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 5: Cycles and slumps in an overly aggregated theoretical framework

Roger W. Garrison

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


Keynesian theory is a set of mutually reinforcing but jointly questionable propositions purporting to show how, in a market economy, a few excessively broad macroeconomic aggregates play off against one another. The writing style of TheGeneral Theory,coupled with its poor organization and seeming conflict with Keynes’s earlier writings, has subjected academic economists to years of conflicting interpretations of Keynes’s message. Meanwhile, policymakers, seeing the short-run advantage to fiscal and monetary stimulation, have been quick to adopt Keynesian thinking. And finally, the lessthansatisfactory performance of the so-called mixed economies has allowed for differing opinions among the electorate about whether the Keynesianizedeconomy’s lackluster performance has been bolstered or hamperedby Keynesian policies.

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