are unwilling to work at the wages on offer, or are prevented by law from working for the wages that employers are willing to pay.

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The presence or absence of this ethic also allows us to answer more precisely the question that underpins this essay: what has happened to Keynesian economics? For the real question being asked might better be posed as, “What has happened to Keynesian economic ethics?” In order for economists to take an interest in Keynesian economics, Keynesian theory, or Keynesian policy, they must first share the ethic that there is a responsibility to address involuntary employment. And one can correctly infer that there are many economists today who do not share that ethic. Consider, for instance, the current manifestation of general equilibrium theory in macroeconomic modeling, dynamic stochastic general equilibrium theory (DSGE). We have noted above that when Roy Harrod and John Hicks first developed a general equilibrium version of The General Theory’s model, Keynes encouraged them. Thus, it is perfectly possible to be a Keynesian who models with the general equilibrium method. But as anyone who understands the ideological battles of the last decades within the economics profession knows, there is no way to label a DSGE model as Keynesian. Paired with the assumption of and offered in any of its various guises, such as “real business cycle theory”, the animating ethic of DSGE is the denial that involuntary unemployment can exist. More particularly, the theory played the central role in the “policy ineffectiveness” literature. Its purpose was to show that active policy intervention can only make the economy perform less well than it would without the intervention. In other words, DSGE is not only not Keynesian economic theory, it is anti-Keynesian theory. DSGE not only does not generate Keynesian economic policies, it generates anti-Keynesian economic policies. One might suppose that the experience of the financial crisis ten years ago would have settled the question of whether Keynesian economic models or DSGE models better explain, or better predict, actual economic outcomes, but it has done nothing of the sort. Despite the fact that any basic Keynesian theoretical model can be used to explain why the crisis happened; and despite the fact that DSGE models neither predicted, nor explained, the crisis; and despite the fact that actual Keynesian policies (fiscal and monetary) prevented the collapse of global capitalism; most DSGE modelers have stuck to their models and their

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(laissez-faire) policy recommendations. Very few people who believed in DGSE modelling and the policy ineffectiveness literature before the crisis have changed their minds.19 Why? The answer seems straightforward. They work from a different economic ethic than Keynesians. They do not believe that widespread involuntary unemployment can exist. If widespread unemployment exists, it is voluntary or it exists because of something that is preventing markets from working correctly such as a union or a minimum wage law. Thus, in their minds, the only moral responsibility attendant to unemployment is to work to minimize the power of unions or to abolish minimum wage laws. In their minds, if wages could be lowered enough, everyone would be fully employed. To be sure, there are many economists who espouse this anti-Keynesian ethic. The question for our purposes is whether anyone still espouses the Keynesian ethic? It seems fair to say that many economists believe that demand management policies can increase aggregate demand, output, and employment in the short run.20 And it is also fair to say that many more believe this than did before the global financial crisis. Following the onset of the financial crisis, aggressive monetary policy helped keep unemployment at lower levels than it had risen to immediately after the crisis began. And to a much lesser extent, because it was used for such a short period, aggressive fiscal policy also helped alleviate unemployment. Many economists cannot “unsee” the unemployment that happened after the crisis began and they cannot “unsee” the benefit that was gained from quick, effective policy responses. And a large number also undoubtedly see that whatever may be true of the “long run”, we actually live in an unending series of short runs. Thus, there are at least two world views, or two economic ethics that currently exist simultaneously today within the economics profession. What separates Keynesian economists, or economists who agree that involuntary unemployment exists and can be

19 One interesting case of a free market advocate who did change his mind is the great scholar (2009a, 2009b, 2009c, and 2010). Posner is not a DSGE theorist, but he is staunch proponent of a laissez-faire approach to free markets. Still, he was able to see what was happening in the crisis and embraced Keynes’s explanation of it. Of particular interest for our purposes is his reflection that he had never read Keynes nor been encouraged to before the crisis. 20 For instance, of the mainstream Nobel Prize-winning economists, one could single out and .

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mitigated, is not so much a disagreement about scientific results as a difference in “vision”, outlook, or ethic.21 The belief on the part of a growing number of economists that demand management policy can effectively combat large-scale, involuntary unemployment is matched, as has already been argued, by a growing appeal to demand management policies by politicians. Keynesian policies were used immediately after the global financial crisis started and then again to mitigate the damage done by the austerity policies that followed these stimulus packages. Thus, Keynesian economic policy has not disappeared. Perhaps the place where the Keynesian economic ethic least animates the world today is in the arena of economic theory. Whereas there are clearly mainstream economists who believe that demand management policies can be effective, there is little or no cutting-edge theory to show this insight in a new and compelling way. Economists have seen the effectiveness of quantitative easing, for instance, but they have not yet seen the need to show why it is effective in a new Keynesian theoretical framework. Professional advancement may require the invention of new theory, but those who share the Keynesian economic ethic seem content to depend on earlier Keynesian models to understand what commonsense has shown them is true. There are deeper ideological and sociological reasons for this lack of innovation. Some advocates of DSGE and its off-shoots simply refuse to acknowledge that their models failed to predict the crisis and cannot be used to explain it. Others acknowledge that this failure is true but claim rather that the ability of economic models to predict and explain the “real” economy is not the purpose of doing economics. Instead, they argue that economics is an activity in which one works with models, but that their “realism” is never the point. According to this argument, the models are important in and of themselves and what matters is their elegance and sophistication. One suspects that yet other advocates of DSGE see economic theorizing as a means to support ideological positions and are, therefore, unwilling to compromise their free-market commitments by (re)introducing into economic theory the issue of (the reality of) widespread, involuntary unemployment for which government policy is a solution.

21 (1951) is the first to say that one’s economic “vision” underpins one’s theoretical work.

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IV. Conclusion

Thus, we find ourselves in a situation in which Keynesian economic policies are alive and well. We saw this when the crisis hit and nations across the globe rolled out stimulus packages in order to avert another Great Depression. We have seen it again as stimulus packages are being implemented to combat the effects of the austerity that the libertarian, free marketers advocated in 2010-11. Thus, we find ourselves in a situation in which there are many advocates of Keynesian economic ethics. These advocates exist both within and in the policy-making sphere. But what we do not have is an active body of cutting-edge theorists who are developing new models to demonstrate Keynesian insights. 22 Luigi Pasinetti (2007) has argued this point eloquently and called for new theorists and new theories to re-ignite Keynesian thinking or create a new Keynesian Revolution. What we also lack is a mainstream in which there is widespread agreement about . In fact, macroeconomics is a badly fragmented field today. In the postwar decades, there was widespread unanimity that Keynesian macroeconomics was the right model with the right policy recommendations. After the of the 1970s, we experienced several decades in which we cycled through a changing set of free market theories and policies that defined a new anti-Keynesian mainstream: monetarism, rational expectations, real business cycle theory, and DSGE. But today the profession is badly split between people who still cling to versions of the anti-Keynesian, free market revolution and those who have returned to a Keynesian economic ethic. While it seems impossible to say

22 Many people have noted that offers new theoretical justifications of Keynes’s insights about how expectations can shift for “non-rational” reasons. There is, in fact, an entire subset of behavioral economics called behavioral finance. Many of these models do, in fact, provide new models for reframing Keynesian insights about the behavior of . What they have not done yet is create a new set of macroeconomic models that can animate unemployment and the policies that can alleviate it.

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how long that pluralism can last, the Keynesians are not likely to last long without new, innovative theoretical forms for their insights.

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Bradley W. Bateman Randolph College, Virginia, U.S.A.

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