Alternative Perspectives on the Global Financial Crisis
Edited by Steven Kates
Chapter 7: The Crisis in Economic Theory: The Dead End of Keynesian Economics
7. The crisis in economic theory: the dead end of Keynesian economics Steven Kates The Great Depression began, in most places, with the share market crash in 1929 and by the end of 1933 was already receding into history. In 1936, well after the Great Depression had reached its lowest point and recovery had begun, a book was published that remains to this day the most influential economics treatise written during the whole of the twentieth century. The book was The General Theory of Employment, Interest and Money. The author was John Maynard Keynes. And his book overturned a tradition in economic thought that had already by then stretched back for more than one hundred years. The dates are significant. The economics that Keynes’s writings had overturned is today called ‘classical theory’,1 yet it was the application of this self-same classical theory that had brought the Great Depression to its end everywhere but in the USA, where something else was tried instead. And at the centre of classical thought was a proposition that Keynes made it his ambition to see disappear absolutely from within economics. It was an ambition in which he was wildly successful. Following a lead set by Keynes, this proposition is now almost invariably referred to as Say’s Law.2 It is a proposition that since 1936 every economist has been explicitly taught to reject as the most certain obstacle to clear thinking and sound policy. Economists have thus been taught to ignore the one principle most...
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