Under what conditions are Keynesian approaches relevant and good policy?

I have put a posting up on the History of Economic Thought (HET) website today in answer to the following question raised by someone in the United States. The rest of this posting is my reply.

I have heard several economists say they are part-time Keynesians, part-time Monetarists, and part-time All-Schools-of-Thought. Under what conditions are Keynesian approaches relevant and good policy? What work is good on this?

It is interesting that this question has circled the world and come to me here in Australia with only a small handful of responses when to most queries by the time it reaches me there have usually been many. And this is an interesting question although one not typically looked at on an HET website. But it is something that does deserve an answer, it is something that HET specialists should have a deep interest in, and is certainly the central economic question of our time.

Part-Keynesian, part-monetarist and part-eclectic is the modern paradigm since every economist takes in with their mothers’ milk the notion of aggregate demand and the strong positive utility of fiscal policy during recessions. This is the Keynesian part. Monetarism as designed by Milton Friedman worked off this same framework built around aggregate demand but thought that fiscal policy was almost useless and that the really strong policy lever was the money supply, an approach which has now migrated over to adjustments in the rates of interest but with the relevant concepts still centred on the demand for money. The eclectic parts are the various strands of thought that everyone picks up along the way but would mostly revolve around microeconomic questions with a high level of interest in game theory and externalities. And this is to give the benefit of the doubt that there actually is a theory behind so much of the econometric work that now populate our leading journals.

The problem with the question asked – “Under what conditions are Keynesian approaches relevant and good policy?” – is that the answer is becoming more evident every day. There are no conditions when Keynesian approaches are relevant and good for policy. A Keynesian policy is a deficit-financed increase in public spending during recessionary periods to hasten a return to strong growth and full employment. It has never worked. Not during the New Deal, not during the Stagflation of the 1970s, not in Japan in the 1990s nor has it worked right up to this minute as embodied in the “stimulus” packages that followed the Global Financial Crisis. Economic theory is in crisis mode although no one goes around pointing it out. But whatever we economists might teach in the classroom, no one actually framing policy will ever again base what they do on the need to restore aggregate demand through higher levels of public spending. We may continue to teach it but no one will do it. Keynesian theory, so far as public policy is concerned, is dead in the water.

What work is good on this? Although I feel a bit embarrassed to say so, in a month’s time in June, Edward Elgar will be publishing my Free Market Economics – an Introduction for the General Reader. The book is drenched in the History of Economics, has two major chapters dealing with HET, but if it has a theme that exists from cover to cover it is that Keynesian theory has been an out and out failure, and that what is wrong with economics today was perfectly well understood by every mainstream economist prior to the publication of the General Theory in 1936. My book restates classical economic theory for the twenty-first century, but to write it requires you to go back to those pre-Keynesian economists of 75 years ago to find out just what it was they said. Even the title of my book is laced with HET, taken as it is from Henry Clay’s brilliant 1916 introductory text, Economics – an Introduction for the General Reader. That is why in many ways it requires someone steeped in the history of economic thought to take these issues on. Hardly anyone else is able to because hardly anyone else can and will read the business cycle literature pre-1936.

But if I were to give a reading list of what one ought to read, I would go back to the business cycle literature of the 1920s and 1930s and start with Gottfried Haberler’s Prosperity and Depression. The problem is that for those writing before the General Theory was published, the idea that aggregate demand deficiency would sweep the world as the mainstream theory would have been absurdly incomprehensible. To find a work with an overlap between an understanding of the classical literature and the Keynesian, there were a few but I don’t think there has been one published for forty years. Others might be able to suggest possible sources on where to turn but that is where I believe you need to go.

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29 Responses to Under what conditions are Keynesian approaches relevant and good policy?

  1. Better to cut taxes, but the problem is we have marxist governments in power who will cut off their right arm before they cut taxes, better soak the rich and buy votes from the “poor”.

    Aggressive taxation is net prosperity destroying.

  2. PSC

    Asked this before, but again this post seems to take very much the opposite view appears to have Say himself supporting the idea of a general glut.

    I’d be very interested to hear an analysis/critique:


  3. .

    Macroeconomics “is not hard” but GDP, unemployment and inflation did the exact opposite of what stimulus was intended to do in the US. It accelerated the fall in our cap ex.

    It’s not hard – reflexively disagree with de Short on the topic and you’ll be right 9 times out of 10.

  4. PSC

    The number of times that article mentions fiscal stimulus is precisely zero.

  5. .

    Um gee PSC what was the title of Steve’s post?

    If only you raed a littel more!

  6. Steve Kates

    If you think that a “general glut” is another way of saying “recession” then what Delong is saying is that there was a time when John Stuart Mill and J.-B. Say did not think that recessions were possible but then changed their minds. If you can believe that, then you may join the other Keynesians in believing ten impossible things before breakfast. A general glut is not just the fact of recession, whose existence everyone was perfectly well aware of, but a recession caused by oversaving and demand deficiency. Read my “Say’s Law and the Keynesian Revolution” where all of this is explained in great detail.

  7. PSC

    Sorry dot, I should outline a bit more. I thought this was the reasoning behind Steve’s article:

    The problem is that for those writing before the General Theory was published, the idea that aggregate demand deficiency would sweep the world as the mainstream theory would have been absurdly incomprehensible.

    DeLong argues directly against this point, and says that JB Say himself pointed to a general glut – in essence a violation of Say’s law – as the cause.

    None of this says that fiscal stimulus is the appropriate answer to a general glut – perhaps monetary policy and altering bank reserve requirements works better. Perhaps all we can do in response to a general glut is starve and learn to endure hunger. Nothing here says that a Keynesian fiscal cure is correct, it might well be disastrous – but it does suggest that the Keynesian diagnosis might at least have some merit.

    But DeLong does, correctly or incorrectly, argue against an axiom of Steve’s reasoning, and pull out quotes from the likes of Say to support him. And Steve being a guy who seems pretty up on the history of macro I thought he or someone else might have an interesting response to this particular issue.

  8. .

    I thought Steve said Say’s law ain’t Say’s law.

    Only if I rad a littel moer!

  9. PSC


    Mill’s arguing something much stronger in DeLong’s quote – unless DeLong is misquoting – he’s arguing that there is the possibility of a recession caused by “an excess of all commodities” such that “all commodities fall in price” (i.e. deflation).

    To my understanding Say’s law requires that there cannot be demand failure – that there can be no such thing as a general glut. But as I read DeLong’s quotes of Mill and Say, they seem to be arguing the opposite.

    Sorry I’ve not read your book, but I have read your essay – something like “Economic management and Keynes” in the collection of essays you edited. Does this cover the same material?

  10. Steve Kates

    In what is recognised as near enough the single best defence of Say’s Law found anywhere in the classical literature, according to Delong Mill was actually contradicting himself and arguing that a general glut was possible. You have no alternative. You have to read my book if you want to understand what any and all of this means.

  11. PSC

    A plain English reading of Mill has that he allows for “temporary” times where there is an “excess of all commodities” when “all commodities fall in price” because of an “under-supply of currency”. Mill explicitly talks about the glut being occasioned by “the sudden annihilation of a great mass of credit” – which to me sounds like a commercial paper market falling over.

    My “Encylopedia of Macro” (Snowdon/Vane) discusses Mill’s essay – last para on page 652 if you’ve got a copy. Summarizing, it says that Say’s law is fine in a barter economy according to Mill. Further in a money economy when discussing growth and capital aggregation, supply creates demand – yay for Say! But in the context of the cycle, “Depressions might involve a glut of all commodities because people … were choosing to postpone their consumption …”.

    My reading of Mill accords pretty closely with this reading by Snowdon and Vane.

    I will look up your book, but it will take a while. Are there any other books which explain your reading which might be easier to get my hands on?

  12. Steve Kates

    Since Keynesian economics was the most frequent fallacy into which people would fall during classical times, it should not surprise me that once someone has entered into the Keynesian mindset that it is near on impossible to get out again. Not just here on this website but across the entire profession. With the global failure of the stimulus – not a success to its name – there is still an inability to see what has been right before our eyes. Here are the facts:

    1) The GFC was not caused by a fall off in aggregate demand. It was a textbook example of a classical recession where there was a downturn in one sector – the housing market in the US – that fed into the financial system.

    2) The symptoms shown by the downturn were that businesses everywhere suddenly found that the goods and services they were profitably able to sell the week before were now unsaleable. These were symptoms of a greater disorder in the structure of production.

    3) Treating symptoms and not the disorder is very bad medicine. A recession is a period when people lose their jobs because the goods and services being produced cannot be sold. If you think the GFC was caused by a general glut feel free to go on in this delusion.

    4) The problem was not too little demand but a major dislocation in production that was made worse by a banking crisis. Fix that and you fix the problem.

    5) If the problem was an absence of demand in that simpleminded Keynesian way, that all you have to do is spend and everything will come good, then the question is, why hasn’t it come good? Everywhere policy makers have recognised that the stimulus has been a problem and no matter what the actual state of the economy are starting to remove the stimulus expenditure. A Keynesian can only explain this by saying that there wasn’t enough stimulus. The rest of us think that such people are charlatans.

    6) If you would like to understand any of this, either read my Say’s Law and the Keynesian Revolution or wait a month or so and pick up a copy of Free Market Economics: an Introduction for the General Reader.

  13. .

    Steve – I believe there was an earlier fall in GDP which was a long time coming due to falling labour productivity growth. I think March 2007 had negative GDP growth. To me, this kicked off the housing problems.

    Clearly not a glut. There may of been a glut in the asset class of real property – but the falling productivity cannot in any way be described as a glut.

  14. daddy dave

    either read my Say’s Law and the Keynesian Revolution or wait a month or so and pick up a copy of Free Market Economics: an Introduction for the General Reader

    Steve, am I reading this right – you’ve got a book coming out?

  15. JC

    Says law is tautological while nearly all of Keynes is toxic quackery.

    Nearly all what Says says is correct. If it is incorrect then one of the Keynesian schelps like Brad De Short needs to explain to us how many IPhones were in demand before Apple came out with them. How many Ipads, how many personal computers were….. bearing in mind that the inventor of the PC at first never visualized any demand for their product and so didn’t move ahead with it. These examples alone refute any quackery Brad De Long tries to peddle.

    Sometimes it certainly is difficult trying to figure out what is chasing what in markets that are near perfect like say wheat. However even the wheat market is not one product with large variation of types and styles.

    I always go to my fall back position in that you cannot demand something that isn’t or won’t be supplied.

    Not allowing Keynesian schleps like De Short try to tear down Say’s concept is hugely important because in my mind there is a little more at play here than just having a debate about some arcane olden day concept. Say’s concept.. I won’t call it law… brings to focus the importance of the vitality of the supply side of the equation and why it’s so important to ensure the producers remain unhampered.

    Allowing over self-promoted quack economists like De Long the opportunity to tear this concept down gives him and other Keynesian loons the opportunity to get a foot in the door in their attempt to corrupt the shit out of economics to the point where deficits as big as 10% of GDP are considered normal.

    My opinion? Fuck’em. Say was far more right than wrong and hair splitting from schelps like Brad De Short won’t change a thing.

    Two contrasts… A short burst of supply sided economics that obviously focused on the producer side in the 80’s produced unparalleled prosperity to the point where the United states grew one entire Germany in GDP terms over 8 years. Then compare that to the present time where the US is barely able to sustain any growth to keep it from falling over in a heap again and the current president is attempting to dampen down expectations as any mediocrity does.

    It also ties in with what Hayek and Mises taught, which is something the Keynesian schelps are really trying to avoid. Producers in almost every facet of the human activity are at the mercy of their customers while the peddlers of Keynesian toxic are always attempting to avoid this truism and pretend that it is the other side that is parmount. And so there is a little more to debate than meets the eye.

    Don’t give these fuckers an inch Steve and hold your ground. Say has more to add than these imposters and moocher lovers.

  16. Steve Kates

    DD: I do have a book coming out: Free Market Economics: an Introduction for the General Reader. I will put up a full blog post as soon as I have sent the proofs off this afternoon, but since you were kind enough to ask, I thought I would let you know. It is a combination of the economics of the entrepreneur; the economic relevance that money must be spent in a business before the future is known and the consequences are realised; and the classical theory of the business cycle in place of Keynesian economics which also gets a large amount of space with the aim of showing just how hollow it is.

  17. PSC

    Steve – I’ll try again with fewer words.


    I have already described the state of the markets for commodities which accompanies what is termed a commercial crisis. At such times there is really an excess of all commodities above the money demand: in other words, there is an under-supply of money. From the sudden annihilation of a great mass of credit, every one dislikes to part with ready money, and many are anxious to procure it at any sacrifice. Almost everybody therefore is a seller, and there are scarcely any buyers; so that there may really be, though only while the crisis lasts, an extreme depression of general prices, from what may be indiscriminately called a glut of commodities or a dearth of money. But it is a great error to suppose, with Sismondi, that a commercial crisis is the effect of a general excess of production. It is simply the consequence of an excess of speculative purchases. It is not a gradual advent of low prices, but a sudden recoil from prices extravagantly high: its immediate cause is a contraction of credit, and the remedy is, not a dilution of supply, but the restoration of confidence.

    (my emphasis)


    The problem is that for those writing before the General Theory was published, the idea that aggregate demand deficiency would sweep the world as the mainstream theory would have been absurdly incomprehensible.


  18. JC


    I don’t understand what it is you’re trying to prove.

    Mill is describing a period of deflation. So what?

  19. JC

    In a fast most situation prices aren’t catching up with with the supply in the market. Big deal.

    You haven’t discovered cold fusion here dude.

  20. PSC

    Mill is describing a period of deflation. So what?

    Mill was writing in 1848. Before the General Theory. Describing “an excess of all commodities” – which he also calls a “glut”. And “scarcely any buyers” – i.e. aggregate demand deficiency.

    But: before the General Theory (1936) the idea that aggregate demand deficiency would sweep the world … would have been absurdly incomprehensible

    ??? Does not compute.

  21. JC

    I don’t know enough about economic history to appreciate if people were aware of deflation in the way we are now or even in the 30’s to the time of Mill. You certainly don’t either.

    What Mill is describing and what Keynes was talking about are two different things.

    Don’t stop the bold where you did. Continue on and bold out this:

    At such times there is really an excess of all commodities above the money demand: in other words, there is an under-supply of money.

    Mill isn’t refuting Say here. He’s making the observation that there is massive disequilibrium as a result of a money shortage…. deflation. Say concept wasn’t addressing a period of such serious volatility in the market, you doofus.

    And here’s the other point. Lord Hee Haw or Keynes thought it was simple demand deficiency when in fact there’s a monetary fracture. Hee Haw didn’t even understand the under-girding of a deflationary depression.

    Stop trying to sound like a litigation attorney in discovery process, as it doesn’t work.

    Mill was describing monetary fracture or instability. It was 100 years before Hee Haw but at least he understand that the problem was coming from a monetary shortage. In other words deflation.

    On the other hand He Haw sees deflation and thinks we need to tweak demand because we lack aggregate demand. He doesn’t understand the problem and neither does Brad De Short.

  22. JC

    oops ….he understood that the problem….

  23. JC

    FFS PSC.

    Mill is discussing deflation and his observations in terms of what is happening the market process.

    Says is offering a tautological concept in the way demand and supply interact.

    If we took Brad De short’s stupid observations he is suggesting that Say’s concept would mean that monetary instability could not occur. The dolt has been living in Berkeley for too long and seems oxygen deprived.

    Furthermore it’s interesting to see that you have no understanding of economics and side with your ideological cousin without even knowing anything about the subject. That’s why I have no respect for left-wingers. You’re basically screwed up in the head and immediately knee jerk into group think.

  24. PSC

    JC – I can’t see any inconsistency between your statement, Mill’s statement and DeLong’s statement ogf one candidate solution to a general glut:

    a depression is the result of an excess demand for money–for those liquid assets generally accepted as means of payment that people hold in their portfolios to grease their market transactions. You fix a depression by having the central bank boost the money stock. Eliminating the excess demand for money also brings the goods and labor markets into balance and out of excess supply.

    But you, Mill and DeLong seem to be inconsistent with Steve Kates, since he states a general glut is impossible.

  25. JC


    Do you understand markets? I ask this seriously.

    Let me try and explain it this way to you.

    There’s nothing to suggest that Say’s concept of the market process must always remain in static equilibrium, otherwise demand would equal supply and prices would remain static forever. Of course Say makes no such suggestion.

    A glut can occur and Say is still correct. That’s because what Mill was describing was that “supply” being offered at a particular price wasn’t being taken up at a particular point in time.

    Mill was essentially describing events that occur during a period of monetary instability.

    Think of it this way.

    I take my cattle to the market and because I don’t like the prices being offered I suspend my lot and take them back to the farm. Does that refute Say? Of course it doesn’t because Say is basically describing a process in which timing isn’t the prime element. I could take my cattle to the market next week and get the price I wanted.

    Mill saw something in the market… monetary dis-equilibrium throwing things out of kilter at a particular point in time.

    Meanwhile that oxygen improvised professor from Berkeley sees the Mill quote, doesn’t understand either what Mill or Say were saying and thinks he’s found struck gold by entirely misunderstanding everything or is being willfully dishonest as usual.

  26. PSC

    JC – where precisely are you disagreeing with anything I’ve written?

  27. PSC

    to be clear – I essentially agree with everything you’ve written.

  28. JC

    Great then you finally agree. Good to see. You weren’t earlier though.

  29. JC

    oops….. oxygen impoverished….

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