The recent decisions to retain the ‘Bush tax cuts’ in the United States and to withdraw the trillion-dollar-plus expenditure bill from the American Senate before it was even put to a vote are a red letter moment in the life of Keynesian economics. So far as policy goes, Keynesian economics, born with the publication of Keynes’s General Theory in 1936, is now for all practical purposes dead.
The same thoughts might now accompany the decision by the British government to cut its own expenditures even in the midst of recessionary times. Where is there a textbook in the world that would advise a government to do that? Yet it is clearly what needs to be done.
The very idea of a Keynesian stimulus to propel an economy out of recession is now so discredited it may not be for another forty years - that is, it may not be until the passing of this entire generation of policymakers - that such policies will ever be on the agenda again.
I must mention, however, the one problem with this hopeful scenario. It is that we are almost certain to continue to teach Keynesian economics to our students. The model of expenditure as the basis for growth is found in nearly every macroeconomics text and is taught to virtually every student of economics.
No one’s education as an economist is complete without having come to terms with aggregate demand and C+I+G. If you, the reader, are unaware of what these letters mean, you have at least been spared the mis-education in economics that has been provided to just about everyone else.
These models, in spite of everything we have gone through, are being taught even now to economics students everywhere. Amongst economists, for most of the profession it is all they know. It is unlikely they would even know where to begin to find something else even assuming it occurred to them to look.
But as it happens, there already exists a completely thought through theory of the cycle that incorporates every feature of a theory of recession and unemployment one could want. If we are going to make economics into a useful study, we will have to resurrect and then redevelop for our circumstances today the pre-Keynesian theory of the cycle that before 1936 had been the mainstream.
Dr Steven Kates will be speaking on ‘The Basic Axioms and Fundamental Principles of a Free Market Economy’at the IEA on 18 January 2011. Click here for details of the event.