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 11: What’s wrong with Keynesian economics?

David Simpson

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

Abstract

The failure of Keynesian economics is part of a broader picture of the failure of fiscal and monetary policymaking as a whole. Central banks and treasuries have been unable to deliver that improvement in the stability of output and price levels that had been hoped for. It is simply the problem of the distribution of knowledge. Centralized fiscal and monetary organs of government lack the information required to manipulate successfully aggregate demand in a market economy. Accordingly, we shall have to look again at arrangements consistent with the dispersed nature of economic information:for money, a consideration of commodity reserve systems, or perhaps competing currencies;for fiscal policies, a return to the principle of balanced budgets.

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