# Keynesianism

John Maynard Keynes (1883-1946)

Under Keynesianism [ keɪnz- ] is in the economics one on John Maynard Keynes returning theory building understood where the aggregate demand critical size to production and employment is. Keynesianism is based primarily on his book General Theory of Employment, Interest and Money , published in February 1936 .

## General

For Keynesianism include economic policy approaches that are geared to the demand for goods and services, control , and if necessary the economy through increased government spending and expansionary monetary policy to revive. The period after the Second World War (in Germany from 1967) up to the 1970s is considered the high phase of Keynesianism worldwide.

After the monetarist counter-revolution (see section 4.9 ) and the appearance of stagflation , Keynes' theory lost its dominance. Today, macroeconomics is dominated by the direction presented in the work published by N. Gregory Mankiw in 1991, in which, however, only the economic policy recommendations are compatible with Keynes, not the theoretical basis (see Section 3.10 ).

In Germany, the Stability and Growth Act from 1967 assigned the federal government, at that time with Karl Schiller ( SPD ) as Minister of Economics , to the task of managing overall economic demand. The specific goals were a real growth rate of the national product of 4%, an unemployment rate of less than 0.8% and an inflation rate of less than 1%. The basis was the concept of global control, with the help of Keynesian economic policy to make economic development more independent of economic fluctuations and to secure a high level of employment.

## Conceptual content

Keynesianism can denote:

1. the political philosophy that dominated all western states from the end of World War II to the mid-1970s. Backhouse and Bateman (2008) name the macroeconomic economy and the welfare state as essential characteristics .
2. Economic policy measures that attempt to absorb shocks by varying government spending and government revenue as well as monetary policy measures with the aim of keeping unemployment low (especially in a political science or sociological context).
3. the economic theory of John Maynard Keynes .
4. Keynesian economic theory in various currents and schools (especially post- and neo-Keynesianism ) that invoke Keynes.

Between Keynes shear theory (3rd), the Keynesian economic theory (4th) and the socio-philosophical and economic meanings (1 and 2) are clear differences. Some authors therefore use the term interventionism for these (1st and 2nd) .

There is no uniform terminology for the different economic theoretical currents of Keynesianism. A distinction must be made (at least):

Keynesian theory
After Leijonhufvud had worked out how much the Keynesian theory had moved away from the Keynes theory through the neoclassical appropriation, a return to Keynes began. Tobin, one of the most prominent campaigners for this return to Keynes, describes himself as the "Old Keynesian"
Neoclassical Keynesianism
Through the "neoclassical synthesis" (see Section 3.4 ), Keynes 'theory was adopted by neoclassics and the resulting "neoclassical-Keynesian theory" provided results that were contrary to Keynes' theory. This applies in particular to his thesis that flexible prices and wages are not suitable for achieving full employment.
Post Keynesianism
The term was used sporadically (as by Joan Robinson ) as early as the 1950s to describe purely chronological theoretical work under the influence of general theory . In order to differentiate a certain Keynesian doctrine from the neoclassical synthesis, the name crystallized only after the essay An Essay on Post Keynesian theory: a new paradigm in economics by Alfred S. Eichner and JA Kregel (Journal of Economic Literature, Vol. 65, 1975 ) and solidified with the publication of the Journal of Post Keynesian Economics in 1978 (in this sense it is to be understood in the following). Occasionally it is still used in a purely chronological sense.
Neo-Keynesianism or New Keynesianism
The term first appeared in the 1960s and was initially used in different ways. Neo-Keynesianism has been used as the German term for New Keynesian Economics since the 1990s . In contrast to this, Thomas Palley distinguishes between New Keynesian Economics and Neo-Keynesianism for the work of authors of neoclassical synthesis.

## Teaching (overview)

Features of the Keynesian school that are accepted by all self-designated Keynesians are not easily discernible. Particularly for the post-Keynesian schools, common school-building characteristics of their economic theory are difficult to determine in a clearly definable form. In part, it is delimited according to sociological (in the sense of Joseph Schumpeter ), philosophical (in the sense of Thomas S. Kuhn or Imre Lakatos ') or purely geographical (according to Terence Hutchinson ) points of view. AP Thirlwall identified "six key messages of Keynes 'vision" ("six central messages of Keynes' vision") which, in terms of economic theory, describe the core teachings of the Keynesian schools:

1. Production and employment are controlled via the goods market , not the labor market ,
2. involuntary unemployment is possible,
3. an increase in savings does not lead to an equal increase in investment ; rather, the investments determine the possible savings volume in the economy, so investments do not depend on savings being made beforehand. Rather, the banks can grant loans through credit and money creation.
4. a money economy is different from a barter economy ,
5. the quantity theory of money only applies to full employment ,
6. In market economies, investment decisions are also determined by the animal spirits (such as 'instinctive behavior' ) of entrepreneurs.

Features of the opposing neoclassical synthesis, on the other hand, are:

1. the IS-LM model , expanded to include a neo-classical labor market ,
2. neo-classical growth models ,
3. the long-term vertical Phillips curve .

## Theory history and development

### Forerunners and environment

In his General Theory, John Maynard Keynes himself refers to influences from scholasticism , mercantilism and Malthus . In the French edition he names Montesquieu , who in its economic importance for France would be equivalent to Adam Smith . There are surprising similarities between Keynes' criticism of the neoclassical and the criticism that Friedrich von Hayek , through whom the Austrian School was received in Great Britain, of the Walras - Pareto equilibrium analysis and of the lack of consideration of time. This criticism later influenced post- Keynesianism through the LSE students Nicholas Kaldor , Abba Lerner and GLS Shackle .

Knut Wicksell already considered it possible that the macroeconomic savings and investment rates could fall apart . Gunnar Myrdal describes the influence Wicksell already had on Keynes' book from 1930:

"JM Keynes' new, brilliant, though not always clear, work, A Treatise on Money, is completely permeated by Wicksell's influence. Nevertheless Keynes' work, too, suffers somewhat from the attractive Anglo-Saxon kind of unnecessary originality, which has its roots in certain systematic gaps in the knowledge of the German language on the part of the majority of English economists. "

Other economists at the Swedish School, particularly Erik Lindahl , Bertil Ohlin, and Erik Lundberg , had highlighted the impact of aggregate demand as early as the 1920s and early 1930s. The same applies to the Pole Michał Kalecki , who worked this out with recourse to Karl Marx and Rosa Luxemburg .

### 1936: Keynesian Revolution

#### John Maynard Keynes (1883-1946): General Theory of Employment, Interest, and Money (1936)

The Keynesian Revolution has its origins in John Maynard Keynes ' General Theory of Employment, Interest and Money from 1936. Keynes was 53 years old at the time of its publication and an internationally respected economist. The first thoughts for his General Theory go back to the early 1930s, shortly after he published his Treatise on Money in 1930; He was dissatisfied with this work, which was then regarded as his magnum opus , after it was published, but rejected the idea of ​​revising it. From 1930 he and his group of students were intensively concerned with the actual demand. To what extent these can be incorporated into a Walrasian model or are actually revolutionary is controversial. Keynes himself soon came to the conclusion that his newly acquired knowledge amounted to an intellectual revolution and a radical break with neoclassical theory :

“To understand my state of mind, however, you have to know that I believe myself to be writing a book on economics 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 ”

- John Maynard Keynes : letter to George Bernard Shaw dated January 1, 1935

#### Basic elements of his theory

Keynes' main work, the general theory of employment, interest and money , is considered a difficult work to understand. That is why the editors of the 11th edition (2009) put an explanation of its structure in front of the book in German.

For Keynes and Keynesianism, aggregate demand is the key determinant of production and employment. Overall economic demand is extremely unstable. The main reason for this is the strongly fluctuating demand for capital goods. This demand depends on the expected return, which is subject to strong and sudden changes due to the uncertainty of the future. If the income generated in a period is to be fully reflected in demand, all savings - mediated through the banking system - must be reinvested. To put it simply, Keynesianism means that, for structural reasons, there is always a demand gap in the market economy system that is responsible for unemployment .

Keynes saw the inherent uncertainty of the future as the cause of sharply fluctuating private investment. Increased above the multiplier , this leads to fluctuating production and unemployment. The multiplier says that a decline in investment also has a negative effect on private consumption. The closure of a factory not only leads to the layoff of workers in that factory and to layoffs at the supplier companies, rather the declining income of the laid-off workers also leads to their consumption being restricted, which in turn leads to layoffs in the consumer goods industry. Richard Kahn had already shown how this multiplier process works in 1931 (see next section ).

Containing these fluctuations requires a countercyclical behavior of the state in order to keep the fluctuations low (countercyclical monetary and financial policy). The overall economic demand is to be controlled by state monetary and fiscal policy ( global control ). So you have to try to keep total demand at a stable level as much as possible. This enables sufficient capacity utilization and a stable economy. Expansive monetary and fiscal policies are bringing the economy towards full employment.

Keynes declared Say's theorem invalid, according to which every offer creates its demand. For this it would be necessary that all savings - mediated via the banking system - are used for investments. Keynes, on the other hand, emphasizes that every additional saving means first and foremost a loss of demand. This reduces the capacity utilization of the companies concerned so that they have less incentive to invest.

Keynes also turned against the classical theory of money and the connections asserted by neoclassical theory in the labor market. He argued against the (neo) classical theory that lowering wages would help combat underemployment. Although this reduces wage costs, the wage cuts lead to a decrease in the purchasing power of the majority of consumers (= real wage reduction) and thus to a reduction in demand. In contrast, exports are favored. Wanting to increase employment through wage cuts is a questionable policy that also tries to compensate for domestic demand problems with foreign trade surpluses, i.e. at the expense of foreign countries.

In many cases Keynes is reduced to an anti-cyclical demand policy . Accordingly, the state, financed through reserves or borrowing, should take fiscal policy measures. The central bank should support this with monetary policy. The interaction is intended to mitigate the effects of recessions and booms . If the state borrows short-term debts during the recession, it is called deficit spending (this term was coined by Abba P. Lerner ). Ideally, these should be paid for with additional tax revenue in the event of an economic upswing.

#### Fellow of the "Keynesian Revolution"

An important discussion partner of Keynes was Roy Harrod (1900-1978), who studied and taught in Oxford. In between, Harrod listened to Keynes' lectures at Cambridge, of which he became a colleague and friend. Keynes sent him the galley proofs of the "General Theory" and Harrod tried in vain to moderate their attacks on the (neo) classical theory.

Harrod tried a little later to dynamize Keynes' theory ("An Essay in Dynamic Theory", 1939) and to develop a growth theory from it. In 1951 he wrote on behalf of the brother of Keynes his official biography ("The Life of John Maynard Keynes", London 1951).

Richard Kahn played a major role in the development of Keynes' general theory . Kahn was Keynes' favorite student and closest collaborator and, as Joan Robinson half-jokingly remarked, was Keynesian before Keynes. In his essay The Relation of Home Investment to Unemployment (1931), Kahn presented the multiplier model, which showed the effect of an exogenous increase in expenditure depending on the marginal consumption rate according to the formula and was taken up by Keynes in the general theory . Kahn also played an outstanding role in their creation: on the one hand, he directed the Cambridge Circus , in which, as participants later ironically reported, he played the role of the “heavenly messenger” between “God Keynes” and the “mortal discussants”; on the other hand, he took over the entire mathematical apparatus on the manuscript himself. He proposed solutions to many problems. Joseph Schumpeter even ascribes co-authorship to him: ${\ displaystyle \ Delta Y = {\ frac {1} {1-c}} \ cdot \ Delta I}$

"Next, we must record [in The General Theory ] Keynes's acknowledgments of indebtedness [...] especially to Mr RF Kahn, whose share in the historic achievement cannot have fallen very far short of co-authorship."

- Joseph Schumpeter : History of Economic Analysis (1954), p. 1172

Quoted from L. Pasinetti (2007), p. 81. On pp. 65–68, Pasinetti presents the life and work of R. Kahn.

After Keynes' death, Kahn succeeded him in almost all positions, but rather took on the role of the gray eminence.

An important collaborator in "Cambridge Circus" was Joan Robinson (1903-1983), with whom Keynes corresponded intensively. She had studied in Cambridge until 1935 and taught there from 1931 to 1977. After the publication of the “General Theory” she wrote an easily understandable “Introduction to the Theory of Employment” (London 1937) and ensured that Keynesian theory was properly anchored in curricula.

James Meade (1907–1995) initially studied and lived in Oxford, but in the development phase of the “General Theory” in Cambridge, where he took part in the meetings of the “Circus”. In 1937 he published "A Simplified Model of Mr. Keynes' System" (Review of Economic Studies, Vol. 4). 1957–1963 he was a professor at Cambridge.

#### Immediate reception

Keynes' General Theory immediately became very controversial. Young economists in particular were enthusiastic about the new approach, which finally offered an explanation of the high and persistent unemployment:

“The General Theory caught most economists under the age of thirty-five with the unexpected virulence of a disease first attacking and decimating an isolated tribe of South Sea Islanders. Economists beyond thirty-five turned out to be quite immune to the ailment. "

- Paul Samuelson (1964)

Keynes' work received strong rejection in England from Arthur Cecil Pigou , Dennis Holme Robertson , Ralph Hawtrey , Lionel Robbins , Friedrich August von Hayek , in the USA from Frank Knight , Joseph Schumpeter and Jacob Viner .

In contrast to Keynes, his London counterpart Friedrich August von Hayek assumed that state forms of organization developed a life of their own, which often led to a bloated administration, which itself needed a large part of the state expenditure for its self-sufficiency. Furthermore, Hayek assumed that in democratic processes it would be very time-consuming or even impossible to reverse subsidies or benefits of all kinds that were granted in the past. Ultimately, economic processes are too complex to be controlled centrally. Because of this limited control knowledge, it is not possible for the state to initiate “anti-cyclical” processes. According to Hayek, this knowledge deficit in the public sector, coupled with the inherent tendencies towards self-preservation of the administration and the progressive bureaucratisation, which are subject to state action, lead to an increased need for income for the state, which makes economic development considerably more difficult. As a result, “countercyclical” measures by the public sector are certainly doomed to failure.

Other critics rely on the neoclassical theory attacked by Keynes. This theory assumes that an economic system is “inherent”; H. is inherently stable and, after disruptions, finds its way back to equilibrium at full employment. State measures are therefore superfluous. They can even lead to undesirable fluctuations in the economy. Therefore supporters of the neoclassical theory take the view that the state should limit its expenditure as much as possible. The state would only have an " allocative " task, while otherwise it should stay out of the economy as much as possible. This criticism is later taken up by Milton Friedman and expanded into a “monetarist counter-revolution” (see section 3.8 below).

Milton Friedman and Anna Schwartz (1963), in their work A Monetary History of the United States, interpreted the global economic crisis not as the result of free markets , but as a wrong policy of the central bank, which increased the money supply by 30% in the USA between 1929 and 1933. decreased. It is undisputed that the money supply fell sharply in those years. It is disputed whether the central bank was able to do this or not. In fact, Keynes warned as early as 1925 of the consequences of a central bank policy which, due to the gold standard, is forced to reduce the money supply pro-cyclically, and warned of the resulting unemployment.

### 1937: Interpretation by the Hicks IS-LM model

John R. Hicks designed as early as 1937, the IS-LM model in his article Mr. Keynes and the Classics: A Suggested Interpretation to Keynes' General Theory of neoclassical theory to face. Hicks distinguished a classical, a middle and the Keynesian area of ​​the liquidity trap and wrongly restricted Keynes' theory to the latter area.

This article had a lasting and ambivalent influence on the expansion and interpretation of Keynes' theory. The comparison of “Mr. Keynes ”and“ the Classics ”refer to Keynes’s approach to designating all economists who write in the neoclassical tradition as“ classics ”, including Arthur Pigou and his recently published book The Theory of Unemployment (1933 ). Hicks confronts this "classical economy" with Keynes' theory by expressing both of them in equations and developing the famous IS / LM diagram for their graphical representation, which today - with a modified theoretical background - can be found in all textbooks on macroeconomics. The instability of investment activity, which is so important for Keynes, and the central role of (uncertain) expectations for economic development are neglected.

With the IS / LM diagram, Hicks determines the combination of interest rate and national income at which there is an equilibrium of supply and demand on the goods market (or in Hicks on the consumer goods and capital goods markets) and on the money market. In the goods market there is equilibrium when the interest-related investments correspond exactly to the income-related savings; In the money market, equilibrium is achieved when the given amount of money (the “money supply”) matches the desired cash holdings (“demand” for money) that are dependent on interest and income. The labor market is not taken into account.

For Hicks (see Section III), the most important innovation by Keynes is the analysis of the demand for money (the demand for liquidity), which is reflected in the curved shape of the LM curve: This takes place at very low interest rates (i) and income ( Y) almost horizontal, but with very high income and interest rate almost vertical. With high values ​​of Y and i, the entire amount of money available is required to finance the transactions. Additional demand for goods then does not lead to more production, but only to a higher interest rate. This is the classic area. At the other extreme, the opposite is true: an increase in the money supply does not change the interest rate; Additional demand for goods, on the other hand, leads to more production and employment without the interest rate rising: “We are completely out of touch with the classical world,” emphasizes Hicks.

However, Hicks now assigns the entire middle area, in which higher demand causes both production and the interest rate to rise, while a higher amount of money to a lower interest rate and thus higher production, to the classical area (“the classical theory will be a good approximation ”), so that for Keynes only the extreme area of ​​the horizontal LM line remains. In contrast, Keynes had emphasized in his book that the general relationship between the demand for money and the interest rate is such that the interest rate falls when the money supply increases. The area of ​​the horizontal LM line, however, is the exception: "But whilst this limiting case might become practically important in the future, I know of no example of it hitherto". The contradicting assignment of the normal range of the LM curve to “classical” causes Hicks to close Section III with the wrong but famous sentence: “So the General Theory of Employment is the Economics of Depression” (p. 155).

Hicks's contribution to the dissemination of Keynes' theory is therefore double-edged. On the one hand, the IS / LM diagram he developed helped a lot to work out the static core of his theory from the difficult book by Keynes and to make it understandable. On the other hand, he laid a foundation for Keynes' falsifying tendency to reduce his theory to the empirically less relevant extreme case of the horizontal LM curve (the liquidity trap). This later led to the widespread practice, which was not compatible with the title of “General Theory”, of assuming Keynes that only fiscal policy was relevant for him, since monetary policy remains ineffective in the area of ​​the liquidity trap, and then the Keynesians to be labeled as "fiscalists".

### From 1944: Neoclassical synthesis

With his IS / LM diagram, Hicks also paved the way for neoclassical synthesis. Franco Modigliani (1944) was the first to attach a neoclassical labor market to this diagram and then, using the Pigou effect and the interest rate effect, to deduce that - in stark contrast to Keynes' theory - wage cuts lead to more employment. With this, Keynes was taken over by the neoclassical. Keynes himself had always spoken out against such a procedure during the discussions with his student circle. In a letter to Roy Harrod in 1935, he wrote about such attempts at reconciliation:

"The general effect of your reaction ... is to make me feel that my assault on the classical school ought to be intensified rather than abated ..."

CW, Vol. 13, p. 548 quoted from Pasinetti (2007), p. 31.

However, after his heart attack (1937) and later because of other current problems and tasks (war financing, Bretton Woods negotiations), he hardly commented on attempts at synthesis.

### From 1945: Cambridge School of Post-Keynesians

During the development of the General Theory - as already described in Section 3.2.3 - a circle of students in Cambridge formed around Keynes from 1930, which became known as Cambridge Circus and discussed Keynes weekly, at the beginning mainly about his Treatise on Money . He included Richard Kahn, Joan Robinson , Austin Robinson , Piero Sraffa, and James Meade . These discussions contributed significantly to the emergence of General Theory. Due to a heart attack by Keynes in 1937, the looming Second World War and Keynes’s advisory duties to the British government, the regular intellectual exchange between them came to a standstill.

After the Second World War and Keynes 'death in 1946, a new group was formed with the strong participation of some of these former students, which, as Keynes' legitimate heirs, saw themselves entrusted with the continuation of his work. Above all, it saw itself in stark contrast to the neoclassical model: They strictly rejected the IS-LM model and emphasized the break in economic thinking since Keynes. That is why Coddington (1956) referred to them in his article Keynesian Economics. The Search for first Principles (Journal of Economic Literature, p. 1283) as fundamentalists. However, within this group, who called themselves Post-Keynesians, there was by no means consensus on many issues; it owed its school-educating external impact more to common dislikes than to common concepts.

Important British Keynesians in Cambridge (of them only Joan Robinson can be called a Post Keynesian in the strict sense):

• Richard Ferdinand Kahn (1905-1989). Under his leadership, the economics studies in Cambridge were reorganized after the Second World War and the Cambridge Circus continued on its premises as a Secret Seminar or Tuesday Group . During this time he published three important papers: 1954 an elaboration of the liquidity preference thesis (Some Notes on Liquidy Preference) , in the late 1950s fundamental articles on Keynesian capital theory and in 1976 several essays on the connections between inflation and full employment, especially because of rising marginal costs.
• Joan Violet Robinson (1903-1983) was already known in the professional world because she published her work The Economics of Imperfect Competition (1933) before the general theory , from whose analysis of the incomplete competition she later distanced herself. Immediately after the publication of the “General Theory” she wrote an easily understandable “Introduction to the Theory of Employment” (London 1937). She also dealt with Marxist economic theory (An Essay on Marxian Economics (1942)) and thus helped Marx to a new phase of a less ideological reception. She then turned to long-term theory and published "The Accumulation of Capital" (London / New York) in 1956, in which she constructed a complicated sequence of equilibrium situations (Golden Age etc.). She was a sharp critic of the "neoclassical synthesis" and was later central to the Cambridge capital controversy.
• Nicholas Kaldor (1908–1986) also taught and researched in Cambridge . He was initially a student at the LSE with Friedrich von Hayek , but soon became one of the first converts after the publication of the General Theory . He became a fellow at King's College, Cambridge in 1950 and was first best known for his work on distribution theory. He developed his cycle theory of distribution, which he formulated - very unkeynesian - for a situation of full employment. To justify this, he cited (p. 94) that Keynes' application of the multiplier to employment applies to the short term, the application to the price level and distribution applies to the long term. He was not a post-Keynesian in the strict sense.
• The same applies to Piero Sraffa (1898–1983), whom Keynes had brought to Cambridge. Most notably, he is the founder of the Neoricardian School and was known for his theory of production prices. He was instrumental in the Cambridge capital controversy.

For more information on these authors (and on Goodwin) see Pasinetti (2007) in Part 2 (pp. 59–248).

### From 1945: Keynesian theory in the United States

After the Second World War, Keynesian theory became the dominant macroeconomic theory, but only until the stagflation of the 1970s, when it was then put on the defensive by the “monetarist counter-revolution”. Its most important representatives include Alvin Hansen , Paul Samuelson , James Tobin and Robert Solow . For details on the spread of Keynesianism in the USA, see Colander / Landreth 1996.

• Alvin Hansen (1887–1975) was appointed professor of political economy at Harvard University in 1937 and taught there until 1957. He contributed significantly to the spread of the Keynes theory in the USA, above all through his “Guide to Keynes” (New York, 1953).
Paul A. Samuelson
• Paul A. Samuelson (1915–2009) is one of the most influential economists of the 20th century. His textbook Economics: An Introductory Analysis (1st edition 1948, 19th edition 2009) is the best-selling economics textbook of all. The word neoclassical synthesis also goes back to Samuelson (see there, 6th edition, 1964, p. 590). However, he meant something else: Like Keynes, he was of the opinion that after reaching full employment through Keynesian economic policy, the old (neo) classical laws would apply again, because then aggregate demand would no longer limit production, but - as in the classical period - the available resources of labor and physical capital. In terms of content, he could have quoted Keynes, who had written in his “General Theory” (p. 378, in the German translation, 11th edition, Berlin, 2009, p. 319):

“Our criticism of accepted classical economic theory has not so much been to find logical errors in its analysis as to emphasize that its tacit premises are seldom or not fulfilled, with the result that it cannot solve the economic problems of the real world. But if our central control succeeds in enforcing a total amount of generation that corresponds as closely as possible to full employment, the classical theory will come into its own again from this point on. "

Samuelson initially studied at the University of Chicago before moving to Harvard University to study with Alvin Hansen . After he was not offered a position there, he moved to the Massachusetts Institute of Technology in Cambridge , which until now had hardly been noticed in economics. In 1947 he was the first to analyze the interaction between the multiplier and the accelerator , which can result in business cycles with decreasing or increasing amplitudes. This then served Hicks as the basis for his Contribution to the Theory of the Trade Cycle (Oxford 1950). The main focus of his research was the mathematical representation of economic theories; he was less interested in empirical research. His best-known contributions include comparative statics and the theory of revealed preferences . He was the first American economist to receive the Nobel Prize in 1970 .
• James Tobin (1918–2002) studied and received his doctorate from Harvard University. In 1950 he moved to Yale University, where he stayed until his death. In 1981 he received the Nobel Prize for his work in the field of portfolio theory. Tobin was a member of Kennedy's “Council of Economic Advisors” in 1961/62. Tobin attacked the monetarist counter-revolution and claimed to be the "Old Keynesian" after the "New Keynesians" Economics from 1991 (see section 3.10 below ) used Keynesian instruments, but reinterpreted its theoretical basis in a neoclassical way.
• Robert Solow (1924) was first known for his neoclassical growth theory (Solow, 1956), with which he wanted to refute the short-term and long-term instability ("growth on the knife edge") present in Harrod's dynamic theory. He ruled out short-term (economic) instability through the neoclassical assumption that overall economic savings determine the investment volume. Long-term stability was achieved through the development of its production function with substitutable production factors. For his contributions to growth theory, Solow received the Nobel Prize in 1987. With Samuelson he designed the modified falling Philipps curve (negative relationship between unemployment rate and inflation rate). With that he approached Keynesian positions; Today he is vehemently in favor of an economic policy that also takes the demand side into account (see e.g. his contribution to Schettkat / Langkan (2007) with the title: Overcoming the limitations of the macroeconomic discussion ).

### From 1960: American Post-Keynesianism

Sidney Weintraub is considered the founding father of US post-Keynesianism . Other important representatives are Hyman P. Minsky and Paul Davidson .

### Keynesianism in Germany

In Germany, too, the dissemination of Keynes' theory encountered considerable hurdles. Resistance was offered by the Ordo-Liberals, also known as the Freiburg School . Although she pleaded for a strong state that has to safeguard competition (with an approximation of the ideal of complete competition), she rejected state intervention in the economic process (constancy of economic policy), probably as a reaction to National Socialism and the wrong economic policy during the Great Depression .

The pioneer for the dissemination of Keynes' theory at universities was the textbook by Erich Schneider "Introduction to Economics" , especially Part III: Money, Credit, National Income and Employment. (1st edition Tübingen, 1952). In Germany, too, Keynes' theory did not escape the adoption of neoclassical synthesis .

Keynes' theory had a great influence on the “Stability and Growth Act” (StabG) of 1967, which was passed by the Bundestag six months after the Kiesinger I cabinet was launched. Economics Minister Karl Schiller (SPD) was very supportive of the law. The zero growth of 1967 did not continue in 1968; Whether or to what extent the StabG contributed to the recovery of the economy cannot be proven.

A Marxist criticized Keynes trying to stabilize capitalism ; in doing so he prevents (if he is successful) its actually desired abolition.

### 1970s: Inflation and Rise in Unemployment / Criticism of Monetarism

One of the core elements of Keynes' theory is the dependence of consumption on current income. Critics dispute the clear relationship most commonly assumed by Keynesians between a household's consumer spending and its respective disposable income. Rather, households determined the level of their consumer spending depending on their long-term income expectations. Friedman had shown with the investigations in his work A Theory of the Consumption Function that this connection claimed by Keynes was not statistically verifiable. Short-term changes in income are mostly ignored (this presupposes, however, that households can and want to finance their consumption through loans if necessary). Hence, government policies to change net incomes could not stimulate as much consumer demand as the Keynesians believe.

The following criticism of the Keynesian political approach is even more vehement: The concept of an economic boost through credit-financed government spending leads to inflation in the long term and has no effect on employment in the long term. This criticism implicitly starts from a situation in which there is only structural unemployment and argues that an increase in demand leads to higher prices. Because of adaptive expectations, employees only realize with a delay that their increased nominal wages have been devalued by the rise in prices. As soon as they notice it, however, they will no longer work - so the money illusion does not last indefinitely. According to this argumentation, the economy finds itself in an equilibrium with a higher inflation rate with unchanged real national income.

The rising unemployment rates in the 1970s with a simultaneous increase in inflation rates are cited as an indication of the failure of Keynesian economic policy . During this decade, industrialized countries have suffered two exogenous shocks in the form of oil crises . This led to imported inflation . The reaction of the trade unions has often been an expansive wage policy , creating a wage-price spiral . These undesirable developments triggered by the supply side were barely dealt with in Keynesian theory, although Keynesians had developed the theory of supplier inflation.

Neither the original Keynesian considerations nor the Keynesian-neoclassical synthesis asserted that demand-side measures of economic policy can lead to better results in the long term if they do not lead to higher investments and thus to a higher physical capital stock. Keynes' economic policy recommendations were primarily aimed at overcoming acute crises, in particular preventing a downturn that would strengthen itself for psychological reasons and preventing a stable state of depression resulting in lower investments.

More criticism is the so-called crowding out effect (crowding out) established by which government investments displace private investment through higher interest rates, would be the more effective. In the extreme case of complete crowding-out, the demand for goods does not increase. However, the more closely interlinked the capital markets are worldwide, the less this interest rate effect is relevant.

There is also criticism in the way that economic operators adjust to the help of the state and behave more and more too “risk-taking”, thereby endangering the economy as a whole more and more and so state interventions would have to become stronger and stronger ( moral hazard ).

The diagnosis of the Keynesian theory that the economy does not find its way back to equilibrium on its own when production factors are fully utilized is now part of the majority opinion in modern economics. In the opinion of most economists, overcoming the demand side of the crisis should be part of the economic policy instruments.

### From 1980: New Keynesianism

In the 1980s, New Keynesianism developed to distinguish it from the "New Classical Macroeconomics". New Keynesians work with neoclassical models, but incorporate limited information, (price) rigidities and incomplete competition into them. Some pioneers of this theory school, namely Joseph Stiglitz , George Akerlof and Michael Spence received the 2001 Nobel Prize for their work on asymmetric information . Supporters of the Keynesian theory (Old Keynesians) doubt that New Keynesianism can actually still be understood as a Keynesian movement and that it is disputed by Post Keynesians. Post- Keynesian Paul Davidson accuses New Keynesians of treating "General Theory" as a classic that everyone quotes but nobody reads. Otherwise they could not call themselves (new) Keynesians.

### Late 1980s: Circuit school in France and Italy

At the end of 1980, especially in France and Québec, but also in Italy, the circuit school developed, which focuses particularly on problems of the money economy . Important representatives are Alain Parguez , Frédéric Poulon , Bernard Schmitt and Marc Lavoie .

## literature

### Primary literature

Keynesian Revolution

• John Maynard Keynes : General Theory of Employment, Interest and Money . 11th edition. Duncker & Humblot, Berlin 2009, ISBN 3-428-07985-X (first edition: 1936).
• Richard Ferdinand Kahn : The Relation of Home Investment to Unemployment . In: Economic Journal . tape 41 , 1931, p. 173-198 .
• JR Hicks : Mr. Keynes and the Classics: A Suggested Interpretation . In: Econometrica . tape 5 , no. 2 , 1937, pp. 147–159 ( Online [PDF; 1.3 MB ] German in: Barens / Caspari (Hrsg.) The IS / LM model. Origin and change. Marburg 1994.).
• GK Shaw (Ed.): The Keynesian Heritage Vol. I (=  Schools of Thought in Economics series . Volume 1 ). Edward Elgar, Cheltenham 1989, ISBN 978-1-85278-117-0 .

Neoclassical Synthesis (Bastard Keynesianism)

The textbook “Macroeconomics and New Macroeconomics” by Bernhard Felderer / Stefan Homburg (Berlin etc. (Springer)) offers a good example of the interpretation of Keynesianism in the sense of neoclassical synthesis . There the “Keynesian theory” is mentioned with only one sentence (p. 99), but not dealt with. For the English-speaking world, see Henry G. Johnson, Money, Trade and Economic Growth (London, Urwin, 1962), Part II. These passages led Joan Robinson to speak of “Bastard Keynesianism” (see Item 1).

Keynesianism in the USA

• James Tobin : Price Flexibility and Output Stability. At Old Keynesian View. In: Journal of Economic Perspectives . tape 7 , 1993.
• Paul A. Samuelson : Interactions between the Multiplier Analysis and the Principle of Acceleration . In: Review of Economics and Statistics . 1939, p. 75-78 .
• Alvin Hansen : Guide to Keynes . New York 1953, p. 75-78 .
• Robert Solow : Overcoming the limitations of the macroeconomic discussion. In: R. Schettkat / J. Langkau (eds.), Upswing for Germany . Bonn 2007.
• Numerous articles in GK Shaw (ed.): The Keynesian Heritage Vol. II . Edward Elgar, Cheltenham 1988.

Cambridge School of Post-Keynesians

• Joan Robinson (Ed.): Forword zu Alfred Eichner, A Guide to Post-Keynesian Economics . White Plains, New York 1979.
• Malcolm Sawyer (Ed.): Post-Keynesian Economics . Edward Elgar, Cheltenham 1989, ISBN 978-1-85278-052-4 (anthology as Volume 2 of the Schools of Thought in Economics series ).

Keynesianism in Germany

• Gottfried Bombach u. a. (Ed.): The Keynesianism. 6 volumes. Springer Verlag, Berlin 1976. *

New Keynesian Economics

### Secondary literature

To the formation

To the reception

a) Critic

• Robert Leeson: The Anti-Keynesian Tradition . Palgrave, 2008, ISBN 978-1-4039-4959-2 .
• Henry Hazlitt: The Failure of the 'New Economics'. An Analysis of the Keynesian Fallacies . Van Nostrand, Princeton, NJ 1959.
• Friedrich von Hayek: Collected Works of FA Hayek . Ed .: Bruce Caldwell. Vol. IX: Contra Keynes and Cambridge: Essays, Correspondence. Liberty Fund, 2009, ISBN 978-0-86597-744-0 .
• Mark Skousen (Ed.): Dissent on Keynes . Praeger Publishers, 1992, ISBN 978-0-275-93778-2 .
• Mark Skousen (Ed.): The Big Three in Economics: Adam Smith, Karl Marx, and John Maynard Keynes . Sharpe, Armonk etc. 2007, 5,6,7.
• John C. Wood (Ed.): John Maynard Keynes: Critical Assessments . Routledge, 1994, ISBN 978-0-415-11413-4 .

b) Sympathetic representations

• Jürgen Kromphardt: John Maynard Keynes in the series The Greatest Economists . UTB-Lucius 3794, Munich 2013.
• Oliver Landmann: Keynes in today's economic theory. In: Gottfried Bombach u. a. (Ed.): The Keynesianism. Volume I: Theory and Practice of Keynesian Economic Policy . Springer, Berlin 1976.
• Joan Robinson: Introduction to the Theory of Employment . MacMillan, London / New York 1937.
• Harald Scherf: John Maynard Keynes . In: Joachim Starbatty (Ed.): Classics of economic thinking . Beck, Munich 1989.
• Keynes Society website

For the further development of Keynesianism

• Michel Beaud and Gilles Dostaler: Economic Thought Since Keynes. A History and Dictionary of Major Economicts. Edward Elgar, Cheltenham 1995 (economic history since Keynes with a comprehensive biographical appendix of important economists).
• Thomas Cate, Geoff Harcourt, and David C. Colander (Eds.): An Encyclopedia of Keynesian Economics . Edward Elgar, Cheltenham / Brookfield 1997, ISBN 978-1-85898-145-1 .
• David C. Colander : The Evolution of Keynesian Economics. From Keynesian to New Classical to New Keynesian . In: OF Hamouda and JN Smithin (Eds.): Keynes and Public Policy After 50 Years . Vol. I: Economics and Policy. Edward Elgar, Aldershot / Brookfield 1988.
• David C. Colander and H. Landreth: The Coming of Keynesianism to America . Edward Elgar, Cheltenham / Brookfield 1996, ISBN 978-1-85898-087-4 .
• Robert William Dimand: The origins of the Keynesian revolution: the development of Keynes' theory of employment and output . Stanford University Press, 1988, ISBN 978-0-8047-1525-6 .
• Shaun P. and Hargreaves Heap: The New Keynesian Macroeconomics . Edward Elgar, 1993, ISBN 978-1-85278-598-7 .
• Robert Leeson (Ed.): The Keynesian Tradition . Palgrave Macmillan, 2008, ISBN 978-1-4039-4960-8 .
• Luigi L. Pasinetti : Keynes and the Cambridge Keynesians . Cambridge University Press, Cambridge 2007, ISBN 978-0-521-87227-0 .
• Teodoro Dario Togati: Keynes and the neoclassical synthesis: Einsteinian versus Newtonian macroeconomics . Routledge, 1998, ISBN 978-0-415-18396-3 (Volume 21 of Routledge studies in the history of economics ).
• Bruno Ventelou: Millennial Keynes: An Introduction to the Origin, Development, and Later Currents of Keynesian Thought . ME Sharpe, 2004, ISBN 978-0-7656-1516-9 .

With a focus on post-Keynesian economics

• Alfred Eichner: A Guide to Post-Keynesian Economics . White Plains, New York 1979.
• GC Harcourt: The Structure of Post-Keynesian Economics: The Core Contributions of the Pioneers . Cambridge University Press, 2006, ISBN 978-0-521-83387-5 .
• John Edward King (Ed.): The Elgar companion to post Keynesian economics . Edward Elgar Publishing, 2003, ISBN 978-1-84064-630-6 .
• John Edward King (Ed.): A history of post Keynesian economics since 1936 . Edward Elgar Publishing, 2003, ISBN 978-1-84376-650-6 .

Wiktionary: Keynesianism  - explanations of meanings, word origins, synonyms, translations

## Individual evidence

1. ^ N. Gregory Mankiw / David Romer, New Keynesian Economics , Cambridge MA, 1991
2. ^ A b c d Roger E. Backhouse and Bradley W. Bateman: Keynesianism . In: Steven N. Durlauf and Lawrence E. Blume (Eds.): The New Palgrave - Dictionary of Economics . 2nd Edition. Vol. 4. Palgrave Macmillan, New York 2008, pp. 731-734 , doi : 10.1057 / 9780230226203.0893 .
3. ^ A b c Michel Beaud and Gilles Dostaler: Economic Thought Since Keynes . Edward Elgar, Cheltenham 1995, ISBN 978-0-613-91449-9 , The Triumph of Interventionism, pp. 2 and Section I.3 .
4. ^ Axel Leijonhufvud : On Keynesian Economics and the Economics of Keynes. A Study in Monetary Theory , New York, Oxford University Press, 1968, German: About Keynes and Keynesianism. A study on monetary theory, Cologne (Kiepenheuer & Witsch) 1973
5. James Tobin: Price Flexibility and Output Stability. At Old Keynesian View. In: Journal of Economics Perspectives, Vol. 7, 1993
6. For details, see Frederic S. Lee: The Organizational History of Post Keynesian Economics in America, 1971–1995 . In: Journal of Post Keynesian Economics . Vol. 23, No. 1 , 2000, pp. 141 (145) .
7. See Joan Robinson: Collected Economic Papers . Volume 2. Blackwell, Oxford Preface, pp. XIII .
8. John Edward King (Ed.): A History of Post Keynesian Economics since 1936 . Edward Elgar Publishing, (Cheltenham / Northampton, MA) 2002, ISBN 978-1-84376-650-6 , pp. 9 ff. sq .
9. ^ For example, MC Howard: Modern Theories of Income Distribution . Macmillan, London 1979.
10. ^ John Edward King (ed.): A history of post Keynesian economics since 1936 . Edward Elgar Publishing, Cheltenham / Northampton, MA 2003, ISBN 978-1-84376-650-6 , pp. 10 .
11. ^ TI Palley: Post Keynesian Economics: Debt, Distribution and the Macro Economy . Macmillan, London 1996, pp. 2016-220 .
12. ^ Anthony Philip Thirlwall: The Renaissance of Keynesian Economics . In: Banca Nazionale del Lavoro Quarterly Review . 186, September, p. 335-337 .
13. ^ A b John Edward King (Ed.): A history of post Keynesian economics since 1936 . Edward Elgar Publishing, Cheltenham 2003, ISBN 978-1-84376-650-6 , pp. 1-11 .
14. ^ John Maynard Keynes: A Treatise on Money. | Location = London etc. | 1930 (German: Vom Gelde. München und Leipzig 1932, pp. 18–19:
“But there is a second way in which the bank can create a claim against itself. It can buy value itself, that is, its investments increase and settle this purchase, at least initially, by making a claim against itself, or the bank can create a claim against itself in favor of a borrower against his promise of later repayment; that is, it can make loans or advances In both cases, the bank creates the credit; only the bank itself can arrange for the creation of credit in its books that entitle the customer to withdraw cash or to transfer his claim to another person; there is no difference between these two cases, apart from the fact that the cause which leads to the creation of the credit on the part of the bank is different, it follows that the extent to which the bank is more solid if observed Bank principles on the asset side by granting loans and buying assets can create deposits ... ")
15. ^ A b c Michel Beaud and Gilles Dostaler: Economic Thought Since Keynes . Edward Elgar, Cheltenham 1997, ISBN 978-0-613-91449-9 , pp. 33-47 .
16. quoted from Luigi L. Pasinetti : Keynes and the Cambridge Keynesians . Cambridge University Press, Cambridge 2007, ISBN 978-0-521-87227-0 , pp. 3-24 .
17. ^ Peter Bofinger : Grundzüge der Volkswirtschaftslehre , 2nd edition 2007, Pearson Studium Munich, ISBN 3-8273-7076-0 , p. 53.
18. Fritz Reinhardt / Ralf Wittrich, The elimination of unemployment in the Third Reich: the emergency program 1933/34 , 2006, p. 81
19. ^ A b Luigi L. Pasinetti : Keynes and the Cambridge Keynesians . Cambridge University Press, Cambridge 2007, ISBN 978-0-521-87227-0 , pp. 65-85 .
20. Quoted from David C. Colander : The Evolution of Keynesian Economics. From Keynesian to New Classical to New Keynesian . In: OF Hamouda and JN Smithin (Eds.): Keynes and Public Policy After 50 Years . Vol. I: Economics and Policy. Edward Elgar, Aldershot / Brookfield 1988, p. 92 .
21. ^ Mark Skousen: The big three in economics: Adam Smith, Karl Marx and John Maynard Keynes. Armonk (ME Sharpe), 2007. ISBN 978-0-7656-1694-4 , pp. 196 f.
22. ^ John Maynard Keynes (1925): Essays in Persuasion. The Economic Consequences of Mr. Churchill. Collected Writings. Vol. IX , p. 220:
The Bank of England is compelled to curtail credit by all the rules of the gold standard game. It is acting conscientiously and "soundly" in doing so. But this does not alter the fact that to keep a tight hold on credit - and no one will deny that the bank is doing that - necessarily involves intensifying unemployment in the present circumstances of this country. What we need to restore prosperity to-day is an easy credit policy. We want to encourage business men to enter on new enterprises, not, as we are doing, to discourage them. Deflation does not reduce wages "automatically". It reduces them by causing unemployment. The proper object of dear money is to check an incipient boom. Woe to those whose faith leads them to use it to aggravate a depression.
23. ^ John Maynard Keynes (1925): Essays in Persuasion. Collected Writing, Vol. IX, p. 225: “ The question is how far public opinion will allow such a policy to go. It would be politically impossible for the Government to admit that it was deliberately intensifying unemployment, even though the members of the Currency Committee were to supply them with an argument for it. On the other hand, it is possible for deflation to produce its effects without being recognized. Deflation, once started ever so little, is cumulative in its progress. If pessimism becomes generally prevalent in the business world, the slower circulation of money resulting from this can carry deflation a long way further, without the bank having either to raise the bank rate or to reduce its deposits. And since the public always understands particular causes better than general causes, the depression will be attributed to the industrial disputes which will accompany it, to the Dawes Scheme, to China, to the inevitable consequences of the Great War, to tariffs, to high taxation , to anything in the world except the general monetary policy which had set the whole thing going.
24. ( Econometrica , Vol. 5, 1937. German in: Barens / Caspari (Ed.) The IS / LM model - emergence and change, Marburg 1994 )
25. This classic article is reproduced with some abbreviations on the Keynes Society website with permission from the Econometric Society . It can be found in German translation in: Ingo Barens & Volker Caspari (eds.): Das IS-LM-Modell. Origin and change. Metropolis, Marburg 1994
26. (Keynes, 1936, p. 171)
27. (ibid., P. 207)
28. ^ Luigi L. Pasinetti : Keynes and the Cambridge Keynesians . Cambridge University Press, Cambridge 2007, ISBN 978-0-521-87227-0 , pp. 25-50 .
29. ^ Luigi L. Pasinetti : Keynes and the Cambridge Keynesians . Cambridge University Press, Cambridge 2007, ISBN 978-0-521-87227-0 , pp. 59-64 .
30. ^ Alternative Theories of Distribution. In Review of Economic Studies , Vol. 23, 1955/1956
31. Production of goods by means of goods , 1960
32. ^ Walter Eucken : Principles of Economic Policy , Tübingen / Zurich, 1952
33. See e.g. B. Claus-Martin Gaul: Economic stimulus programs in the history of the Federal Republic of Germany: Classification and evaluation of global control from 1967 to 1982 , p. 10.
34. Schiller claimed in 1967 that inflation was "dead as a rusty nail". The Bundesbank under its then President Karl Blessing , on the other hand, had fears of inflation and resisted further 'stimulus measures'. ( Otmar Emminger : D-Mark, Dollar, Currency Crises , p. 139.)
35. So z. B. Christoph Deutschmann : Left Keynesianism , Frankfurt 1982
36. Wolfgang Cezanne: General Economics . Oldenbourg Wissenschaftsverlag 2005. ISBN 3-486-57770-0 . P. 457f
37. ^ Gerhard Willke: John Maynard Keynes. Frankfurt (Campus Verlag), 2002. ISBN 3-593-37034-4 . P. 156f
38. ^ Claus-Martin Gaul: Economic stimulus programs in the history of the Federal Republic of Germany: Classification and evaluation of global control from 1967 to 1982 . Ed .: Scientific Services of the German Bundestag. January 2009 ( bundestag.de [PDF; accessed on March 13, 2020]).
39. see the introduction to Mankiw, N. Gregory and Romer, David (eds.), "New Keynesian Economics", Cambridge, (MIT Press) 1991 and Richard Clarida, Jordi Galí , and Mark Gertler : The Science of Monetary Policy: A New Keynesian Perspective . Journal of Economic Perspectives, 1999 (PDF; 569 kB).
40. ^ Paul Davidson: What revolution? The legacy of Keynes . In: Journal of Post Keynesian Economics . tape 19 , 1 (autumn), 1996, ISSN  0160-3477 , p. 47 ( online ).