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 13: The conclusive fault line in Keynesian economics

Peter Smith

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


The key to unequivocally undoing Keynesian economics is via the price system. Aggregation leads Keynesian economics down the flawed path of giving primacy to demand instead of to production. In turn, this shifts its focus away from the role of prices in determining the makeup of production and in guiding the economy out of trouble. The damage stimulus expenditure – the epitome of Keynesian policy – inevitably and conclusively does in retarding recovery, by interfering with price signals, is thus buried out of sight.

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