Home > Keynes, New vs. Old Paradigm > What is Post Keynesian Economics?

What is Post Keynesian Economics?

from Lars Syll

John Maynard Keynes’s 1936 book The General Theory of Employment, Interest, and Money attempted to overthrow classical theory and revolutionize how economists think about the economy. Economists who build upon Keynes’s General Theory to analyze the economic problems of the twenty-first-century global economy are called Post Keynesians. Keynes’s “principle of effective demand” (1936, chap. 2) declared that the axioms underlying classical theory were not applicable to a money-using, entrepreneurial economic system. Consequently, the mainstream theory’s “teaching is misleading and disastrous if we attempt to apply it to the facts of experience” (Keynes 1936, p. 3). To develop an economic theory applicable to a monetary economy, Keynes suggested rejecting three basic axioms of classical economics (1936, p. 16).


Unfortunately, the axioms that Keynes suggested for rejection are still part of the foundation of twenty-first-century mainstream economic theory. Post Keynesians have thrown out the three axioms that Keynes suggested rejecting in The General Theory. The rejected axioms are the ergodic axiom, the gross-substitution axiom, and the neutral-money axiom, which are explained below. Only if these axioms are rejected can a model be developed that has the following characteristics:

•Money matters in the long and short run, that is, changes in the money supply can affect decisions that determine the level of employment and real economic output.

•As the economic system moves from an irrevocable past to an uncertain future, decision makers recognize that they make important, costly decisions in uncertain conditions where reliable, rational calculations regarding the future are impossible.

•People and organizations enter into monetary contracts. These money contracts are a human institution developed to efficiently organize time-consuming production and exchange processes. The money-wage contract is the most ubiquitous of these contracts.

•Unemployment, rather than full employment, is a common laissez-faire situation in a market-oriented, monetary production economy.

•The ergodic axiom postulates that all future events are actuarially certain, that is, that the future can be accurately forecasted from an analysis of existing market data. Consequently, this axiom implies that income earned at any employment level is entirely spent either on produced goods for today’s consumption or on buying investment goods that will be used to produce goods for the (known) future consumption of today’s savers. In other words, orthodox theory assumes that all income is always immediately spent on producibles, so there is never a lack of effective demand for things that industry can produce at full employment … Post Keynesian theory rejects the ergodic axiom.

In Post Keynesian theory, however, people recognize that the future is uncertain (nonergodic) and cannot be reliably predicted. Consequently, people decide on how much of current income is spent on consumer goods and how much is not spent on consumption goods but is instead saved by purchasing various liquid assets.

Liquid assets are time-machine vehicles that savers use to store and transport savings to an indefinite future date or dates. Unlike savers in the classical system who can reliably predict their economic future, real-world savers do not know exactly what they will buy, and what contractual obligations they will incur, at any specific future date. As long as money discharges all contractual obligations and monetary contracts are used to organize production and exchange activities, the possession of money (and liquid assets that have small carrying costs and can be easily resold for money) means that holding one savings in the form of liquid assets gives savers the ability to demand products whenever they desire in the uncertain future and/or to meet a future unforeseen contractual commitment. Liquid assets are savers’ security blankets, protecting them from possible hard times …

Keynes (1936, chap. 17) argued that money (and all liquid assets) have two essential properties. First, money does not grow on trees, and hence labor cannot be hired to harvest money trees when income earners reduce consumption to save more in the form of money or liquid assets. Accordingly, the decision to consume rather than to save is a choice between an employment-inducing demand and a non-employment-inducing demand. When savings increase at the expense of the demand for producibles, sales and employment decline. Second, liquid asset prices will increase as new savings increase the demand for such assets. Because of high carrying and high resale costs, producible durables are not gross substitutes for liquid assets, contrary to the classical gross-substitution axiom where the latter assumes anything is a good substitute for anything else. Post Keynesians reject the gross substitution axiom as applicable to assets that savers use to store their savings. Consequently, higher liquid asset prices do not divert this savings demand for liquid assets to a demand for producibles whose relative price has declined …

In the real world, investment spending on producible durables is constrained solely by entrepreneurs’ expectations of profits. If the future is uncertain, these expectations depend on “animal spirits” rather than on a reliable calculation of future profit income (Keynes 1936, p. 161). In an economy where money is created by banks, if entrepreneurs borrow from banks to finance the production of working capital goods, the resulting increases in the quantity of money will be associated with increasing employment and output. In contrast, the classical neutral-money axiom implies that, for example, if the money supply increases as people borrow more from banks, this change in the money quantity cannot affect the level of employment or output.

Post Keynesians reject the classical neutral-money axiom when they argue that changes in the money supply due to borrowing from banks to finance the production of investment goods affect the level of employment and output in both the short run and the long run.

Paul Davidson

  1. December 13, 2013 at 2:36 am

    Reblogged this on wiseexpressions and commented:
    i wonder how this will shape the future

  2. William Neil
    December 13, 2013 at 6:50 pm


    Where do you place Michael Hudson’s arguments – contained in “The Bubble and  Beyond,” which maintain that 80% of bank lending goes to real estate/mortgage loans, not capital producing inventions/plants, and his direct challenge that given this fact, all investment is not equal, the real estate end not increasing economic productivity, certainly not the way funding a new invention – the PC – does?  Also let me throw in the challenge by an historian who focuses on the profit/investment track record (and does not make the same arguments that Hudson does about the rent seeking nature of the banking real estate nexus): that would be James Livingston’s “Against Thrift: Why Consumer Culture is Good for the Economy, the Environment, and your Soul.”

    Livingston would seem to challenge both Keynes and Hudson by arguing that new net investment in plant and equipment (he’s a little blurry on Silicon Valley type start-up seed capital – venture capital) has not been necessary since about 1919:  “These economists {Moses Abramovitz, Robert Solow, Harold Vatter and others…} point us toward the awkward but verifiable conclusion that economic growth since the 1920’s does not require net private investment or net capital formation – because the mere replacement and maintenance of the existing capital stock, which is financed out of retained earnings and depreciation funds, increases the productivity of capital and labor.  In other words, net additions to the capital stock – private investments in new plant an equipment financed out of profits – are unnecessary to drive growth.” 

    I would guess that makes Livingston an all-around heretic about capitalism, no?  



  3. William Neil
    December 13, 2013 at 7:03 pm

    And let me add just a little more context to fill in some of the blanks about the thrust of Livingston’s arguments.  He’s driving at the macro-point, a shocking one, that most of the arguments that economic life moves forward with the greatest innovation and maximum efficiency when there are income distributions as skewed as ours of today – and this reality driven by the arguments that higher profits from the “shareholder uber alles” logic – are unnecessary, the system had already set up an “investment mechanism” (depreciation and replacement of old plant and equipment) that had “progress” almost “built in,”(my words)  …so why allow Wall Street Banks to capture such a large share of national income profits under their claim that they are necessary for what is already occurring outside their control….  

    Now you professional economists may not like such a challenge from someone outside the fraternity, and I’ve sent Livingston my own critiques about leaving out the “venture capital” mechanisms (I’m also outside the fraternity, if that’s what it is), but he did add a twenty page Appendix entitled “Capital in the American Economy: Kuznets Revisited – and has enough stats to seemingly bait the quants into a response.  What say ye, quants, are ye game to answer a “commoner?”  


  4. December 14, 2013 at 12:52 am

    “Accordingly, the decision to consume rather than to save is a choice between an employment-inducing demand and a non-employment-inducing demand. When savings increase at the expense of the demand for producibles, sales and employment decline.”

    All true, but Keynes overlooks the fundamental nature of money created as debt.

    Money is created as bank credit, usually on a time schedule for repayment. Indefinite savings are bank credit that is not available to be earned by the borrower that created that money in time to pay it back unless it has first been borrowed into circulation as existing money. Whether the original loan is paid back with existing money or newly-created money, it robs the Principal from some other loan. The total volume of savings is always unavailable to be earned free of a second debt-of-itself.

    Savings are interrupted debt cycles that set up two or more (n) simultaneous debts of the same Principal, thus creating a mutual dependence on the amount of the Principal never decreasing, and its delivery never slowing down. ie, in practice, it requires the perpetual growth of aggregate debt to banks.

    Slowdowns are a natural cyclic phenomenon. Whenever they happen, for any reason, people lose their homes by the P < nP math alone. Because the savers won't spend the Principal that was created as someone else's debt, the banks foreclose. I think this familiar chart supports this overlooked information.


  5. Jorge Buzaglo
    December 14, 2013 at 5:25 pm

    I would say that real Keynesians are those who share Keynes’s view, that “[t]he outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes” (General Theory, p. 372). When this is not clearly and openly avowed, I think we are in presence of what Joan Robinson called “bastard Keynesianism.” Neoclassical economics, purportedly a “value-free” science, has of course a problem with Keynes’s point of departure.
    Real Keynesians cannot say: “Those are my principles, and if you don’t like them… well, I have others.”

  6. Allen
    December 14, 2013 at 9:54 pm

    A very clear exposition of Post -Keynesianism from Paul Davidson. My compliments to the other contributors too. No-one has mentioned the most important aspect of all; real-world economics must be founded on physical and ecological factors. Any realistic economic model must deliver favourable changes in quality of life while reducing inputs and outputs which at present, being destructive to our habitat, are unsustainable in scale. Debt-based monetary systems which Paul Grignon derides, deliver financial collapse and eventually ecological catastrophe. They can continue to operate only with continued growth in input and output (which is physically impossible). A sound economic model will encompass monetary reform, encouragement of technical and administrative efficiency gains, and, above all, reduction of human population.

    For a deeper examination of these things see


    • December 15, 2013 at 6:12 pm

      “A sound economic model will encompass monetary reform, encouragement of technical and administrative efficiency gains, and, above all, reduction of human population.”

      In reference to the appropriate monetary reform called for above, I propose that the solution is to create money as promises of the goods and services we want to buy with it, instead of as a debt-of-itself, payable only in money (bank credit or legal tender). Currently an estimated 20% of world trade is already conducted between businesses in “barter credit” “capacity credit” or as I prefer to call it “Producer Credit” basis. This is all money that is redeemable for Product from a Producer and is thus defined in value by its redemption.

      These businesses vet the credit worthiness of their members. The evolution we need is to make these Producer Credits available to everyone to use as money in addition to the current system. Then we can transition smoothly into a new system.

      When this change of concept is carried through as I have shown in Money as Debt III, the math of the whole system becomes inherently stable, inclusive, and perfectly capable of dealing with economic shrinkage without a wave of defaults being the result.

      • chdwr
        December 16, 2013 at 10:18 pm

        That should read: And attempting to implement a non governmental voluntary program on non-governmental entities like corporations is IMO folly….even if well intentioned. So the goal needs to be governmental and economic/monetary policy….whose effects themselves….are freedom producing.

  7. November 10, 2016 at 2:07 pm

    Post Keynesianism, science, and universal idiocy
    Comment on Lars Syll on ‘What is Post Keynesian Economics?’

    There is science and non-science. The former is the realm where the criterion true/false is applied and nothing else, the latter is the vast realm of what John Stuart Mill called universal idiocy (1879, p. 26).

    True/false in turn has two inseperable aspects: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994, p. 31)

    Logical consistency is methodologically secured by the axiomatic-deductive method. This method presupposes firm ground to start with or, as Aristotle put it: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” Without firm ground logic runs amok and thus contributes to universal idiocy. As Keynes aptly remarked: “… a remorseless logician can end up in Bedlam.” (Moggridge, 1976, p. 36). This, clearly, is NOT an argument against logic but against logic that lacks firm ground. Logical consistency is indispensable.

    Refutation of a theory/model consists in the proof that it is either logically inconsistent or empirically inconsistent. Theories/models that take nonentities into the premises (angels, unicorns, Santa Claus, utility, equilibrium, etcetera) are a priori OUT of science. However, sometimes it is not immediately obvious whether a word denotes a nonentity or not, e.g. ether or phlogiston or extraterrestrials. Nonentities are the conversation topic of universal idiocy, entities are the subject matter of science.

    Keynes was very clear about the all-decisive importance of sound premises: “For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises.” (1973, p. xxi)

    Keynes left not the slightest doubt that Orthodoxy’s premises are false. Consequently, he left them behind and formulated the foundational syllogism of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income – consumption. Therefore saving = investment.” (1973, p. 63)

    This elementary two-liner, though, is conceptually and logically defective because Keynes did not come to grips with profit and therefore “discarded the draft chapter dealing with it.” (Tómasson et al., 2010, p. 12). As a result, the whole Post Keynesian theoretical superstructure is false (2011).

    Because Keynes did not get the macrofoundations right the Keynesian Revolution ultimately failed. Just like his predecessors, Keynes had no idea of the fundamental concepts of economics, viz. profit and income. Yet, neither Keynesians nor Post Keynesians nor New Keynesians nor Anti-Keynesians ever spotted the logical inconsistency in Keynes’s macrofoundations. Not very profound thinkers these Walrasian, Keynesian, Marxian, Austrian folks.

    As as result, model bricolage, discussion and debate drifted away into the realm of economic nonentities like general equilibrium, ergodicity, rational expectations or the vacuous pseudo-realism of uncertainty, animal spirits, or folk psychology/sociology/politics.

    The axiomatic foundations of economics are provably false since more than 140 years in the case of Walrasianism and since more than 80 years in the case of Post Keynesianism. Because of this, economic policy advice of BOTH Walrasians AND Keynesians has no sound scientific foundation (2015). Like Walrasianism, Post Keynesianism is NOT an instantiation of science but an instantiation of universal idiocy.

    Egmont Kakarot-Handtke

    Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL http://ssrn.com/abstract=1966438.
    Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
    Keynes, J. M. (1973). The General Theory of Employment Interest and Money. London, Basingstoke: Macmillan.
    Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.
    Mill, J. S. (1879). Utilitarianism. URL https://www.amazon.de/
    Moggridge, D. E. (1976). Keynes. London, Basingstoke: Macmillan. Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34.
    URL http://mpra.ub.uni-muenchen.de/20557/.

    • Yoshinori Shiozawa
      August 19, 2020 at 9:34 am

      I have read two papers of Egmont Kakarot-Handtke. It is good to read Keynes with critical eyes. It is also good to try to construct a new theory even economics that supersedes various existing economics (Mainstream or Heterodox, or Walrasianism, Keynesianism, and Austrianism economics). But to claim that Kakarot-Handtke has created totally different third economics, he has to prove he has succeeded in his try. His axiomatic economic is disappointing. What Kakarot-Handtke call axioms are but accounting identities that serve as definitions. The major assumptions he gives are probability distributions of each of growth rates (See 2.4 Assumptions (10)). We get a set of fluctuating time series (Figure 2). But there is no explanations how these probabilities are obtained or defined. If not, his system is a pure imaginary construction that has no relations to real economy. It may be a purely mathematical theory but it is not a science in the sense of Karl Popper, because it is not a refutable theory.

  8. Yoshinori Shiozawa
    August 2, 2019 at 10:21 am

    I do not know why this post becomes among Top Posts- last 48 hours as of August 2, 2019. Main post is dated December 12, 2013. The last comment is dated November 10, 2016 at 2:07. It is good to reflect on the problems posed many years ago.

    I am rather happy to find this old post, because I have just posted a complaint on his blog series that it would be better for him to talk more on heterodox economics. Post Keynesian economics is one of it.

    See my fifth comment (dated August 2, 2019) to the page

    If I have to classify myself, I an a Post Keynesian of a Sraffian strand, but these names are not important, because opinions are very different among those who shares the same name of school and strand.

    This post is uploaded by Lars Syll but the text is by Paul Davidson. There are no comments of Lars Syll. I wonder why Syll chose to post this part of Davidson text. Does he totally agree with Davidson? Or, does he have some points of doubt or objection? I do not know.

    From my own point of view, this text by Paul Davison includes a grave flaw that became more clear from six years of Abenomics. This economic policy bundle of Prime Minister Abe of Japan is principally based on the contentions of “reflation” group which is inspired by Paul Krugman’s paper: It’s baaack: Japan’s Slump and the return of Liquidity Trap (Brookings Papers on Economic Activity, 2:1998. See also the paper by Krugman “It’s Baaack, Twenty Years Later”).

    Click to access 1998b_bpea_krugman_dominquez_rogoff.pdf

    Click to access Its-baaack.pdf

    I do not argue Krugman. I want to point one proposition of Paul Davidson’s seems to be proved to be wrong by facts.

    At the top of the several pillars that he considers basis of a new system, Davidson wrote:

    “Money matters in the long and short run, that is, changes in the money supply can affect decisions that determine the level of employment and real economic output.”

    The first arrow of Abenomics (there were three arrows in the original Abenomics) is to increase monetary basis and money stock by a financial easing of “different dimension” according to Mr. Kuroda, the Governor of Bank of Japan (BOJ). As intended by Mr. Kuroda, the monetary base was increased enormously, but the increase mainly occurred to the current accounts at the BOJ. That part did not flew out from BOJ and money stock did not increased as it was expected. Details omitting, Mr. Kuroda could not realize his original policy commitment that he will raise the inflations rate up to 2 % within 2 years. Six years have passed and he could not even realize his target of 2 % inflation.

    Now come back to Davison’s first pillar. Did changes in the money supply affect decisions (of entrepreneurs and consumers) and increased the level of employment and real economic output? The answer is quite negative.

    As for the unemployment, the rate of unemployment decreased much. But many people point that this is rather a result of aging of Japan (Active population started to decrease since 1995 and total population started to decrease since 2008). The total output (measured in real and nominal GDP) is still stagnating.

    The economic theory that was at the back of the First Arrow of Abenomics was much inspired by quantity theory of money. I wonder why Davidson admitted the similar proposition as one of pillars of his system.

    The main proposal to Lars Syll in my comment to his post “Arrow-Debreu and the Bourbaki illusion of rigour” was the suggestion that he may better contribute to economics when he points possible errors of heterodox economics. He could have pointed this flaw in Davidson’s economics, but he missed the chance. Of course, I admit, it was not as easy as now to do it.

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