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 orthodox
classical economic framework, which based on
Say's LawSay's law, or the law of markets, is an economic proposition attributed to French businessman and economist Jean-Baptiste Say , which states that in a free market economy goods and services are produced for exchange with other goods and services, and in the process a precisely sufficient level of...
argued that unless special conditions prevailed the free market would naturally establish full employment equilibrium with no need for government intervention.
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 orthodox
classical economic framework, which based on
Say's LawSay's law, or the law of markets, is an economic proposition attributed to French businessman and economist Jean-Baptiste Say , which states that in a free market economy goods and services are produced for exchange with other goods and services, and in the process a precisely sufficient level of...
argued that unless special conditions prevailed the free market would naturally establish full employment equilibrium with no need for government intervention. Employers will be able to make a profit by employing all available workers as long as workers drop their wages below the value of the total output they are able to produce – and classical economics assumed that in a free market workers would be willing to lower their wage demands accordingly, because they are rational agents who would rather work for less than face unemployment.
Keynes argued that both Say’s Law and the assumption that economic actors always behave rationally are misleading simplifications , and that the classical economics was only reliable at describing a special case. The Keynesian Revolution replaced the classical understanding of employment with Keynes view that employment is a function of demand, not supply.
Revolutions in Economic thought prior to Keynes
Professor Harry Johson has written that Economics in its modern form can been seen as dawning with the
SmithianAdam Smith was a Scottish moral 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...
Revolution against
mercantilismMercantilism is an economic theory that holds that the prosperity of a nation is dependent upon its supply of capital, and that the global volume of international trade is "unchangeable." Economic assets or capital, are represented by bullion held by the state, which is best increased through a...
. Prior to Keynes there were five other major developments in economic thought rapid enough in pace to be characterised as revolutions, most notability the
RicardianDavid Ricardo was an English political economist, often credited systematizing economics, and was one of the most influential of the classical economists, along with Thomas Malthus and Adam Smith. He was also a member of Parliament, businessman, financier and speculator, who amassed a considerable...
. Collectively these fashioned the classical economic orthodoxy that Keynes attacked.
The course of the revolution
Keynes revolutionary theory was set out in his book, General Theory of Employment, Interest and Money , commonly referred to by the abbreviated title
General Theory. While working on the book, Keynes wrote to George Bernard Shaw 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" Professor Keith Shaw wrote that this degree of self confidence was quite amazing especially considering it took more than fifty years for the Newtonian revolution to gain universal recognition; but also that Keynes's confidence was fully justified.
John Kenneth GalbraithJohn Kenneth "Ken" Galbraith, OC was a Canadian-American economist. He was a Keynesian and an institutionalist, a leading proponent of 20th-century American liberalism and progressivism...
, has wrote that Say's Law dominated economic thought prior to Keynes for over a century, and the shift to Keynesianism was difficult. Economists who contradicted the law, which inferred that underemployment and underinvestment (coupled with over-saving) were virtually impossible, risked losing their careers.
Keyne's
General Theory was published in 1936 and provoked considerable controversy, yet according to professor Gordon Fletcher it rapidly conquered professional opinion.
For biographer Robert Skidelsky, the
General Theory triggered a massive reaction immediately after its release, with extensive reviews in journals and popular news papers all around the world. While many academics were critical, even the harshest critics recognised there was a case to be answered. As with other theoretical revolutions the young were most receptive with some older economists never fully accepting Keynes work, but by 1939 Keynes view had gained ascendancy both in Great Britain and the US.
According to
Murray RothbardMurray Newton Rothbard was an American intellectual, individualist anarchist, author, and economist of the Austrian School who helped define modern libertarianism and popularized a form of free-market anarchism he termed "anarcho-capitalism"...
, an
Austrian SchoolThe Austrian School is a school of economic thought that emphasizes the spontaneous organizing power of the price mechanism or price system...
economist strongly opposed to Keynes:
Rothbard goes on to describe that by the end of the 1930s every single one of
Friedrich HayekFriedrich August von Hayek CH , was an Austrian and British economist and philosopher known for his defense of classical liberalism and free-market capitalism against socialist and collectivist thought. He is considered by some to be one of the most important economists and political philosophers...
's followers at the LSE were convinced by Keynes ideas - all economists who had previously opposed Keynes advocacy of state intervention in the economy.
Despite Keynes's early success, the revolutionary effect on theoretical economics was soon diminished. From the late 1930s, a process began to reconcile the
General Theory with the classical ways of viewing the economy - developments which included
Neo-Keynesian Neo-Keynesian economics is a school of macroeconomic thought that was developed in the post-war period from the writings of John Maynard Keynes...
and later
New KeynesianNew 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...
economics. For economists such as
Hyman MinskyHyman P. Minsky , was an American economist and professor of economics at Washington University in St. Louis. His research attempted to provide an understanding and explanation of the characteristics of financial crises...
and
Joan RobinsonJoan Violet Robinson FBA was a post-Keynesian economist who was well known for her knowledge of monetary economics and wide-ranging contributions to economic theory...
, this process amounts to an abortion of the revolution , with important Keynesian insights such as the difficulty of the market in delivering optimum results without government intervention being diluted.
Economists
Robert ShillerRobert 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...
and
George AkerlofGeorge 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 . His father was Swedish and his mother a Jewish/German-American. Akerlof graduated from the Lawrenceville School and received...
aired this theme in their 2009 book
Animal SpiritsAnimal Spirits is a book written to promote the understanding of the role played by emotions in influencing economic decision making. According to the authors, economists have tended to de-emphasise the importance of emotional factors, as the effects of emotions are difficult to model and quantify...
.
An alternative take was advocated at the dawning of the revolution by
Dennis RobertsonSir Dennis Holme Robertson was an English economist who taught at Cambridge and London Universities.Robertson, the son of a Church of England clergyman, was born in Lowestoft and educated as a scholar of Eton and at Trinity College, Cambridge, where he read Classics and Economics, graduating in 1912...
, who Fletcher has described as the most intellectually formidable of Keynes's contemporary critics. This view held that the great excitement triggered by the
General Theory was unjustified - that genuinely new ideas presented were over stated and not supported by evidence, while the verifiable ideas were merely well established principles dressed up in new ways. According to Minsky this position eventually became dominant in mainstream academia, though it is by no means unchallenged.
On the practical side of economics - decision makers in governments, central banks and global institutions like the IMF- Keynesian thinking was generally the decisive influence through out the 1940s, 50s, and most of the 60s. From the late sixties Keynes's influence declined following the success in attracting attention from decision makers of "counter revolutionary" work by economists like
Milton FriedmanMilton Friedman was an American economist, statistician and public intellectual, and a recipient of the Nobel Memorial Prize in Economics...
and others sympathetic to the free market. Following the financial crises in 2008, there has been a revival in Keynesian thinking among policy makers in favour of robust government intervention, which the
Financial TimesThe Financial Times is a British international business newspaper. It is a morning daily newspaper published in London and is printed at 22 sites...
has described as a "stunning reversal of the orthodoxy of the past several decades".
Significance
Professor Gordon Fletcher stated that Keyne's
General Theory provided a conceptual justification for policies of government intervention in economic affairs which was lacking in the established economics of the day - immensely significant as in the absence of a proper theorectical underpining 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 back in the 1930s before the revolution was launched. . Almost 80 years later in 2009, Keynes ideas are once again a central inspiration for the global response to the
Financial crisis of 2007–2009The financial crisis of 2007–2009 has been called the worst financial crisis since the one related to the Great Depression by leading economists, and it contributed to the failure of key businesses, declines in consumer wealth estimated in the trillions of U.S. dollars, substantial financial...
.
See also
- John Maynard Keynes
John Maynard Keynes, 1st Baron Keynes, CB was a British economist whose ideas have been a central influence on modern macroeconomics, both in theory and practice...
- 2008-2009 Keynesian resurgence
- Post-war displacement of Keynesianism
The Main is a river in Germany, 524 km long , and it is one of the more significant tributaries of the Rhine. The Main flows through the German states of Bavaria, Baden-Württemberg and Hesse...
- Keynesian economics
Keynesian economics is a macroeconomic theory based on the ideas of 20th-century British economist John Maynard Keynes...
- Paradigm Shift