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 8: The problem of Keynesian aggregation

Arnold Kling

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


Keynesian economists go off track by treating the economy as if it were one gigantic business producing a single output called GDP using a known technology. This leads Keynesians to propose misguided theories of unemployment while ruling out by assumption the main likely source of unemployment. In a complex economy, unemployment is likely due to the time and cost that it takes for entrepreneurs to discover new products, processes, and trading patterns when existing patterns become unprofitable.

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