Sunday, April 24, 2011

Keynes is Dead, Long Live Keynesian Economics

The 21 April, 2011 marked the 65th anniversary of Keynes’ death. That is not a happy anniversary for me, as I regard Keynes as one of the greatest economists of all time, and his true legacy to be modern Post Keynesian economics, with Modern Monetary Theory/Chartalism firmly within the Post Keynesian family (though others might disagree with the latter assertion).

Keynes died of a heart attack on 21 April, 1946 at the age of 62, not long after his return from America. Keynes was survived by his wife Lydia Lopokova, a Russian ballerina, who actually lived until 1981. Keynes’ passing was a few years after he had attended the Bretton Woods conference in 1944, at which the world’s post-WWII international monetary system was organised. The International Monetary Fund (IMF) was one of the institutions that emerged from the transactions at Bretton Woods.

How interesting it is, then, to see the IMF’s managing director Dominique Strauss-Kahn paying lip service to Keynes and his ideas in a recent speech, even while the IMF continues to wreak neoliberal havoc on many of the world’s economies (see Mark Weisbrot, “Emerging out of the IMF’s Shadow,”, 18 April, 2011 and “The Ghost of Keynes at the IMF?, Lofty Rhetoric, Hollow Policies”, Counterpunch, April 19, 2011).

It is rather astonishing to see Strauss-Kahn making statements like this:
“At the end of his magnum opus, The General Theory, Keynes stated the following: “The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes” ….

“Let me start with employment. Just as we managed to tame inflation in the 1980s, this decade should be the decade that takes full employment seriously once again ….

Collective bargaining rights are important, especially in an environment of stagnating real wages….”
All true, but I don’t expect a conversion to Keynesian truth at the IMF board any time soon, though there have of course been some promising changes at the IMF recently, not least of all the recognition that discretionary capital controls are now needed in developing and even some developed countries to control destructive short-term capital flows.

But the real test of whether Keynes is still relevant is what happened during the global financial crisis and world-wide recession in 2008–2009. Faced with the plunge into global depression, most governments returned to the tried and tested Keynesian medicine of fiscal stimulus. That policy worked well, but more stimulus was, and is now, required.

It is sad to note the anniversary of Keynes’ death, but his economics is alive and well, as is the struggle to return us to Keynesian full employment.

Keynes might be dead, but long live Keynesian economics.


  1. IMF is an incredible source of moral hazard.

    Allow me to explain. South Korea was a poor country for most of the time it received foreign assistance. It was a poor country after it stopped receiving foreign assistance. But it soared in its living standards in the period after the 1960s into a mostly upper middle class country. That's because South Korea's own survival was at stake, when it was no longer protected by foreign lending. It had to make the right institutional reforms.

    On the other hand, nearly every country, especially Indonesia, that receives IMF lending repeatedly has been given virtually free money over and over and over. They never had to make any reforms. They were being subsidised for being failed governments. Implicity, this reward for failure was also a punishment for successful reform and change, since a non-failing government would not qualify for IMF lending.

    The absurd thing about IMF as a "lender of last resort" is that the IMF is actually the lender of first resort. It will throw away cheap loans that will never be paid back, and simply gives newer loans to allow past loans to be repaid. Failed governments have never to look at other creditors before heading straight to IMF.

  2. Hayek: You see, another political element was that, of course, politicians just lapped the argument and Keynes taught them if you outspend your income and run a deficit, you are doing good to the people in general. The politicians didn’t want to hear anything more than that -- to be told that irresponsible spending was a beneficial thing and that’s how the thing became so influential.

  3. "politicians just lapped the argument and Keynes taught them if you outspend your income and run a deficit, you are doing good to the people in general"

    And I suppose the opposite policy: letting depression grip your economy, and seeing mass unemployment, homelessness, and starvation is in fact the Austrian prescription for "doing good"?

    Hayek, as I have noted before, in fact changed his position later in life on the dangers of "secondary deflation" and himself wanted some "evil" state interventions:

    Greg Ransom claims that Hayek even supported limited fiscal policy.

    So maybe read your Hayek more carefully, before you go quoting him selectively?

  4. Another AnonymousApril 25, 2011 at 5:50 PM

    Prateek, the problem is worse. The IMF is an international loan-sharking institution. Poorer countries are often forced into their arms. The money the IMF gives is far from free, and is conditioned on making reforms which unfortunateley are almost always carried out. The "reforms" are the problem, as they are suicidal, criminally insane, and destroy the "reformed" economy, while oh-so-coincidentally enriching foreign capital in the very short term.

    The loan-sharking phrase is from Jonathan Kwitny's old book Endless Enemies, the first expose of the IMF. There's a chilling passage where he interviews an unnamed IMF official, describing how the IMF plan would wreck an economy and force it into debt peonage. The reply is something like: "Yes, that is our intent."

  5. These are encouraging signs, but I often get the impression that "Keynesianism Light" is just being used to prop up a kind of zombie neoliberalism. As I see it, politicians like President Obama were willing to use just enough state intervention to prevent the whole system from collapsing as spectacularly as it did in the 1930s, but on the other hand, they seem unwilling to fight for a real, robust full employment policy or for more radical structural changes.

    I see this not as a failure of Keynesian economics but as a failure of political will, and more importantly, a result of the collapse of civil society in much of the West, but especially in the United States, where various populist organizations, such as labor unions and mutual aid societies, have become much weaker as the people generally suffer from a high degree of social isolation.

  6. There is some good that will come from all of this: After 14 Trillion (with a "T" !) debt following the Keynesian dream, we are all currently living in an economic laboratory. After the smoke clears and people start counting the results of US stimulus initiatives, with live metrics, not wishful oak-paneled university la-la land economics, at long-last, Keynes will truly and FINALLY, be dead. How can you spend more than you make to stimulate anything? Rubbish.

    Sure, a lighthouse here and there. A coroners office and laboratory, etc. But purchase entire industries, hand out money you don't have? Actually construct an economic model on Government-in-the-economy? Rubbish.

    Oh, sure, Keynes' ideas were all the rage when nobody could prove any of it. Well, you got your wish - let's see how you will explain this??? Oh, I know: the mess created by the non-Keynes people was just too great.