In the broad and dynamic world of economics, few names have had as much influence as John Maynard Keynes. His revolutionary ideas laid the groundwork for modern macroeconomic theory, particularly in how governments interact with economies during recessions and booms. Keynesian economics, centered on managing demand to prevent prolonged economic downturns, became the bedrock for much of 20th-century economic thought. But as the global economy evolved, so did critiques, adaptations, and alternatives to Keynes’ theories. One such response is Post-Keynesian Economics.
Post-Keynesian economics, an umbrella term for various theories influenced by but diverging from traditional Keynesian thought, takes a more radical stance in several areas. It explores deep issues about money, uncertainty, inequality, and the roles of institutions. The goal of this tutorial is to give you a comprehensive understanding of Post-Keynesian economics, how it compares to classical and neoclassical frameworks, and how it remains relevant today.
1. Foundations of Post-Keynesian Economics
Before diving into the specifics of Post-Keynesian economics, it’s important to understand the foundation upon which it is built. The term “Post-Keynesian” comes from economists who expanded on, modified, and, at times, critiqued Keynes’ work after his death. They argued that mainstream economics had overly simplified or misinterpreted some of Keynes’ most important insights.
Key Aspects of Post-Keynesian Thought:
- Demand-driven economies: While Keynesians believe in the significance of demand in determining output, Post-Keynesians are even more adamant about this idea. They emphasize that demand, not supply, is the most important determinant of economic activity.
- Endogenous money theory: Unlike neoclassical models where the central bank controls the money supply, Post-Keynesians argue that money is created within the economy, often through the banking system. Banks play a crucial role in creating money by issuing loans, and their behavior can drive economic fluctuations.
- Fundamental uncertainty: Post-Keynesian economists are particularly concerned with uncertainty. Keynes himself noted the difference between measurable risks (which can be calculated) and true uncertainty (where future events are unknowable). This is critical to Post-Keynesian thought because they argue that neoclassical economics incorrectly assumes that the future can be predicted through mathematical models.
- Non-neutrality of money: While many economic schools view money as neutral in the long run (that is, changes in the money supply only affect prices, not output), Post-Keynesians believe that money always matters. They emphasize that monetary policy can have real, long-term effects on output and employment.
2. Historical Context: Keynes and the Evolution of Post-Keynesianism
To fully grasp the importance of Post-Keynesian economics, we must start with the broader context in which it developed: the rise of Keynesianism and its eventual decline in popularity.
The Rise of Keynesian Economics
During the Great Depression in the 1930s, traditional economic thinking failed to offer solutions. Classical economists believed that markets were self-correcting, and government intervention would do more harm than good. Keynes challenged this view, arguing that in times of severe recession, aggregate demand (the total spending in the economy) can fall so much that only government intervention can boost economic activity. His landmark work, The General Theory of Employment, Interest, and Money (1936), became the cornerstone of what is now known as Keynesian economics.
Keynesian policies dominated much of the post-World War II economic landscape. Governments engaged in active fiscal policy, adjusting their spending and taxes to influence economic activity. This led to an era of sustained economic growth, especially in Western economies, with relatively low levels of unemployment.
The Decline of Keynesianism
However, in the 1970s, Keynesian economics faced a crisis. Stagflation—a period of high inflation combined with high unemployment—challenged the basic Keynesian framework. According to traditional Keynesian models, inflation and unemployment should have an inverse relationship (captured by the Phillips Curve). The failure to explain stagflation opened the door for neoclassical and monetarist thinkers, such as Milton Friedman, who argued for less government intervention and a focus on controlling inflation.
The Emergence of Post-Keynesianism
It was during this period of critique that Post-Keynesianism started to gain traction. Economists like Joan Robinson, Nicholas Kaldor, and Hyman Minsky criticized both traditional Keynesian and neoclassical approaches. They felt that the core insights of Keynes had been misunderstood or neglected and sought to build upon his original ideas.
Key Figures:
- Joan Robinson: A leading figure in the Cambridge School of economics, Robinson was critical of both neoclassical and orthodox Keynesian thought. She emphasized the role of power relations in the economy, especially between labor and capital.
- Nicholas Kaldor: Kaldor focused on the dynamic nature of economies and was a strong critic of equilibrium thinking in neoclassical economics. He developed models emphasizing the importance of increasing returns to scale and the role of effective demand.
- Hyman Minsky: Minsky is perhaps best known for his theories on financial instability. He argued that financial markets are inherently unstable and that economic crises are a natural outcome of capitalist systems, not an aberration.
3. Core Theories of Post-Keynesian Economics
Now that we have an understanding of the historical background, let’s dive deeper into some of the core theories of Post-Keynesian economics.
3.1. Demand-driven Growth
A central theme of Post-Keynesian economics is the idea that economic growth is primarily driven by demand. This contrasts with neoclassical models that focus on supply-side factors, such as technological progress and capital accumulation. Post-Keynesians argue that without sufficient demand, the economy will fail to reach its full potential, no matter how much technology or capital is available.
3.2. The Role of Institutions
Unlike neoclassical economics, which tends to treat markets as self-regulating systems, Post-Keynesians place a strong emphasis on the role of institutions. Institutions, such as governments, banks, and trade unions, play a critical role in shaping economic outcomes. These institutions are not neutral; they can reinforce existing power dynamics or push for more equitable distributions of wealth.
3.3. The Theory of Endogenous Money
One of the most important contributions of Post-Keynesian thought is the theory of endogenous money. In contrast to the neoclassical idea that the central bank controls the money supply, Post-Keynesians argue that money is created within the economy, primarily through bank lending. When banks issue loans, they create deposits, which increases the money supply. This means that the money supply is determined by the demand for credit, not by central bank policy.
3.4. Financial Instability Hypothesis
Perhaps the most famous Post-Keynesian contribution to economic theory is Hyman Minsky’s Financial Instability Hypothesis. Minsky argued that financial markets are inherently unstable and that booms and busts are a natural part of the capitalist system. During periods of economic expansion, financial institutions become increasingly willing to take on risk. This eventually leads to speculative bubbles, which can burst, leading to financial crises.
Minsky’s work gained renewed attention after the 2008 financial crisis, which many saw as a confirmation of his theories.
4. Comparing Post-Keynesian Economics to Other Schools
Post-Keynesian economics is often contrasted with neoclassical and Keynesian schools, but it also has significant differences with other heterodox schools like Marxism or institutional economics. Let’s compare some of these.
4.1. Post-Keynesian vs. Neoclassical Economics
- Rationality and equilibrium: Neoclassical economics relies heavily on the assumption that individuals act rationally and that markets tend toward equilibrium. In contrast, Post-Keynesians argue that individuals often act irrationally, especially under conditions of uncertainty, and that economies are always in a state of flux.
- Role of government: Neoclassicals often advocate for minimal government intervention, believing that markets are efficient and self-correcting. Post-Keynesians argue that markets can fail, and that government intervention is necessary to ensure full employment and prevent crises.
4.2. Post-Keynesian vs. Keynesian Economics
While Post-Keynesians build on Keynes’ ideas, there are important distinctions. Traditional Keynesians focus on short-term economic stabilization, usually through fiscal and monetary policy. Post-Keynesians, on the other hand, are more concerned with long-term issues such as inequality, power dynamics, and structural changes in the economy.
Post-Keynesians are also more critical of the use of mathematical models, arguing that they often fail to capture the inherent uncertainty and instability of real-world economies.
5. Criticisms of Post-Keynesian Economics
Like any school of thought, Post-Keynesian economics has faced criticisms. Some argue that its rejection of formal models and mathematical rigor makes it less scientific than other approaches. Others believe that its focus on uncertainty and instability makes it less applicable in times of economic stability.
Moreover, critics argue that Post-Keynesians have not provided enough practical policy solutions, particularly in the realm of monetary policy. While they have been adept at critiquing mainstream economics, some suggest they have not done enough to develop alternative models for guiding economic policy.
6. Relevance Today: Post-Keynesian Economics in the 21st Century
Despite these criticisms, Post-Keynesian economics has enjoyed a resurgence, especially in the wake of the 2008 financial crisis. The crisis highlighted the instability of financial markets and the failure of traditional models to predict or prevent such a collapse.
In response, Post-Keynesian economists have argued for stronger financial regulation, policies to promote full employment, and a rethinking of central banking practices. They have also called for more attention to issues of inequality, arguing that an unequal distribution of wealth can lead to economic instability and slower growth.
Moreover, in a world facing challenges like climate change, Post-Keynesians have advocated for a “green” new deal, where governments play an active role in transitioning to a sustainable economy. This is aligned with their belief in the importance of government intervention and the role of institutions in shaping economic outcomes.
Conclusion
Post-Keynesian economics is a rich and evolving field that challenges many of the assumptions of both neoclassical and traditional Keynesian economics. By emphasizing demand-driven growth, the role of institutions, the importance of money and finance, and the inherent uncertainty of economic life, Post-Keynesians offer a compelling alternative to mainstream economic thinking.
In today’s rapidly changing world, with rising inequality, increasing financial instability, and looming environmental challenges, Post-Keynesian economics provides important insights and tools for understanding and addressing these complex issues. Whether or not you agree with all of its conclusions, Post-Keynesian thought remains a crucial part of the ongoing debate about how best to manage modern economies.