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P3: Impact of Keynes

from Asad Zaman

This 1000 word article is the third in a series of posts on Re-Reading Keynes. It traces the impact of Keynesian theories on the 20th century, as necessary background knowledge for a contextual and historically situated study of Keynes. It was published in Express Tribune on 4 Nov 2016.

The Global Financial Crisis (GFC) has created awareness of the great gap between academic models and reality. IMF Chief Economist Olivier Blanchard said that modern DSGE macroeconomic models currently used for policy decisions are based on assumptions which are profoundly at odds with what we know about consumers and firms. More than seven different schools of macroeconomic thought contend with each other, without coming to agreement on any fundamental issue. This bears a striking resemblance to the post-Depression era when Keynes set out to resolve the “deep divergences of opinion between fellow economists which have for the time being almost destroyed the practical influence of economic theory.”

Likewise, today, the inability of mainstream economists to predict, understand, explain, or find remedies for the Global Financial Crisis, has deeply damaged the reputation of economists and economic theories. Recently, World Bank Chief Economist Paul Romer stated that for more than three decades, macroeconomics has gone backwards. Since modern macroeconomics bears a strong resemblance to pre-Keynesian theories, Keynesian theories have fresh relevance, as described below.   read more

  1. Neville
    November 25, 2016 at 12:31 pm

    Economic policy has to be relevant to the underlying fundamentals in operation at the time. For example, what were the Debt to GDP ratios for private debt in the 1930’s compared to now? The high war debt was to be repaid over many decades (100 years). The consumer buying power of the world at present is low and the supply of goods is over capacity to meet demand in the developed countries. Most of the money printed therefore has not found its way to the economy, but to the financial markets that are at high levels. Also, money today is not used only as a means of exchange but largely through various financial instruments as another large constituent of GDP. The emphasis should therefore be on development economics to bring more consumers to the market and on the write off of bad debts that will neve be repaid. Keynes therefore is not relevant to first world problems at present, but certainly was in the post war period with high slack in the economies of the developed world.

    • November 25, 2016 at 5:44 pm

      Don’t agree, Neville. There has already been too much development in First World countries, which are capable of producing far more than consumers need. The emphasis should therefore be on infrastructure regeneration, especially on the critical biological infrastructure of natural regeneration. Credit incomes provided to help make this possible will have the side effect of taking up some of the REAL “high slack” created by the vicious circle of investment of excessive profits in profit-seeking, manpower saving technology; they can’t buy what we haven’t already got. Commercially unnecessary investment should be in training and technology to facilitate the infrastructure regeneration.

      In retrospect, it is obvious Britain got its priorities reversed in the 1960’s, when it destroyed rather than improved the efficiency of its urban tramways and inter-urban railways to promote mass car production, and efficiencies of scale in that by centralisation: thereby to justify even more environmentally inefficient new roads – from the centre to the periphery. Having hidden the real and cultivated fashionable demand, the harvest has been a long time a-growing, but now we find its centralisation traffic-jamming even rail transport and multiplying the costs of long-overdue renovation by mass traffic hindering the work and the work disrupting mass traffic.

      I just heard the next head of the EU, the Prime Minister of Malta, commenting on Britain’s chances in its Brexit negotiations. He was astonished that our Civil Service hadn’t had the possibilities sorted a long time ago. By our Civil Service, of course, he meant the bits of it politicians come in contact with: its pampered, predominantly public-school, Oxbridge and American, classically and neo-classically trained Administrative Class, which managed to forestall implementation of Lord Fulton’s report of 1967 until the arrival of Thatcher, who eliminated its inconvenience by selling off Britain’s basic science.

      Need for a little editorial correction, Asad. There is an ambiguity where you say “In the aftermath of the Great Depression, economic misery was a major factor which led to the Russian Revolution and the rise of Hitler in Germany”. Economic misery was indeed a major factor which led to the Russian Revolution, but this was decades before, not in the aftermath, of the Great Depression.

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