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 6: The problems with Keynesianism: a view from Austrian capital theory

Steven Horwitz

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


Before the advent of Keynesianism, most recessions were short-lived as producers were left free to shuffle the jigsaw pieces into better combinations. It is the very lack of trust in markets, and the misguided trust in the political process, that Keynesianism produced as a result of its theoretical errors with respect to capital that now leads us to think stimulus spending is necessary and effective. The approach of Hayek and the Austrians give us good reasons to think otherwise. The evidence would seem to be in their favor.

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