Chapter 18: Methodological Issues in Keynesian Macroeconomics
Roger E. Backhouse and Bradley W. Bateman 18.1 INTRODUCTION The crisis of 2007–8 brought the name of John Maynard Keynes back into public discourse. Faced with a real prospect of a slide into a depression comparable with the 1930s, Keynesian ideas helped to provide an explanation of what had happened, a reason for taking action to expand demand, and a way to legitimate the budget deficits that arose as a result of propping up a banking system that was on the brink of collapse. Clearly, because of his role as Chairman of the Federal Reserve System (the Fed) from 1987 to 2006, in fostering the ideology that led up to the crisis, the paradigmatic statement of this position will be Alan Greenspan’s confession, testifying before a House of Representatives Committee on 23 October 2008, that he had found a flaw in his ideology: that his belief that free competitive markets were the best way to organize economies could not be sustained. However, a fuller statement of such a view can be found in the writing of another economist whose view was changed as a result of the crisis, Richard Posner: Some conservatives believe that the depression is the result of unwise government policies. I believe it is a market failure. The government’s myopia, passivity, and blunders played a critical role in allowing the recession to balloon into a depression . . . but without any government regulation we would still, in all likelihood, be in a depression. We are learning from it...
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