Post-Keynesian Economics - Introduction

Introduction

The term post-Keynesian was first used to refer to a distinct school of economic thought by Eichner and Kregel (1975) and by the establishment of the Journal of Post Keynesian Economics in 1978. Prior to 1975, and occasionally in more recent work, Post Keynesian could simply mean economics carried out after 1936, the date of Keynes's The General Theory. Post-Keynesian economists are united in maintaining that Keynes's theory is seriously misrepresented by the two other principal Keynesian schools: neo-Keynesian economics which was orthodox in the 1950s and 60s – and by New Keynesian economics, which together with various strands of neoclassical economics has been dominant in mainstream macroeconomics since the 1980s. Post-Keynesian economics can be seen as an attempt to rebuild economic theory in the light of Keynes's ideas and insights. However even in the early years Post Keynesians such as Joan Robinson sought to distance themselves from Keynes himself and much current post-Keynesian thought cannot be found in Keynes. Some Post Keynesians took an even more progressive view than Keynes with greater emphases on worker friendly policies and re-distribution. Robinson, Paul Davidson and Hyman Minsky were notable for emphasising the effects on the economy of the practical differences between different types of investments in contrast to Keynes more abstract treatment.

The theoretical foundation of post-Keynesian economics is the principle of effective demand, that demand matters in the long as well as the short run, so that a competitive market economy has no natural or automatic tendency towards full employment. Contrary to the views of New Keynesian economists working in the neo-classical tradition, Post-Keynesians do not accept that the theoretical basis of the market failure to provide full employment is rigid or sticky prices or wages. Post-Keynesians typically reject the IS/LM model of John Hicks, which was very influential in neo-Keynesian economics.

The positive contribution of post-Keynesian economics has extended beyond the theory of aggregate employment to theories of income distribution, growth, trade and development in which money demand plays a key role, whereas in neoclassical economics these are determined by the 'real' forces of technology, preferences and endowment. In the field of monetary theory, post-Keynesian economists were among the first to emphasise that the money supply responds to the demand for bank credit, so that the central bank can choose either the quantity of money or the interest rate but not both at the same time. This view has largely been incorporated into monetary policy, which now targets the interest rate as an instrument, rather than the quantity of money. In the field of finance, Hyman Minsky put forward a theory of financial crisis based on financial fragility, which has recently received renewed attention.