I’m often asked—by students and readers of this blog—why I include Keynesian economics, alongside neoclassical economics, within mainstream economic theory.
The major reason I do so is because the mainstream debate within the discipline of economics is mostly confined within limits defined by neoclassical economics and Keynesian economics—between (as I explained last year), the conservative invisible hand of free markets and the more liberal visible hand of government intervention.
It’s basically what most students of economics are exposed to their in their micro and macro courses:
At the microeconomic level, capitalism (or, as liberals generally refer to it, the market system) has the potential of achieving an efficient allocation of resources. As for the macroeconomy, capitalism is capable of providing stable growth and full employment. Capitalism, therefore, promises the best possible outcomes both for individuals and for the economy as a whole.
Now, while conservative mainstream economists believe that efficiency, growth, and full employment stem from allowing markets to operate freely, liberal mainstream economists argue that markets are often imperfect and therefore the only way to achieve (or at least approximate) those goals is to intervene in and regulate markets. Those are the terms of the mainstream debate in economics, from the origins of modern economic discourse in the late-eighteenth century right on down to the present.
Keynesian economics was, of course, born as a critique of neoclassical economics, in the midst of the First Great Depression, when the allocation of resources was anything but efficient and capitalism provided neither stable growth nor full employment. Far from it!
Keynes introduced new ideas into economic discourse, emphasizing the role of economic and social structures (such as collective bargaining and, from later Keynesians, imperfect competition), mass psychology (especially with respect to investors and stock-market speculators), and fundamental uncertainty (it was impossible to make rational decisions in the face of an unknown—and unknowable—future).
While I think Roberts begins by overstating his case (I, for one, am not convinced that “Keynes is the economic hero of those wanting to change the world”), he does convincingly argue that Keynes’s economic prescriptions are based on a fallacy:
The long depression continues not because there is too much capital keeping down the return (‘marginal efficiency’) of capital relative to the rate of interest on money. There is not too much investment (business investment rates are low) and interest rates are near zero or even negative. The long depression is the result of too low profitability and so not enough investment, thus keeping down productivity growth. Low real wages and low productivity are the cost of ‘full employment’, contrary to all the ideas of Keynesian economics. Too much investment has not caused low profitability, but low profitability has caused too little investment.
Dillow, for his part, explains that Keynes “was largely silent about three related issues: class, power and profits, or least he dismissed them lightly.” In a sense, then,
Keynesianism was profoundly conservative. In believing that technocratic governments could provide workers with decent wages and full employment, Keynesianism did away with the need for industrial democracy: one of the achievements of Keynes was to eclipse movements such as guild socialism. It wasn’t Keynes himself who said “the man in Whitehall knows best” but one of his disciples, Douglas Jay – and that encapsulated a key part of Keynesian ideology, its belief in top-down management.
Populism, of course, is a backlash against just this. That slogan “take back control” and the dismissal of experts represent a rejection of Keynesianism; the baby of decent macroeconomic policy is being thrown out with the bathwater of elitism. It’s far from clear that Keynesianism has the intellectual or political resources to fight back.
In my view, neither neoclassical nor Keynesian economics turns out to have the intellectual or political resources to effectively respond to the issues that motivate and resonate within contemporary populism. If anything, they have served to create the problems that have brought right-wing nationalist populism to the fore.
For good reason, both wings of mainstream economics have ceased to be persuasive.