What’s Wrong with Keynesian Economic Theory?

What’s Wrong with Keynesian Economic Theory?

Edited by Steven Kates

Possibly the strangest phenomenon in all of economics is the absence of a long tradition of criticism focused on Keynesian economic theory. Keynesian demand management has been at the centre of some of the worst economic outcomes in history, from the great stagflation of the 1970s to the lost decade and more in Japan following the expenditure program of the 1990s. And once again, following the Global Financial Crisis, it is incontrovertible that no stimulus program in any part of the world has been a success, each one having been abandoned as conditions deteriorated under the weight of public sector spending. This book brings together some of the most vocal critics of Keynesian economics. Each author attempts to explain what is wrong with Keynesian theory in ways that can be understood by those seeking guidance on where to turn for a more accurate explanation of the business cycle and on what to do when recessions occur.

Chapter 2: What the entrepreneurial problem reveals about Keynesian macroeconomics

Per L. Bylund

Subjects: economics and finance, austrian economics, history of economic thought, post-keynesian economics, teaching economics


The Keynesian story has no room for the entrepreneurial problem of value creation through production, and adding it makes it rather obvious that the Keynesian reasoning is backwards. Aggregate demand, the problem that is the starting point for the Keynesian theory, simply cannot arise in a real market; but this fact is not obvious because entrepreneurship is not to be found anywhere in the theory.Keynesian theory begins with an assumed general deficiency of demand – that is, a general glut – because consumers are unwilling and unable to effectively demand that which is produced and offered in the market. This effectively puts the cart before the horse because it assumes that consumers – primarily workers rather than entrepreneurs and capitalists – lack the wish to demand the products completed and that entrepreneurs will therefore even give up trying to find goods and services to try to sell.

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