A New Hope for a Dishonored Legacy


Edward Dunn

Date of Award

Spring 2020




Jan Kregel, Ph.D.


It is interesting to look at instances of progress which are reversed or forgotten. Such is the subject of this paper. Economics underwent a monumental transformation as a result of the work of John Maynard Keynes, who recognized the weaknesses of the dominant economic paradigm in the early 20th century. Keynes’s teachers, Alfred Marshall and Arthur Pigou, developed the ‘classical’ approach to employment, interest, and money, which Keynes believed were built on erroneous understandings of the economy. Through several publications including Treatise on Money and The General Theory of Employment, Interest, and Money, Keynes proposed several new ideas that reshaped our understanding of the macroeconomy. From effective demand to liquidity preference, Keynes put forth ideas which called into question much of the understanding of the economy up until that point. It becomes interesting to entertain the counterfactual of how things might have progressed had Keynes not died when he did. In any case, it became the mission of emerging economists to carry forth the legacy of Keynes and incorporate his ideas into policy. From the 1930s until the 1970s Keynesian economics dominated macroeconomic policy. Many economists thought we had moderated into a new era of macroeconomic policymaking in which the economy was simply a machine which could be fine-tuned. A series of policies were implemented that were ostensibly Keynesian, but were, in fact, merely the product of those who interpreted Keynes ideas and sought to synthesize them with prevailing Neoclassical theories. This work is associated with that of the ‘Bastard’ Keynesians, such as Paul Samuelson and John Hicks. As we will explore, the Neo-Keynesian school made several mistakes which had a longlasting impact on how Keynes’s ideas were viewed in the economic community. I would argue that much of Keynes’s work was meant to exist independently of —if not in contrast to — neoclassical economics. Therefore any attempt to synthesize the two approaches would be inappropriate. Even so, the Neo-Keynesians pushed onward and developed several tools which guided policy decisions, such as the IS-LM model and the Phillips Curve. These tools proved to be ineffective as the Neo-Keynesian school displayed an inability to deal with the economic issues of the day, such as stagflation in the 1970s. As a consequence, there was an overall loss of faith in ‘Keynesian’ economics, even though ‘Keynesian’ policies came to represent something other than what Keynes had originally put forth in his most seminal works. Thus, an ideological vacuum was created and Keynesianism was eclipsed by Monetarism, the resurgent neoclassical school championed by Milton Friedman. The Lucas Critique and the work of Milton Friedman fully disarmed the Keynesian school as faith in fiscal policy was replaced with faith in monetary policy. The quantity theory of money prevailed yet again, relying on the erroneous assumption that the supply of money is exogenous and could be manipulated by the central bank. Surely, it did not take long for economists to realize that this approach was, too, flawed. From austerity to an over-reliance on the market, Monetarism showed us that the work of Keynes should not be forgotten and should be interpreted appropriately, so as to honor the legacy of an economist whose ideas were only underdeveloped, not incorrect. As a response to Monetarism, Post-Keynesian economists sought to correctly interpret, formalize, and expand the work of Keynes so as to redeem the failure of the Neo-Keynesian school. Economists such as Basil Moore and Nicholas Kaldor helped formalize the theory of an endogenous money supply, effectively disarming the monetarist framework. Then, through the work of Hyman Minksy was the theory of liquidity preference revived and extended to understand the nature of economic stability. Thus, it is through the Post-Keynesian tradition that the work of Keynes has been extended and once again meaningfully applied to macroeconomic policy. In this paper I aim to show how the Neo-Keynesian school failed to honor the legacy of Keynes and how Modern Money Theory (MMT) has emerged as the dominant Post-Keynesian school providing a new hope for macroeconomic policy making. More importantly, I aim to show how much of MMT has been an act of reframing the original ideas of Keynes to get the attention that it deserves.

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