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 3: A critique of two key concepts in Keynesian textbooks

Tim Congdon

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


The purpose of this chapteris to discredit Keynesian income–expenditure analysis and the concept of the multiplier embedded within it. These two key concepts of the Keynesian textbook mainstream omit variables critical to the determination of macroeconomic outcomes. The omissions are so serious that the income–expenditure circular flow is incomplete and misleading if it pretends to constitute a policy-making framework. Critically, when organized in its familiar textbook form, income–expenditure analysis has no room for either the banking system or the quantity of money. But changes in the quantity of money have major impacts on asset portfolios and expenditure decisions. These changes must be integrated in all discussions of the macroeconomic conjuncture if such discussions are to make any claim to real-world plausibility.

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