Keynesian Revolution

The Keynesian Revolution was a fundamental reworking of economic theory concerning the factors determining employment levels in the overall economy. The revolution was set against the then orthodox economic framework: neoclassical economics.

See also: Keynesian economics.

Quotes

• There were many ways in which the Keynesian revolution could have developed. It could have extended to core theory and connected to Robertson's and Hayek's work, but it did not, in large part because of the interest of the Keynesian revolutionaries in policy. Complex core theory has little to say about policy; surface theory has much to say. Thus much of the early work in Keynesian economics involved the development of policy-related surface theory. A key place for this development was the Harvard seminar centered around Alvin Hansen, who had come from the University of Minnesota as the first Littauer Professor and who became the one tenured Harvard faculty member accepting Keynesian ideas. With Hansen the young Keynesians had a powerful faculty ally who, like them, was primarily interested in policy, not complex theory. Thus, like a river, the Keynesian revolution followed the path of least resistance, and it was this area of theoretical policy that constituted that path.
  • David C. Colander and Christian A. Johnson, The Coming of Keynesianism to America: Conversations with the Founders of Keynesian Economics (1996), Introduction

• As was the case with the Keynesian theoretical revolution, the Keynesian policy revolution in the United States did not need to be tied to The General Theory. It could have occurred without The General Theory, and much of it ― specifically the emphasis given to monetary and fiscal policy ― was as much a C.E.D. revolution as it was a Keyneisan revolution. Our interviews support this view, and it explains an interesting event recounted in a story about a seminar at which Keynes repudiated what was then thought to be Keynesian economics. This Keynesian policy revolution could be garnered from the Treatise as easily as from The General Theory, and indeed was.
  Ironically, this policy revolution, while in many ways the least revolutionary aspect of the Keynesian revolution, was the most contentious at the time. People care about policy in ways they do not care about theories or textbooks. That it took place in the 1930s made this policy revolution all the more contentious.
  • David C. Colander and Christian A. Johnson, The Coming of Keynesianism to America: Conversations with the Founders of Keynesian Economics (1996), Introduction

• The Keynesian Revolution is one of the most remarkable episodes in the entire history of economic thought; certainly never before and perhaps never since has the economics profession been won over so rapidly and so massively to a new economic theory.
  • Mark Blaug, "Second Thoughts on the Keynesian Revolution", History of Political Economy, Summer 1991.

• Contrary to what is widely believed, the crucial result of the 'Keynesian Revolution' is the general acceptance of a factual assumption and, what is more, of an assumption which becomes true as a result of its being generally accepted. The Keynesian theory, as it has developed during the last twenty years, has become a formal apparatus which may or may not be more convenient to deal with the facts than classical monetary theory; this is not our concern here. The decisive assumption on which Keynes's original argument rested and which has since ruled policy is that it is impossible ever to reduce the money wages of a substantial group of workers without causing extensive unemployment. The conclusion which Lord Keynes drew from this, and which the whole of his theoretical system was intended to justify, was that since money wages can in practice not be lowered, the adjustment necessary, whenever wages have become too high to allow 'full employment', must be effected by the devious process of reducing the value of money. A society which accepts this is bound for a continuous process of inflation.
  • Friedrich A. von Hayek, "Inflation Resulting from Downward Inflexibility of Wages," §15 of "Wage Rigidities and Inflation," ch. V of A Tiger by the Tail: The Keynesian Legacy of Inflation, compiled by Sudha R. Shenoy, 3rd. ed. (published jointly by The Institute of Economic Affairs and the Ludwig von Mises Institute, 2009), p. 68; essay originally published in Studies in Philosophy, Politics and Economics (Routledge, 1967), p. 295.

• Though with its reliance on apparently measurable magnitudes it appears at first more scientific than the older microtheory, it seems to me that it has achieved this pseudo-exactness at the price of disregarding the relationships which really govern the economic system. Even though the schemata of micro-economics do not claim to achieve those quantitative predictions at which the ambitions of macro-economics aim, I believe by learning to content ourselves with the more modest aims of the former, we shall gain more insight into at least the principle on which the complex order of economic life operates, than by the artificial simplification necessary for macro-theory which tends to conceal nearly all that really matters. I venture to predict that once this problem of method is settled, the 'Keynesian Revolution' will appear as an episode during which erroneous conceptions of the appropriate scientific method led to the temporary obliteration of many important insights which we had already achieved and which we shall then have painfully to regain.
  • Friedrich A. von Hayek, "Personal Recollections of Keynes," §18 of "Main Themes Restated," ch. VI of A Tiger by the Tail: The Keynesian Legacy of Inflation, compiled by Sudha R. Shenoy, 3rd. ed. (published jointly by The Institute of Economic Affairs and the Ludwig von Mises Institute, 2009), pp. 118–119; essay originally published as "Personal Recollections of Keynes & the 'Keynesian Revolution'" in The Oriental Economist (1966).

• I do not consider the term "Keynesian revolution" appropriate. [...] It seemed to be a more political event than a scientific event. The Depression discredited the whole profession, people were alarmed about it. The General Theory is a political response to the Depression and to the discrediting of conventional economics that resulted from it.

  But I should acknowledge that Keynes left an opening for younger econometricians and mathematical economists to take over and to write down models. When their senior colleagues criticized their models, they could say, "Well, these are Keynesian models." And since the older people still hadn't caught up with Keynes, that shut them up. So people like Klein and Tinbergen took over because they had the exciting new methods.

  • Robert E. Lucas, in Conversations with Economists (1983) by Arjo Klamer.

• John Maynard Keynes, late economic adviser to the British Government, is the new prophet of inflationism. The "Keynesian Revolution" consisted in the fact that he openly espoused the doctrines of Silvio Gesell. As the foremost of the British Gesellians, Lord Keynes adopted also the peculiar messianic jargon of inflationist literature and introduced it into official documents. Credit expansion, says the Paper of the British Experts of April 8, 1943, performs the "miracle . . . of turning a stone into bread." The author of this document was, of course, Keynes. Great Britain has indeed traveled a long way to this statement from Hume's and Mill's views on miracles.
  • Ludwig von Mises, §I of "Stones into Bread, the Keynesian Miracle," ch. 4 of Planning for Freedom and twelve other essays and addresses, Memorial Edition (3rd), (South Holland, Illinois: Libertarian Press, 1952, 1962, 1974; essay originally published in Plain Talk (March 1948)), p. 51.

• The great economists were harbingers of new ideas. The economic policies they recommended were at variance with the policies practiced by contemporary governments and political parties. As a rule many years, even decades, passed before public opinion accepted the new ideas as propagated by the economists, and before the required corresponding changes in policies were effected.

  It was different with the "new economics" of Lord Keynes. The policies he advocated were precisely those which almost all governments, including the British, had already adopted many years before his "General Theory" was published. Keynes was not an innovator and champion of new methods of managing economic affairs. His contribution consisted rather in providing an apparent justification for the policies which were popular with those in power in spite of the fact that all economists viewed them as disastrous. His achievement was a rationalization of the policies already practiced. He was not a "revolutionary," as some of his adepts called him. The "Keynesian revolution" took place long before Keynes approved of it and fabricated a pseudo-scientific justification for it. What he really did was to write an apology for the prevailing policies of governments.

  This explains the quick success of his book. It was greeted enthusiastically by the governments and the ruling political parties. Especially enraptured were a new type of intellectuals, the "government economists." They had had a bad conscience. They were aware of the fact that they were carrying out policies which all economists condemned as contrary to purpose and disastrous. Now they felt relieved. The "new economics" reestablished their moral equilibrium. Today they are no longer ashamed of being the handymen of bad policies. They glorify themselves. They are the prophets of the new creed.

  • Ludwig von Mises, §II of "Lord Keynes and Say's Law," ch. 5 of Planning for Freedom and twelve other essays and addresses, Memorial Edition (3rd), (South Holland, Illinois: Libertarian Press, 1952, 1962, 1974; essay originally published in The Freeman (30 October 1950)), pp. 69–70.

• I think that Keynes was certainly a good example of a new paradigm. His work is possibly the best example of a case for which I think Kuhn's theory fits as well as it can in the domain of the social sciences. In a fairly short period of time, Keynes gave a new way of looking at the economy, a way which was widely accepted, at least by the younger generation.
  • Franco Modigliani, in Conversations with Economists (1983) by Arjo Klamer.

• Work by economists reexamining the so-called Keynes-versus-the-classics debate has led to another debate, one that might be termed the Keynes-and-the-Keynesians debate. Economists refer to both Keynes's General Theory and the ensuing debates as the Keynesian Revolution. The word revolution implies a radical break with previous tradition. Early work on this revolution dealt with what Keynes was really saying and with how much and where it differed in general terms from what his predecessors had said. Interest then shifted to what Keynes's predecessors really said: was there truly a "classical economics" or was this simply a straw man to make Keynes's writings look significant.
  • Gerald P. O'Driscoll, Economics as a Coordination Problem: The Contributions of Friedrich A. Hayek (1977), Chap. 1 : The Controversies of the 1920s, p. 3.

• If liberalism's core doctrine is that, given institutional adherence to the rights of life, liberty, and property, civil society can be counted on by and large to run itself, and if the showcase example in liberalism's brief is the undirected market economy's capacity to function satisfactorily, then the "Keynesian Revolution" signaled the abandonment of liberalism.
  • Ralph Raico, "Was Keynes a Liberal?," The Independent Review 13, no. 2 (Fall 2008), p. 196.

• The sum and substance of the "Keynesian Revolution" was the thesis that there can be an unemployment equilibrium on the free market. As we have seen, the only sense in which this is true was known years before Keynes: that widespread union maintenance of excessively high wage rates will cause unemployment.
  • Murray N. Rothbard, "Social Income, Expenditures, and Unemployment," §1 of "Hoarding and the Keynesian System," §F of "The Demand for Money," §5 of "Money and its Purchasing Power," ch. 11 of Man, Economy, and State: A Treatise on Economic Principles (orig. 1962), contained in Man, Economy, and State with Power and Market, Scholars Edition (2nd ed.) (Auburn, AL: The Ludwig von Mises Institute: 2004, 2009), p. 783.

• During the early 1930s, there was a great deal of interest, in the United States and Great Britain, in Mises's theory of the trade cycle, an interest unfortunately nipped in the bud by the excitement surrounding the "Keynesian Revolution."
  • Murray N. Rothbard, "Problems in the Austrian theory of the trade cycle," §7 of "The Positive Theory of the Cycle," ch. 1 of "Business Cycle Theory," pt. 1 of America's Great Depression, 5th ed. (Auburn, AL: The Ludwig von Mises Institute, 2000; orig. 1963), p. 32.

• Keynes was scarcely a "revolutionary" in any real sense. He possessed the tactical wit to dress up ancient statist and inflationist fallacies with modern, pseudoscientific jargon, making them appear to be the latest findings of economic science. Keynes was thereby able to ride the tidal wave of statism and socialism, of managed and planning economies. Keynes eliminated economic theory's ancient role as spoilsport for inflationist and statist schemes, leading a new generation of economists on to academic power and to political pelf and privilege.
  • Murray N. Rothbard, "Keynes, the Man," ch. 11 in Mark Skousen, ed., Dissent on Keynes: A Critical Appraisal of Keynesian Economics (New York, N. Y.: Praeger, 1992), pp. 179, 183–184, 185, 186–187, 194.

• The Keynesian revolution, led by Alvin Hansen, Seymour Harris, Abba P. Lerner, and Paul Samuelson, among others, excited the minds of a new generation of economists for several reasons. First, Keynes's middle-of-the-road policies were viewed, not as a threat to free-market capitalism, but as its savior. According to Marxism, which was growing in influence in the 1930s, capitalism was inherently unstable and would be characterized by periodic crises and depressions. Keynes's allegation that government could expand or contract aggregate demand as conditions required seemed to eliminate the apparent cycle in capitalism without eliminating capitalism itself. A laissez-faire policy of economic freedom could be preserved on a microeconomic level. Thus, Keynes changed the dismal science to the optimists' club: man could be the master of his economic destiny.
  • Mark Skousen, "This Trumpet Gives an Uncertain Sound: The Free-Market Response to Keynesian Economics," ch. 1 in Mark Skousen, ed., Dissent on Keynes: A Critical Appraisal of Keynesian Economics (New York, N. Y.: Praeger, 1992).

• In this extended survey, we have witnessed a kaleidoscopic variety of opinions and reactions to the Keynesian revolution. Unfortunately, no immediate consensus among free-market advocates arose in response to the challenge of a new and dangerous macroeconomics that grew out of the Great Depression. Some dismissed Keynes prematurely; others considered Keynes a major threat; still others treated his theory as a second-best solution to the vagaries of laissez-faire capitalism. Many were mesmerized by Keynes's new bag of techniques, which they could not always claim fully to understand. Because no united front developed to counter the Keynesian revolution, the most industrialized nations of the world languished under the spell of its magic.
  • Mark Skousen, "This Trumpet Gives an Uncertain Sound: The Free-Market Response to Keynesian Economics," ch. 1 in Mark Skousen, ed., Dissent on Keynes: A Critical Appraisal of Keynesian Economics (New York, N. Y.: Praeger, 1992).