2008–2009 Keynesian resurgence

2008–2009 Keynesian resurgence

Discussion
Ask a question about '2008–2009 Keynesian resurgence'
Start a new discussion about '2008–2009 Keynesian resurgence'
Answer questions from other users
Full Discussion Forum
 
Encyclopedia

In 2008 and 2009, there was a resurgence of interest in Keynesian economics among policy makers in the world's industrialized economies. This has included discussions and implementation of economic policies in accordance with the recommendations made by John Maynard Keynes
John Maynard Keynes
John Maynard Keynes, Baron Keynes of Tilton, CB FBA , was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of governments...

 in response to the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...

—such as fiscal stimulus and expansionary monetary policy
Monetary policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...

.

From the end of the Great Depression until the early 1970s, Keynesian economics
Keynesian economics
Keynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...

 provided the main inspiration for economic policy makers in Western industrialized countries. The influence of Keynes's theories waned in the 1970s, due to stagflation
Stagflation
In economics, stagflation is a situation in which the inflation rate is high and the economic growth rate slows down and unemployment remains steadily high...

 and critiques from Milton Friedman
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...

, Robert Lucas, Jr.
Robert Lucas, Jr.
Robert Emerson Lucas, Jr. is an American economist at the University of Chicago. He received the Nobel Prize in Economics in 1995 and is consistently indexed among the top 10 economists in the Research Papers in Economics rankings. He is married to economist Nancy Stokey.He received his B.A. in...

, Friedrich Hayek
Friedrich Hayek
Friedrich August Hayek CH , born in Austria-Hungary as Friedrich August von Hayek, was an economist and philosopher best known for his defense of classical liberalism and free-market capitalism against socialist and collectivist thought...

 and other economists who were less optimistic about the ability of interventionist government policy to positively regulate the economy. The advent of the global financial crisis in 2008 prompted a resurgence of support for Keynesian economics among policy makers and later among academics.

Competing views on macroeconomic policy


Macroeconomic policy focuses on high level government decisions which affect overall national economies rather than lower level decisions concerning markets for particular goods and services.

Keynes was the first economist to popularize Macroeconomics and also the notion that governments can and should intervene in the economy to alleviate the suffering caused by unemployment. Before the Keynesian revolution that followed Keynes's 1936 publication of his General Theory, the prevailing orthodoxy was that the economy would naturally establish full employment
Full employment
In macroeconomics, full employment is a condition of the national economy, where all or nearly all persons willing and able to work at the prevailing wages and working conditions are able to do so....

. So successful was the revolution that the period spanning the aftermath of WWII to about 1973 has been labelled the Age of Keynes. Stagnating economic performance in the early 1970s provided support for a counter revolution in successfully shattering the previous consensus for Keynesian economics. Milton Friedman monetarism school was prominent in displacing Keynes ideas both in academia and from the practical world of economic policy making. For an overview on the different perspectives concerning the optimal balance between public and private power in the economy, see Liberal, Realist & Marxist. For more detail on specific systems of thought relevant to debate on this fiscal policy see Keynesian economics
Keynesian economics
Keynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...

, Monetarism
Monetarism
Monetarism is a tendency in economic thought that emphasizes the role of governments in controlling the amount of money in circulation. It is the view within monetary economics that variation in the money supply has major influences on national output in the short run and the price level over...

, Austrianism, New Classical economics, Real business cycle theory
Real business cycle theory
Real business cycle theory are a class of macroeconomic models in which business cycle fluctuations to a large extent can be accounted for by real shocks. Unlike other leading theories of the business cycle, RBC theory sees recessions and periods of economic growth as the efficient response to...

, and New Keynesian economics
New Keynesian economics
New Keynesian economics is a school of contemporary macroeconomics that strives to provide microeconomic foundations for Keynesian economics. It developed partly as a response to criticisms of Keynesian macroeconomics by adherents of New Classical macroeconomics.Two main assumptions define the New...

. A key common feature of the anti Keynesian schools of thought is that they argued for policy ineffectiveness or policy irrelevance; though the theoretical justifications vary, the various schools all hold that government intervention will be much less effective than Keynes had believed, with some advocates even claiming that in the long run interventionist policy will always be counterproductive.

Keynesian economics followed on from the Keynesian Revolution
Keynesian Revolution
The Keynesian Revolution was a fundamental reworking of economic theory concerning the factors determining employment levels in the overall economy. The revolution was set against the then orthodox economic framework: neoclassical economics....

. In contrast to the recent resurgence of Keynesian policy making, the revolution initially comprised a shift change in theory. There had been several experiments in policy making that can be seen as precursors for Keynes ideas, most notably Franklin D. Roosevelt
Franklin D. Roosevelt
Franklin Delano Roosevelt , also known by his initials, FDR, was the 32nd President of the United States and a central figure in world events during the mid-20th century, leading the United States during a time of worldwide economic crisis and world war...

's famous "New Deal
New Deal
The New Deal was a series of economic programs implemented in the United States between 1933 and 1936. They were passed by the U.S. Congress during the first term of President Franklin D. Roosevelt. The programs were Roosevelt's responses to the Great Depression, and focused on what historians call...

" (Roosevelt was US president from 1933 to 1945). These experiments however had been influenced more by morals, geopolitics and political ideology than by new developments in economics, although Keynes had found some support in the US for his ideas about counter-cyclical public-works policy as early as 1931. According to Gordon Fletcher, Keynes' General Theory provided a conceptual justification for 'New Deal'-type policies which was lacking in the established economics of the day; this was immensely significant, as in the absence of a proper theoretical underpinning there was a danger that ad hoc policies of moderate intervention would be overtaken by extremist solutions, as had already happened in much of Europe. However, Keynes did not agree with all aspects of the New Deal; he considered that the almost immediate revival of business activity after the program's launch could only be accounted for by psychological factors, which are dangerous to rely on, such as the boost to confidence by Roosevelt's inspiring oratory.

The Keynesian ascendancy: 1941–1979




While working on his General Theory, Keynes wrote to George Bernard Shaw
George Bernard Shaw
George Bernard Shaw was an Irish playwright and a co-founder of the London School of Economics. Although his first profitable writing was music and literary criticism, in which capacity he wrote many highly articulate pieces of journalism, his main talent was for drama, and he wrote more than 60...

 saying "I believe myself to be writing a book on economic theory which will largely revolutionize, not I suppose at once but in the course of the next ten years – the way the world thinks about economic problems … I don't merely hope what I say, in my own mind I'm quite sure". Keynes ideas quickly became established as the new foundations for mainstream economics, and also as a leading inspiration for Industrial nations economic policy makers from about 1941 to the midseventies, especially in the English speaking countries. The 1950s and 60s, where Keynes's influence was at its peak, has been described as appearing in retrospect to have been a golden age.
In contrast to the decades before WWII, the industrial world and much of the developing world enjoyed high growth, low unemployment and an exceptionally low frequency of economic crises. In late 1965 Time magazine ran a cover article with the title inspired by Milton Friedman
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...

's statement, later associated with Nixon
Richard Nixon
Richard Milhous Nixon was the 37th President of the United States, serving from 1969 to 1974. The only president to resign the office, Nixon had previously served as a US representative and senator from California and as the 36th Vice President of the United States from 1953 to 1961 under...

, that "We are all Keynesians now
We are all Keynesians now
"We are all Keynesians now" is a now-famous phrase coined by Milton Friedman and attributed to U.S. president Richard Nixon. It is popularly associated with the reluctant embrace in a time of financial crisis of Keynesian economics by individuals such as Nixon who had formerly favored monetarist...

". The article described the exceptionally favourable economic conditions then prevailing, and reported that "Washington's economic managers scaled these heights by their adherence to Keynes's central theme: the modern capitalist economy does not automatically work at top efficiency, but can be raised to that level by the intervention and influence of the government." The article also states that Keynes was one of the three most important economists ever, and that his General Theory was more influential than the magna opera
Masterpiece
Masterpiece in modern usage refers to a creation that has been given much critical praise, especially one that is considered the greatest work of a person's career or to a work of outstanding creativity, skill or workmanship....

 of his rivals – Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...

's The Wealth of Nations
The Wealth of Nations
An Inquiry into the Nature and Causes of the Wealth of Nations, generally referred to by its shortened title The Wealth of Nations, is the magnum opus of the Scottish economist and moral philosopher Adam Smith...

and Marx
Karl Marx
Karl Heinrich Marx was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist. His ideas played a significant role in the development of social science and the socialist political movement...

's Das Kapital
Das Kapital
Das Kapital, Kritik der politischen Ökonomie , by Karl Marx, is a critical analysis of capitalism as political economy, meant to reveal the economic laws of the capitalist mode of production, and how it was the precursor of the socialist mode of production.- Themes :In Capital: Critique of...

.

Displacement by monetarism and New Classical economics: 1979–1999


The stagflation of the 1970s, including Richard Nixon
Richard Nixon
Richard Milhous Nixon was the 37th President of the United States, serving from 1969 to 1974. The only president to resign the office, Nixon had previously served as a US representative and senator from California and as the 36th Vice President of the United States from 1953 to 1961 under...

's imposition of wage and price controls on August 15, 1971 and in 1972 unilaterally canceling the Bretton Woods system
Bretton Woods system
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century...

 and ceasing the direct convertibility
Nixon Shock
The Nixon Shock was a series of economic measures taken by U.S. President Richard Nixon in 1971 including unilaterally cancelling the direct convertibility of the United States dollar to gold that essentially ended the existing Bretton Woods system of international financial exchange.-Background:By...

 of the United States dollar to gold, as well as the 1973 oil crisis
1973 oil crisis
The 1973 oil crisis started in October 1973, when the members of Organization of Arab Petroleum Exporting Countries or the OAPEC proclaimed an oil embargo. This was "in response to the U.S. decision to re-supply the Israeli military" during the Yom Kippur war. It lasted until March 1974. With the...

 and the recession that followed, unleashed a swelling tide of criticism for Keynesian economics, most notably from Milton Friedman
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...

, a leading figure of monetarism
Monetarism
Monetarism is a tendency in economic thought that emphasizes the role of governments in controlling the amount of money in circulation. It is the view within monetary economics that variation in the money supply has major influences on national output in the short run and the price level over...

, and the Austrian School's Friedrich von Hayek. In 1976, Robert Lucas
Robert Lucas, Jr.
Robert Emerson Lucas, Jr. is an American economist at the University of Chicago. He received the Nobel Prize in Economics in 1995 and is consistently indexed among the top 10 economists in the Research Papers in Economics rankings. He is married to economist Nancy Stokey.He received his B.A. in...

 of the Chicago school of economics introduced the Lucas critique
Lucas critique
The Lucas critique, named for Robert Lucas′ work on macroeconomic policymaking, argues that it is naïve to try to predict the effects of a change in economic policy entirely on the basis of relationships observed in historical data, especially highly aggregated historical data.The basic idea...

, which called into question the logic behind Keynesian macroeconomic policy making and leading to New classical macroeconomics
New classical macroeconomics
New classical macroeconomics, sometimes simply called new classical economics, is a school of thought in macroeconomics that builds its analysis entirely on a neoclassical framework. Specifically, it emphasizes the importance of rigorous foundations based on microeconomics...

. By the mid 70s policy makers were already beginning to lose their confidence in the effectiveness of government intervention in the economy. In 1976 British Prime Minister James Callahan went on record saying the option of “spending our way out of recession” no longer exists.
in 1979, the election of Margaret Thatcher
Margaret Thatcher
Margaret Hilda Thatcher, Baroness Thatcher, was Prime Minister of the United Kingdom from 1979 to 1990...

 as UK prime minister brought monetarism to British economic policy. In the US, the Federal Reserve under Paul Volcker
Paul Volcker
Paul Adolph Volcker, Jr. is an American economist. He was the Chairman of the Federal Reserve under United States Presidents Jimmy Carter and Ronald Reagan from August 1979 to August 1987. He is widely credited with ending the high levels of inflation seen in the United States in the 1970s and...

 adopted similar policies of monetary tightening in order to squeeze inflation out of the system.

In the world of practical policy-making as opposed to economics as an academic discipline, the monetarist experiments in both the US and the UK in the early 1980s were the pinnacle of anti-Keynesian influence. The strong form of monetarism being tested at this time taught that fiscal policy is of no effect, and that monetary policy should purely try to target the money supply with a view to controlling inflation, without trying to target real interest rates; this was in contrast to the Keynesian view that monetary policy should target interest rates, which it held could influence unemployment. Monetarism succeeded in bringing down inflation, but at the cost of unemployment rates in excess of 10%, causing the deepest recession seen in those countries since the end of the Great Depression and severe debt crises in the developing world. Contrary to monetarist predictions, the relationship between the money supply and the price level proved unreliable in the short- to medium-term. Another monetarist prediction not borne out in practice was that the velocity of money
Velocity of money
300px|thumb|Similar chart showing the velocity of a broader measure of money that covers M2 plus large institutional deposits, M3. The US no longer publishes official M3 measures, so the chart only runs through 2005....

 did not remain constant, in fact it dropped sharply. The US Federal Reserve began increasing the money supply above Monetarist-advised thresholds with no effect on inflation, and discarded monetarism in 1984, and the Bank of England likewise abandoned its sterling M3 money targeting in October 1985.

Keynesian counter currents 1999–2007


By 1999, the 1997 Asian Financial Crisis and the harsh response by the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...

 (IMF) had already caused free market policies to be at least partially discredited in the eyes of developing world policy makers. The developing world as a whole stopped running current account deficits in 1999, largely as a result of government intervention to devalue their currencies, which would help build foreign reserves to protect against future crises and help them enjoy export led growth rather than rely on market forces.

For the advanced economies, while there was much talk of reforming the International financial system after the Asian crises, it was not until the market failure of the 2000 Dot com crash that there was a significant shift away from free market policies. In America there was a return by the Bush government to a moderate form of Keynesian policy, with interest rates lowered to ease unemployment and head off recession, along with a form of fiscal intervention with emergency tax cuts to boost spending.
In Britain, Gordon Brown
Gordon Brown
James Gordon Brown is a British Labour Party politician who was the Prime Minister of the United Kingdom and Leader of the Labour Party from 2007 until 2010. He previously served as Chancellor of the Exchequer in the Labour Government from 1997 to 2007...

 as Chancellor had gone on record saying "the real challenge was to interpret Keynes's insights for the modern world."

Yet American and British policy makers continued to ignore many elements of Keynesian thinking such as the recommendation to avoid large trade imbalances and to reduce government deficits in boom years. There was no general global return to Keynesian economics in the first 8 years of the 2000s. European policy became slightly more interventionist after the turn of the century, but the shift in a Keynesian direction was smaller than was the case for the US and UK, however Europeans had not generally embraced free market thinking as whole heartedly as had the Anglosphere in the 80s and 90s. Japan had been using moderate Keynesian policies in the nineties, and switched to neo liberalism with the Koizumi
Junichiro Koizumi
is a Japanese politician who served as Prime Minister of Japan from 2001 to 2006. He retired from politics when his term in parliament ended.Widely seen as a maverick leader of the Liberal Democratic Party , he became known as an economic reformer, focusing on Japan's government debt and the...

 government of 2001–2006. For the first half of the 2000s, free-market influences remained strong in powerful normative institutions like the World Bank, the IMF, and in prominent opinion-forming media such as the Financial Times and The Economist.
The Washington consensus
Washington Consensus
The term Washington Consensus was coined in 1989 by the economist John Williamson to describe a set of ten relatively specific economic policy prescriptions that he considered constituted the "standard" reform package promoted for crisis-wracked developing countries...

 view that current account imbalances do not matter continued even in the face of a ballooning US deficit, with mainstream academic opinion only turning to the view that the imbalances are unsustainable by 2007. Another notable anti Keynesian view that remained dominant in US and UK policy making circles was the idea that markets work best if they are unregulated.

In the world of popular opinion, there had been a upsurge in vocal but minority opposition to the raw free market, with anti-globalization protests
Anti-globalization movement
The anti-globalization movement, or counter-globalisation movement, is critical of the globalization of corporate capitalism. The movement is also commonly referred to as the global justice movement, alter-globalization movement, anti-globalist movement, anti-corporate globalization movement, or...

 becoming increasingly notable after 1998. By 2007 there had been bestsellers promoting Keynesian or at least pro mixed economy policies: in the Anglosphere, Naomi Klein's The Shock Doctrine
The Shock Doctrine
The Shock Doctrine: The Rise of Disaster Capitalism is a 2007 book by Canadian author Naomi Klein, and is the basis of a 2009 documentary by the same name....

; in China and south east Asia, Song Hongbing's Currency Wars
Currency Wars
Currency Wars by Song Hong bing, also known as The Currency War, is a bestselling book in China, reportedly selling over 200,000 copies and is reportedly being read by many senior level government and business leaders in China...

.

In the academic world, the partial shift towards Keynesian policy had gone largely unnoticed.

The Keynesian revival of 2008–2009


In the wake of the financial crisis of 2007–2010 the free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...

 consensus began to attract negative comment even by mainstream opinion formers from the economic right, leading to a reassessment or even reversal of normative opinion on a number of topics. The Keynesian view receiving most attention has been fiscal stimulus
National fiscal policy response to the late 2000s recession
Many nations of the world have enacted fiscal stimulus plans in response to the global, ongoing recession. These nations have used different combinations of government spending and tax cuts to boost their sagging economies...

. Against the prevailing economic orthodoxy at the time, then IMF managing director Dominique Strauss-Kahn
Dominique Strauss-Kahn
Dominique Gaston André Strauss-Kahn , often referred to in the media, and by himself, as DSK, is a French economist, lawyer, politician, and member of the French Socialist Party...

 had been advocating for global fiscal stimulus from as early as January 2008. Gordon Brown built support for fiscal stimulus among global leaders at September's UN General Assembly
United Nations General Assembly
For two articles dealing with membership in the General Assembly, see:* General Assembly members* General Assembly observersThe United Nations General Assembly is one of the five principal organs of the United Nations and the only one in which all member nations have equal representation...

, after which he went on to secure George Bush's agreement for the first G20 leaders summit. In late 2008 and 2009 fiscal stimulus packages were widely launched across the world, with packages in G20 countries averaging at about 2% of GDP, with a ratio of public spending to tax cuts of about 2:1. The stimulus in Europe was notably smaller than for other large G20 countries. Other areas where opinion has shifted back towards a Keynesian perspective include:
  • Global trade imbalances. Keynes placed great importance on avoiding large trade deficits or surpluses, but following the Keynesian displacement an influential view in the West was that governments need not be concerned about them. From late 2008 imbalances are once again widely seen as an area for government concern. In October 2010 the US suggested a possible plan to address global imbalances, with targets to limit current account surpluses similar to those proposed by Keynes at Bretton Woods.
  • Capital Control
    Capital control
    Capital controls are measures such as transaction taxes and other limits or outright prohibitions, which a nation's government can use to regulate the flows into and out of the country's capital account....

    s. Keynes strongly favoured the use of controls to restrain international capital movement, especially short term speculative flows, but in the 1970s and 1980s opinion among Western economists and institutions switched swung firmly against them. During 2009 and 2010 capital controls have once again came to be seen as an acceptable part of a governments macroeconomic policy toolkit, though institutions like the IMF still caution against overuse.
  • Scepticism concerning the role of maths in academic economics and in economic decision making. Despite his degree in Maths, Keynes remained skeptical about the usefulness of mathematical models for solving economic problems. Maths however became increasingly central to economics even during Keynes career, and even more so in the decades following his death. While the resurgence has seen no general reversal of opinion on the utility of complex math, there have been numerous calls for a broadening of economics to make further use of disciplines other than maths. In the practical spheres of banking and finance, there have been warnings against over reliance on mathematical models, which have been held up as one of the contributing causes of the 2008–2009 crises.

Among policy makers



In March 2008, leading free-market journalist Martin Wolf
Martin Wolf
Martin Wolf, CBE is a British journalist, widely considered to be one of the world's most influential writers on economics. He is associate editor and chief economics commentator at the Financial Times.-Early life:...

, chief economics commentator at the Financial Times
Financial Times
The Financial Times is an international business newspaper. It is a morning daily newspaper published in London and printed in 24 cities around the world. Its primary rival is the Wall Street Journal, published in New York City....

, announced the death of the dream of global free-market capitalism, and quoted Josef Ackermann, chief executive of Deutsche Bank
Deutsche Bank
Deutsche Bank AG is a global financial service company with its headquarters in Frankfurt, Germany. It employs more than 100,000 people in over 70 countries, and has a large presence in Europe, the Americas, Asia Pacific and the emerging markets...

, as saying "I no longer believe in the market's self-healing power." Shortly afterward economist Robert Shiller
Robert Shiller
Robert James "Bob" Shiller is an American economist, academic, and best-selling author. He currently serves as the Arthur M. Okun Professor of Economics at Yale University and is a Fellow at the Yale International Center for Finance, Yale School of Management...

 began advocating robust government intervention to tackle the financial crisis, citing Keynes. Macro economist James K. Galbraith
James K. Galbraith
James Kenneth Galbraith is an American economist who writes frequently for mainstream and liberal publications on economic topics. He is currently a professor at the Lyndon B. Johnson School of Public Affairs and at the Department of Government, University of Texas at Austin. He is also a Senior...

 used the 25th Annual Milton Friedman Distinguished Lecture to launch a sweeping attack against the consensus for monetarist economics and argued that Keynesian economics were far more relevant for tackling the emerging crises.

Much discussion among policy makers reflected Keynes's advocacy of international coordination of fiscal or monetary stimulus, and of international economic institutions such as the IMF and World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...

, which he had helped to create at Bretton Woods
United Nations Monetary and Financial Conference
The United Nations Monetary and Financial Conference, commonly known as the Bretton Woods conference, was a gathering of 730 delegates from all 44 Allied nations at the Mount Washington Hotel, situated in Bretton Woods, New Hampshire, to regulate the international monetary and financial order after...

 in 1944, and which many argued should be reformed at a "new Bretton Woods". This was evident at the G20 and APEC meetings in Washington, D.C., and Lima, Peru, in November 2008, and in coordinated reductions of interest rates by many countries in November and December 2008. IMF and United Nations
United Nations
The United Nations is an international organization whose stated aims are facilitating cooperation in international law, international security, economic development, social progress, human rights, and achievement of world peace...

 economists and political leaders such as British Prime Minister Gordon Brown
Gordon Brown
James Gordon Brown is a British Labour Party politician who was the Prime Minister of the United Kingdom and Leader of the Labour Party from 2007 until 2010. He previously served as Chancellor of the Exchequer in the Labour Government from 1997 to 2007...

 advocated a coordinated international approach to fiscal stimulus. The President of the World Bank, Robert Zoellick
Robert Zoellick
Robert Bruce Zoellick is the eleventh president of the World Bank, a position he has held since July 1, 2007. He was previously a managing director of Goldman Sachs, United States Deputy Secretary of State and U.S. Trade Representative, from February 7, 2001 until February 22, 2005.President...

, advocated that all developed countries pledge 0.7 percent of its stimulus package to a vulnerability fund for assisting developing countries. It was argued, e.g. by Donald Markwell
Donald Markwell
For the Montgomery, Alabama, talk radio personality, Don Markwell, see Don Markwell Professor Donald John 'Don' Markwell is an Australian social scientist and college president...

, that the absence of an effective international approach in the spirit of Keynes, would risk allowing the return to play of the economic causes of international conflict which Keynes had identified back in the 1930s.

A series of major bailouts followed, starting on September 7 with the announcement that the U.S. government was to nationalize the two firms which oversaw most of the U.S. mortgage market—Fannie Mae and Freddie Mac. In October, Britain's Chancellor
Chancellor of the Exchequer
The Chancellor of the Exchequer is the title held by the British Cabinet minister who is responsible for all economic and financial matters. Often simply called the Chancellor, the office-holder controls HM Treasury and plays a role akin to the posts of Minister of Finance or Secretary of the...

, Alistair Darling
Alistair Darling
Alistair Maclean Darling is a Scottish Labour Party politician who has been a Member of Parliament since 1987, currently for Edinburgh South West. He served as the Chancellor of the Exchequer from 2007 to 2010...

 referred to Keynes as he announced plans for substantial fiscal stimuli to head off the worst effects of recession. These measures were later described by Ed Balls
Ed Balls
Edward Michael Balls, known as Ed Balls, is a British Labour politician, who has been a Member of Parliament since 2005, currently for Morley and Outwood, and is the current Shadow Chancellor of the Exchequer....

 as the first time a post war British government had been able to meet a recession with a "classic Keynesian response".
In his autobiography published in 2011, Darling recounts how his response to the crisis was "influenced hugely by Keynes's thinking, indeed, as were most other governments"

Similar policies to those announced by Darling were used in other European countries, by the U.S., by China and across the world.
In a speech on January 8, 2009, then-President Elect Barack Obama
Barack Obama
Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...

 unveiled a plan for extensive domestic spending to combat recession, further reflecting Keynesian thinking. The plan was signed by the President on February 17, 2009. There had been extensive debate in Congress concerning the necessity, adequacy, and likely effects of the package, which saw it being cut from $819 to $787 billion during its passage through the Senate.
On January 21, 2010, the Volcker Rule
Volcker Rule
The Volcker Rule is a specific section of the Dodd–Frank Wall Street Reform and Consumer Protection Act originally proposed by American economist and former United States Federal Reserve Chairman Paul Volcker to restrict United States banks from making certain kinds of speculative investments that...

 was endorsed by U.S. President Barack Obama. At its heart, it is a proposal by US economist Paul Volcker
Paul Volcker
Paul Adolph Volcker, Jr. is an American economist. He was the Chairman of the Federal Reserve under United States Presidents Jimmy Carter and Ronald Reagan from August 1979 to August 1987. He is widely credited with ending the high levels of inflation seen in the United States in the 1970s and...

 to restrict banks from making speculative
Speculation
In finance, speculation is a financial action that does not promise safety of the initial investment along with the return on the principal sum...

 investments that do not benefit their customers. Volcker has argued that such speculative activity played a key role in the financial crisis of 2007–2010. Plans for a new $180 billion stimulus plan were announced by President Obama in September 2010.

A renewed interest in Keynesian ideas was not limited to Western countries, with stimulus plans a common response to the crisis from nations across the globe. Stimulus packages in Asia were on a par with those in Europe and America. In a speech delivered in March 2009 entitled Reform the International Monetary System, Zhou Xiaochuan
Zhou Xiaochuan
Zhou Xiaochuan is a Chinese economist, banker, reformist and bureaucrat. As governor of the People's Bank of China since December 2002, he has been in charge of the monetary policy of the People's Republic of China....

, the governor of the People's Bank of China
People's Bank of China
The People's Bank of China is the central bank of the People's Republic of China with the power to control monetary policy and regulate financial institutions in mainland China...

, revived Keynes's idea of a centrally managed global reserve currency
Reserve currency
A reserve currency, or anchor currency, is a currency that is held in significant quantities by many governments and institutions as part of their foreign exchange reserves...

. Dr Zhou argued that it was unfortunate that Keynes's Bancor
Bancor
The Bancor was a supranational currency that John Maynard Keynes and E. F. Schumacher conceptualised in the years 1940-42 and which the United Kingdom proposed to introduce after the Second World War...

 proposal was not accepted at Bretton Woods
Bretton Woods system
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century...

 in the 1940s. He argued that national currencies were unsuitable for use as global reserve currencies as a result of the Triffin dilemma
Triffin dilemma
The Triffin dilemma is a theory that when a national currency also serves as an international reserve currency, there could be conflicts of interest between short-term domestic and long-term international economic objectives...

 – the difficulty faced by reserve currency issuers in trying to simultaneously achieve their domestic monetary policy goals and meet other countries' demand for reserve currency. Dr Zhou proposed a gradual move towards adopting IMF Special Drawing Rights
Special Drawing Rights
Special Drawing Rights are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund . Not a currency, SDRs instead represent a claim to currency held by IMF member countries for which they may be exchanged...

 (SDRs) as a centrally managed global reserve currency.
Dr Zhou's view was echoed in June 2009 by the IMF and in September was described by the Financial Times as the boldest statement of the year to come from China.

In an widely read article on dollar hegemony
Dollar hegemony
Dollar hegemony is the hypothesized monetary hegemony of the US dollar in the global economy. Henry C.K. Liu popularized the term in the article "Dollar Hegemony has to go" in Asia Times, April 11, 2002...

 published in Asia Times On Line on April 11, 2002, Henry C.K. Liu asserted that "The Keynesian starting point is that full employment is the basis of good economics. It is through full employment at fair wages that all other economic inefficiencies can best be handled, through an accommodating monetary policy." Liu has also advocated denominating Chinese exports in Chinese currency (RMB
Renminbi
The Renminbi is the official currency of the People's Republic of China . Renminbi is legal tender in mainland China, but not in Hong Kong or Macau. It is issued by the People's Bank of China, the monetary authority of the PRC...

) as a step to free China from the constraints of excessive reliance on the dollar.

Effectiveness


China was one of the first nations to launch a substantial fiscal stimulus package, estimated at $586 billion spread over two years, and in February 2009 the Financial Times reported that both government officials and private investors were seeing signs of recovery, such as rises in commodity prices, a 13% rise in the Chinese stock market over a period of 10 days, and a big increase in lending – reflecting the government's success in using state-owned banks to inject liquidity into the real economy.
Reviewing events from 2010, economics commentator John Authers finds the stimulus and associated expansionary monetary policy had a dramatic effect in reviving the Chinese economy. The Shanghai index had been falling sharply since the September bankruptcy of Lehman Brothers
Bankruptcy of Lehman Brothers
Lehman Brothers filed for Chapter 11 bankruptcy protection on September 15, 2008. The bankruptcy of Lehman Brothers remains the largest bankruptcy filing in U.S...

 but the decline was halted when news of the planned stimulus leaked in late October. The day after the stimulus was officially announced the Shanghai index immediately rose by 7.3% , followed by sustained growth.
Speaking at the 2010 Summer Davos, Premier Wen Jiabao
Wen Jiabao
Wen Jiabao is the sixth and current Premier and Party secretary of the State Council of the People's Republic of China, serving as China's head of government and leading its cabinet. In his capacity as Premier, Wen is regarded as the leading figure behind China's economic policy...

 also credited the stimulus for good performance of the Chinese economy over the past two years.
As late as April 2009 central bankers and finance ministers remained cautious about the overall global economy, but by May the Financial Times was reporting that according to a package of leading indicators there were signs that recovery was imminent in Europe too, after a trough in March. The US was one of the last major economies to implement a major stimulus plan, and the slowdown there looked set to continue for at least a few more months.
There was also a rise in business and consumer confidence across most of Europe, especially in the emerging economies such as Brazil, Russia and India.
In June, the Organisation for Economic Cooperation and Development (OECD) reported improvements to the global economic outlook, with overall growth forecast for 2010 instead of a small contraction. The OECD gave the credit to stimulus plans, which they warned should not be rolled back too swiftly.
The IMF also reported a better than expected global economic outlook in July, though warning the recovery is likely to be slow. Again they credited the "unprecedented" global policy response and echoed the OECD in urging leaders to avoid complacency and not to unwind recession fighting fiscal and monetary policy too soon.

In a widely syndicated article published in August 2009, Paul Krugman announced that the world had been saved from the threat of a second great depression, thanks to "Big Government".
The US economy emerged from recession in the third quarter of 2009, which the Financial Times credited to the stimulus measures.
In November then managing director of the IMF Dominique Strauss-Kahn
Dominique Strauss-Kahn
Dominique Gaston André Strauss-Kahn , often referred to in the media, and by himself, as DSK, is a French economist, lawyer, politician, and member of the French Socialist Party...

 again repeated the warning against exiting from the stimulus measures too soon, though the Financial Times reported significant differences had emerged even within Europe, with senior members of the European Central Bank
European Central Bank
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...

 expressing concern about the risk of delaying the exit for too long.
On 8 December 2009, President Obama unveiled what the Financial Times described as a "second stimulus plan" for additional job creation
using approx $200 billion of unused funds that had been pre-approved for the Troubled Asset Relief Program. The same speech saw the President advise that the initial stimulus had already saved or created 1.6 million jobs.
In an article looking back at 2009, economics professor Arvind Subramanian wrote in the Financial Times that economics had helped to redeem itself by providing advice for the policy responses that successfully prevented a global slide into depression, with the fiscal policy stimulus measures taking their "cue from Keynes".

Writing in July 2010 for the Financial Times, economics journalist Robin Harding stated that American economists are close to consensus in agreeing that the US stimulus did have a large influence on the economy, though he mentions there are high profile dissenters such as Robert Barro and John Taylor
John B. Taylor
John Brian Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University, and the George P. Shultz Senior Fellow in Economics at Stanford University's Hoover Institution....

.
Barro's arguments against the effectiveness of the stimulus has been addressed by Keynesian economics professor Brad Delong
J. Bradford DeLong
James Bradford DeLong commonly known as Brad DeLong, is a professor of Economics and chair of the Political Economy major at the University of California, Berkeley. He served as Deputy Assistant Secretary of the United States Department of the Treasury in the Clinton Administration under Lawrence...

.
A July 2010 paper by Moody's
Moody's
Moody's Corporation is the holding company for Moody's Analytics and Moody's Investors Service, a credit rating agency which performs international financial research and analysis on commercial and government entities. The company also ranks the credit-worthiness of borrowers using a standardized...

 chief economist Mark Zandl and former Federal Reserve vice chairman Alan Blinder
Alan Blinder
Alan Stuart Blinder is an American economist. He serves at Princeton University as the Gordon S. Rentschler Memorial Professor of Economics and Public Affairs in the Economics Department, Vice Chairman of The Observatory Group, and as co-director of Princeton’s Center for Economic Policy Studies,...

 predicted that the US recession would have been far worse without the government intervention. They calculate that in the absence of both a monetary and fiscal response, unemployment would have peaked at about 16.5% instead of about 10%, the peak to trough GDP decline would have been about 12% instead of 4%. Despite the lack of deficit spending, the 2010 and 2011 U.S. government deficit was forecast to be almost twice as large due to the predicted collapse of tax receipts.
In August 2010, a report from the non partisan Congressional Budget Office
Congressional Budget Office
The Congressional Budget Office is a federal agency within the legislative branch of the United States government that provides economic data to Congress....

 found the US stimulus had boosted growth by as much as 4.5%, though some senior US officials, such as House of Representatives Minority Leader John Boehner
John Boehner
John Andrew Boehner is the 61st and current Speaker of the United States House of Representatives. A member of the Republican Party, he is the U.S. Representative from , serving since 1991...

, expressed skepticism about the report's accuracy.

In academia


The Keynesian resurgence has largely been a phenomenon in politics and the media rather than academia (abstracting momentarily from the foundation of The Cambridge Trust for New Thinking in Economics, the Institute for New Economic Thinking and the contributions of Economics-Nobel Laureates therein). Some argue that no academic breakthroughs would be associated with the resurgence. However, the recession and financial crisis did cast doubt on the validity and relevance of some academic perspectives and economic theories. There has been a shift in emphasis and perspective among many academics. Judge Richard Posner
Richard Posner
Richard Allen Posner is an American jurist, legal theorist, and economist who is currently a judge on the United States Court of Appeals for the Seventh Circuit in Chicago and a Senior Lecturer at the University of Chicago Law School...

, associated with the University of Chicago and its eponymous economic ideology, used a mostly Keynesian framework to evaluate the recession in A Failure of Capitalism
A Failure of Capitalism
A Failure of Capitalism is a major 2009 nonfiction book by Judge Richard Posner, the most-cited American legal scholar in history, among the most respected judges in the United States , and a major proponent of the economic analysis of law...

. Until recently, mainstream economists had largely ignored fiscal policy (which was deemed unnecessary for most economic downturns), but it has become relevant given the extent of the financial crisis of 2007–2010. The mainstream of New Keynesians and New Classical economists had agreed monetary policy
Monetary policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...

 was sufficient for most downturns and the two schools of thought only debated technicalities. The extent of the recession made New Keynesians reevaluate the potential of large stimulus, and their debates with New Classical economists, who often opposed stimulus entirely, became substantive. Some economists (primarily post-Keynesians) have accused the New Keynesian system of being so integrated with pro-free market neo-classical influences that the label 'Keynesian' may be considered a misnomer.

There has been a shift in thinking amongst many mainstream economists, paralleling the resurgence of Keynesianism among policy makers. The New York Times
The New York Times
The New York Times is an American daily newspaper founded and continuously published in New York City since 1851. The New York Times has won 106 Pulitzer Prizes, the most of any news organization...

reported that in the 2008 annual meeting of the American Economic Association mainstream economists remained hostile or at least sceptical about the government’s role in enhancing the market sector or mitigating recession with fiscal stimulus – but in the 2009 meeting virtually everyone voiced their support for such measures. However a substantial shift in opinion was less obvious in the academic literature. Speaking in March 2009, Galbraith has stated that he has not detected any changes among academic economists, nor a re-examination of orthodox opinion in the journals.

The 2008 financial crisis has led some in the economic profession to pay greater attention to Keynes’s original theories. In February 2009, Robert Shiller and George Akerlof
George Akerlof
George Arthur Akerlof is an American economist and Koshland Professor of Economics at the University of California, Berkeley. He won the 2001 Nobel Prize in Economics George Arthur Akerlof (born June 17, 1940) is an American economist and Koshland Professor of Economics at the University of...

 argued in their book Animal Spirits
Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism
Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism is a book written to promote the understanding of the role played by emotions in influencing economic decision making...

that the current US stimulus package was too small, as it does not take into account loss of confidence or do enough to restore the availability of credit. In a September 2009 article for The New York Times
The New York Times
The New York Times is an American daily newspaper founded and continuously published in New York City since 1851. The New York Times has won 106 Pulitzer Prizes, the most of any news organization...

, on the lessons economists should learn from the crisis, Paul Krugman urged economists to move away from neoclassical
Neoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...

 models and employ Keynesian analysis:
By mid 2010 interest in Keynes idea's was growing within academia, even while the revival in Keynesian policy making had partially stalled.

In October 2011 journalist John Cassidy
John Cassidy
John Cassidy is a professional comedian, magician, and balloon artist who holds several Guinness World Record speed records for balloon sculpting. In November 2007, Cassidy inflated and sculpted a record 747 balloons in one hour...

 noted the large number of new books that have recently came out about Keynes, including from leading universities like Cambridge and MIT, with more books due to come out towards the end of 2011.

Calls for the resurgence to extend further


In 2009 there were several books published by economists advocating a further shift towards Keynesian thinking. The authors advocated further reform in academic economics,
policy making
and even the public's general ethics.
Theoretical arguments regarding the relative merits of free market versus mixed economy policies do not always yield a clear conclusion. In his 2009 book Keynes: The Return of the Master
Keynes: The Return of the Master
Keynes: The Return of the Master is a 2009 book by economic historian Robert Skidelsky. The work discusses the economic theories and philosophy of John Maynard Keynes, and argues about their relevance to the world following the Financial crisis of 2007–2010...

, economic historian Lord Skidelsky
Robert Skidelsky, Baron Skidelsky
Robert Jacob Alexander, Baron Skidelsky FBA is a British economic historian of Russian origin and the author of an award-winning major three volume biography of John Maynard Keynes. He read history at Jesus College, Oxford...

 has a chapter comparing the performance of the world economy between the Golden Age period of 1951–1973 where Keynesian policies were dominant with the Washington Consensus
Washington Consensus
The term Washington Consensus was coined in 1989 by the economist John Williamson to describe a set of ten relatively specific economic policy prescriptions that he considered constituted the "standard" reform package promoted for crisis-wracked developing countries...

 period of 1981–2008 where free market polices were adopted by leading governments. Samuel Brittan
Samuel Brittan
Sir Samuel Brittan is a British columnist for the Financial Times and an author.At Cambridge he was taught by Peter Bauer and Milton Friedman...

 of The Financial Times called this part of the book the key chapter for the practically inclined reader.
Using data from the IMF, Skidelsky finds superior economic performance on a whole range of metrics, except for inflation where he says there was no significant difference.
Metric Golden Age period Washington Consensus period
Average global growth 4.8% 3.2%
Average global inflation 3.9% 3.2%
Average Unemployment (US) 4.8% 6.1%
Average Unemployment (France) 1.2% 9.5%
Average Unemployment (Germany) 3.1% 7.5%
Average Unemployment (Great Britain) 1.6% 7.4%


Skidelsky suggests the high global growth during the golden age was especially impressive as during that period Japan was the only major Asian economy enjoying high growth – it was not until later that the world had the exceptional growth of China and other emerging economies raising the global average. Lord Skidelsky also comments that the golden age was substantially more stable – comparing slightly different periods, Martin Wolf
Martin Wolf
Martin Wolf, CBE is a British journalist, widely considered to be one of the world's most influential writers on economics. He is associate editor and chief economics commentator at the Financial Times.-Early life:...

 found that in 1945–71 (27 years) the world saw only 38 financial crises, whereas in 1973–97 (24 years) there were 139.

Skidelsky also reports that inequality was generally decreasing during the golden age, whereas since the Washington Consensus was formed it has been increasing. He notes that South America has been an exception to general rise in inequality – since the late 1990s inequality has been falling there, which James Galbraith explains as likely due to the region's early "retreat from neoliberal orthodoxy".

In his 2009 book The Keynes Solution, post-Keynesian economist Paul Davidson
Paul Davidson (economist)
Paul Davidson is an American macroeconomist who has been one of the leading spokesmen of the American branch of the Post Keynesian school in economics...

 makes another historical case for the effectiveness of Keynesian policy, referring to the experience of the United States during the Great Depression. He notes how economic growth and employment levels increased for four successive years as New Deal policies were pursued by president Roosevelt. When government spending was cut back in 1937 due to concerns about the budget deficit, all the gains were lost in one year, and growth only resumed after spending increased again from 1938, as a response to growing acceptance of the case for deficit spending in a recession and later due to WWII. For Davidson, this experience validated the view that Keynesian policy has the power to deliver full employment and prosperity for a government's entire labor force. Elsewhere Davidson has written that both price stability and employment were superior in the Keynesian age to even the classical gold standard era that was ended by World War I.

On November 8, 2008, Paul Davidson and Henry C.K. Liu co-authored an open letter to world leaders attending the November 15 White House summit on financial markets and the world economy, urging reconsideration of Keynes' analytical system that contributed to the golden age of the first quarter century after World War II. The letter, signed by many supporting economists, advocates a new international financial architecture based on an updated 21st century version of the Keynes Plan originally proposed at Bretton Woods in 1944.

The letter ends by describing this new international financial architecture as aiming to create (1) a new global monetary regime that operates without currency hegemony, (2) global trade relationships that support rather than retard domestic development and (3) a global economic environment that promotes incentives for each nation to promote full employment and rising wages for its labor force.

Criticisms


Keynesian ideas have also attracted considerable criticism. While from late 2008 to early 2010 there was broad consensus among international leaders concerning the need for co-ordinated stimulus, the German administration initially stood out in their reluctance to wholeheartedly embrace Keynesian policy.
George Osborne
George Osborne
George Gideon Oliver Osborne, MP is a British Conservative politician. He is the Chancellor of the Exchequer of the United Kingdom, a role to which he was appointed in May 2010, and has been the Member of Parliament for Tatton since 2001.Osborne is part of the old Anglo-Irish aristocracy, known in...

, at the time shadow Chancellor for Great Britain, opposed a return to Keynesian policy from as early as October 2008, saying "even a modest dose of Keynesian spending" could act as a "cruise missile aimed at the heart of recovery."
Critics focus on arguing that Keynesian policy will be counter-productive – reasons given include assertions that it will be inflationary, create more income disparity and cause consumers to rein in their spending even more as they anticipate future tax rises.
In 2009 more than 300 professional economists, led by three Nobel Laureates in economics, James M. Buchanan
James M. Buchanan
James McGill Buchanan, Jr. is an American economist known for his work on public choice theory, for which he received the 1986 Nobel Memorial Prize in Economic Sciences. Buchanan's work initiated research on how politicians' self-interest and non-economic forces affect government economic policy...

, Edward C. Prescott
Edward C. Prescott
Edward Christian Prescott is an American economist. He received the Nobel Memorial Prize in Economics in 2004, sharing the award with Finn E. Kydland, "for their contributions to dynamic macroeconomics: the time consistency of economic policy and the driving forces behind business cycles"...

 and Vernon L. Smith
Vernon L. Smith
Vernon Lomax Smith is professor of economics at Chapman University's Argyros School of Business and Economics and School of Law in Orange, California, a research scholar at George Mason University Interdisciplinary Center for Economic Science, and a Fellow of the Mercatus Center, all in Arlington,...

, signed a statement against more government spending, arguing that "Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth." Robert Barro
Robert Barro
Robert Joseph Barro is an American classical macroeconomist and the Paul M. Warburg Professor of Economics at Harvard University. The Research Papers in Economics project ranked him as the 4th most influential economist in the world as of August 2011 based on his academic contributions...

, an economics professor at Harvard University
Harvard University
Harvard University is a private Ivy League university located in Cambridge, Massachusetts, United States, established in 1636 by the Massachusetts legislature. Harvard is the oldest institution of higher learning in the United States and the first corporation chartered in the country...

 (and author of the 1974–Ricardian Equivalence
Ricardian equivalence
The Ricardian equivalence proposition is an economic theory holding that consumers internalize the government's budget constraint: as a result, the timing of any tax change does not affect their change in spending...

-theory that government stimuli are inefficient in a perfect market), has argued that stimulus spending may be unwise, claiming one of the factors the US stimulus package
American Recovery and Reinvestment Act of 2009
The American Recovery and Reinvestment Act of 2009, abbreviated ARRA and commonly referred to as the Stimulus or The Recovery Act, is an economic stimulus package enacted by the 111th United States Congress in February 2009 and signed into law on February 17, 2009, by President Barack Obama.To...

 depends on for its effectiveness, the multiplier effect, is in practice close to zero – not 1.5 as he says the Obama team were assuming – which means the extra employment generated by the stimulus will be cancelled out by less output and investment in the private sector.
A group of German economists have also argued that the size of the multiplier effect has been overestimated, while the Memorandum Group of German Economics professors have claimed the opposite and demanded a larger stimulus.

Edward Prescott (author of the Real-Business Cycle Model that post-Keynesians hold failed to forecast the crisis)
and fellow economist Eugene Fama
Eugene Fama
Eugene Francis "Gene" Fama is an American economist, known for his work on portfolio theory and asset pricing, both theoretical and empirical. He is currently Robert R...

 (whose Efficient Market Hypothesis
Efficient market hypothesis
In finance, the efficient-market hypothesis asserts that financial markets are "informationally efficient". That is, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made.There are...

 had been criticised for its strong belief in self-regulating markets ) presented the view that stimulus plans are unlikely to have a net positive effect on employment, and may even harm it. Jeffrey Sachs
Jeffrey Sachs
Jeffrey David Sachs is an American economist and Director of The Earth Institute at Columbia University. One of the youngest economics professors in the history of Harvard University, Sachs became known for his role as an adviser to Eastern European and developing country governments in the...

 has argued that the stimulus and associated policies "may work in the short term but they threaten to produce still greater crises within a few years".
In a June 2010 article, referring to the cooling of enthusiasm for further stimulus found among G20 policy makers at the 2010 G-20 Toronto summit
2010 G-20 Toronto summit
The 2010 G-20 Toronto summit was the fourth meeting of the G-20 heads of government, in discussion of the global financial system and the world economy, which took place at the Metro Toronto Convention Centre in Toronto, Ontario, Canada, during June 26–27, 2010...

, Sachs declared that Keynesian economics is facing its “last hurrah”.
There have also been arguments from the right that the late 2000s crisis was caused not by excessively free markets but by the remnants of Keynesian policy. Luigi Zingales
Luigi Zingales
Luigi G. Zingales is the Robert C. McCormack professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business. Zingales also serves as a member of the Committee on Capital Markets Regulation....

 of the University of Chicago
University of Chicago
The University of Chicago is a private research university in Chicago, Illinois, USA. It was founded by the American Baptist Education Society with a donation from oil magnate and philanthropist John D. Rockefeller and incorporated in 1890...

 argues that "Keynesianism is just a convenient ideology to hide corruption and political patronage".

In February 2009, Alan Reynolds, senior fellow at the Cato Institute, acknowledged the resurgence, then proceeded to argue that evidence from various studies suggest Keynesian remedies will be ineffective and that Keynesian advocates appear to be driven by blind faith.
In 2009, Austrian school
Austrian School
The Austrian School of economics is a heterodox school of economic thought. It advocates methodological individualism in interpreting economic developments , the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have...

 economic historian Thomas Woods
Thomas Woods
Thomas E. "Tom" Woods, Jr. is an American historian, economist, political analyst, and New York Times-bestselling author. He has written extensively on the subjects of American history, contemporary politics, and economic theory...

 published a book, Meltdown
Meltdown (book)
Meltdown is a 2009 book on the global financial crisis of 2007–2010 by historian Thomas Woods, with a foreword by Rep. Ron Paul. Woods is a follower of the Austrian School of economics and believes in allowing the market to freely compete in currency, which he believes would lead to mostly...

, which places the blame for the crises on government intervention, and blames the Federal Reserve as the primary culprit behind the financial calamity.

In Septembery 2011, US presidential candidate Rick Perry
Rick Perry
James Richard "Rick" Perry is the 47th and current Governor of Texas. A Republican, Perry was elected Lieutenant Governor of Texas in 1998 and assumed the governorship in December 2000 when then-governor George W. Bush resigned to become President of the United States. Perry was elected to full...

 said "Keynesian policy and Keynesian theory is now done ... We'll never have that experiment on America again."

Critics on the left, such as Nobel Laureate Paul Krugman, question whether government policy has become sufficiently Keynesian – looking at the US for example, they consider Obama's economic team to be disappointingly centrist, with its inclusion of economists who have previously been associated with support for the neoliberal
Neoliberalism
Neoliberalism is a market-driven approach to economic and social policy based on neoclassical theories of economics that emphasizes the efficiency of private enterprise, liberalized trade and relatively open markets, and therefore seeks to maximize the role of the private sector in determining the...

 or pro free market agenda, such as Jason Furman
Jason Furman
Jason Furman is an economist and influential policy intellectual. On January 28, 2009, Furman was named Deputy Director of the National Economic Council in the administration of President Barack Obama, whom he'd been advising since the latter stages of the 2008 presidential campaign...

 and Larry Summers. These Keynesians condemn what they see as a blind faith in austerity, budget cutting, and low taxes among Western policy makers.
From the radical left, sociology professor John Bellamy Foster
John Bellamy Foster
John Bellamy Foster is a professor of sociology at the University of Oregon and also editor of Monthly Review, an independent socialist magazine. His writings have focused on political economy, environmental sociology, and Marxist theory...

 has questioned whether the resurgence has been truly Keynesian in character; he suggests those few economists he regards as genuinely progressive such as James Galbraith are now far from the centre of government. He also asserts that it is to Marx, and not to Keynes, that society should look for a full solution to economic problems.

Aftermath: 2010 and later


In April 2010, a communiqué from the Washington
Washington, D.C.
Washington, D.C., formally the District of Columbia and commonly referred to as Washington, "the District", or simply D.C., is the capital of the United States. On July 16, 1790, the United States Congress approved the creation of a permanent national capital as permitted by the U.S. Constitution....

 meeting of finance ministers called for continued support until the recovery is firmly entrenched with strong private sector activity, though it accepted that some countries had already began to exit from stimulus policies. By mid 2010 the earlier global consensus for ongoing Keynesian stimulus had fractured. Especially in Europe, there was an increase in rhetoric calling for immediate fiscal tightening, following events such as the Greek sovereign debt crisis
2010 European sovereign debt crisis
From late 2009, fears of a sovereign debt crisis developed among investors concerning some European states, intensifying in early 2010 and thereafter.....

 and the displacement of the UK Labour government with a coalition dominated by Conservatives after the May elections. While some high level officials, particularly from the US and India, have continued advocating sustained stimulus until the global recovery is better established, a communiqué from the G20 issued after their June 2010 meeting of finance ministers in Busan
Busan
Busan , formerly spelled Pusan is South Korea's second largest metropolis after Seoul, with a population of around 3.6 million. The Metropolitan area population is 4,399,515 as of 2010. It is the largest port city in South Korea and the fifth largest port in the world...

 welcomed the trend towards fiscal consolidation rather than further deficit financed stimulus. Though the G20 did reiterate that forceful government intervention had been the correct response in 2008 and 2009. Then IMF managing director Dominique Strauss-Kahn
Dominique Strauss-Kahn
Dominique Gaston André Strauss-Kahn , often referred to in the media, and by himself, as DSK, is a French economist, lawyer, politician, and member of the French Socialist Party...

, who had been a leading advocate for stimulus spending from as early as January 2008, said he was comfortable with the reversal. European political leaders in particular have embarked on substantial austerity drives. In July 2010, leading European economic policy maker Jean-Claude Trichet
Jean-Claude Trichet
Jean-Claude Trichet is a French civil servant who was the president of the European Central Bank, a position he held from 2003 to 2011. He is also a member of the Board of Directors of the Bank for International Settlements...

, then president of the ECB
European Central Bank
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...

 stated that it was time for all industrial nations to stop stimulating and start tightening. Keynesian economists and Keynes biographer Lord Skidelsky have argued the move to implement cuts while the economy is still fragile is a mistake. In a July 2010 article, Financial Times columnist Philip Stephens has argued that recent events show that the markets have re-established themselves as leading influences on western economic policy.

In September 2011 Steven Rattner
Steven Rattner
Steven Lawrence Rattner is an American financier who served as the lead auto advisor in the United States Treasury Department under President Barack Obama...

 opined that the 2012 US presidential election
United States presidential election, 2012
The United States presidential election of 2012 is the next United States presidential election, to be held on Tuesday, November 6, 2012. It will be the 57th quadrennial presidential election in which presidential electors, who will actually elect the President and the Vice President of the United...

 is shaping up to be a contest between the economic policies of Keynes and Hayek - "a clash of ideologies the likes of which America has not seen in decades." Republican candidates have been openly praising vons Hayek and Mises
Ludwig von Mises
Ludwig Heinrich Edler von Mises was an Austrian economist, philosopher, and classical liberal who had a significant influence on the modern Libertarian movement and the "Austrian School" of economic thought.-Biography:-Early life:...

. Rattner says that while the Democrats economic strategy remains largely based on Keynes, the economists name is now rarely mentioned; "Keynes" has become an almost politically toxic word due to the extensive criticism of the 2009 Keynesian stimulus. Rattner refers to the work of Blinder and Zandi which found the 2009 US stimulus saved about 8.5 million jobs, with Obama's third stimulus, a $450 billion Jobs plan projected to create 1.9 million jobs in 2012.
Also in September, President of the European Commission José Manuel Barroso called for additional fiscal olicy to boost economic growth, while recognising many European countries do not currently have the capability to launch a substantial stimulus programme. German Chancellor Angela Merkel
Angela Merkel
Angela Dorothea Merkel is the current Chancellor of Germany . Merkel, elected to the Bundestag from Mecklenburg-Vorpommern, has been the chairwoman of the Christian Democratic Union since 2000, and chairwoman of the CDU-CSU parliamentary coalition from 2002 to 2005.From 2005 to 2009 she led a...

 rejected the idea of further stimulus.

By November 2011, efforts to pass Obama's Jobs plan, either in whole or in part, had so far been rejected by the US congress with the prospects of it passing in the near future looking poor.
In Britain, Cameron made a November speech accepting a darkening economic outlook while saying those arguing for traditional fiscal stimulus are "dangerously wrong". Also in November the book The Courageous State was released by the anti tax evasion campaigner Richard Murphy
Richard Murphy (accountant)
Richard Murphy is a chartered accountant, the founder of the Tax Justice Network and the TUC on taxation and economic issues, and a columnist for The Guardian and Forbes.com...

, calling for a revival of the Keynesian resurgence, which he argues is the best economic policy for the interests of ordinary people. Murphy sees the resurgence as having faded out by late 2009. Other influential figures have came out against Keynesian policy even from left of center politics - these include Lord Glasman
Maurice Glasman, Baron Glasman
Maurice Glasman, Baron Glasman is an English academic, social thinker and Labour life peer in the House of Lords.-Biography:Glasman was born in Walthamstow, London, the son of Rivie and Collie Glasman. He was educated at Clapton Jewish Day School and Jewish Free School from where he won an...

, whose favorite economist is von Hayek and the diplomat Carne Ross
Carne Ross
Carne Ross is founder and director of Independent Diplomat, a diplomatic advisory group. Born in 1966, Ross has a fraternal twin, Oliver Ross, a successful paediatric anaesthetist in UK. Ross taught in Zimbabwe before attending the University of Exeter where he studied economics and politics. He...

 who has argued that no form of centralized authority can meet the problems of the modern world, arguing for Participatory democracy
Participatory democracy
Participatory Democracy, also known as Deliberative Democracy, Direct Democracy and Real Democracy , is a process where political decisions are made directly by regular people...

 instead.

External links