Is Keynesian Economics Dead?

Since capitalism's beginnings, the market economy has been subject to fluctuations, to booms and busts. Capitalist economies are not self-adjusting: market forces might eventually restore an economy of full employment, as Keynes said, but in the long run we are all dead. Keynes proposed clear prescriptions for hard economic times: expansionary monetary and fiscal policy. He thought fiscal policy particularly important in situations where monetary policy was likely to be ineffective.

In advanced economies, Keynesian economics is the bread and butter of economic forecasting and policy making. Expansions are longer and downturns shallower and shorter, because Keynesian prescriptions work. Of course, theory and practice have been refined. The theory of asymmetric information provides much of the micro-foundations for modern macroeconomics. But some of the simplest and most important precepts, formulated well before these micro-foundations were well established--such as the fact that temporary income tax cuts are unlikely to be effective, while temporary investment tax credits can be extremely powerful--are as valid today as ever.

We learn from economic policy failures as well as from successes. When the IMF forced large expenditure cuts in East Asia, output in those countries fell--just as Keynesian theory predicted.

To continue reading, please log in or enter your email address.

To access our archive, please log in or register now and read two articles from our archive every month for free. For unlimited access to our archive, as well as to the unrivaled analysis of PS On Point, subscribe now.

required

By proceeding, you agree to our Terms of Service and Privacy Policy, which describes the personal data we collect and how we use it.

Log in

http://prosyn.org/fNuoTtu;

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated cookie policy and privacy policy.