Keynesian Revolution - AbsoluteAstronomy.com

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

Neoclassical economics

Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...

.

The early stage of the Keynesian Revolution took place in the years following the publication of Keynes's General Theory in 1936. It saw the neoclassical understanding of employment

Employment

Employment is a contract between two parties, one being the employer and the other being the employee. An employee may be defined as:- Employee :...

replaced with Keynes's view that demand, and not supply, is the driving factor determining levels of employment. This provided Keynes and his supporters with a theoretical basis to argue that governments should intervene to alleviate severe unemployment. With Keynes unable to take much part in theoretical debate after 1937, a process swiftly got under way to reconcile his work with the old system to form Neo-Keynesian economics

Neo-Keynesian Economics

Neo-Keynesian economics is a school of macroeconomic thought that was developed in the post-war period from the writings of John Maynard Keynes. A group of economists , attempted to interpret and formalize Keynes' writings, and to synthesize it with the neo-classical models of economics...

, a mixture of neoclassical economics and Keynesian economics

Keynesian economics

Keynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...

. The process of mixing these schools is referred to as the neoclassical synthesis

Neoclassical synthesis

Neoclassical synthesis is a postwar academic movement in economics that attempts to absorb the macroeconomic thought of John Maynard Keynes into the thought of neoclassical economics...

, and Neo-Keynesian economics can be summarized as "Keynesian in macroeconomics, neoclassical in microeconomics".

Summary

The revolution was primarily a change in mainstream economic views and in providing a unified framework – many of the ideas and policy prescriptions advocated by Keynes had ad hoc precursors in the underconsumptionist school of 19th century economics, and some forms of government stimulus were practiced in 1930s United States without the intellectual framework of Keynesianism.

The central policy change was the proposition that government action could change the level of unemployment

Unemployment

Unemployment , as defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks...

, via deficit spending

Deficit spending

Deficit spending is the amount by which a government, private company, or individual's spending exceeds income over a particular period of time, also called simply "deficit," or "budget deficit," the opposite of budget surplus....

(fiscal stimulus) such as by public works

Public works

Public works are a broad category of projects, financed and constructed by the government, for recreational, employment, and health and safety uses in the greater community...

or tax cuts, and changes in interest rates and money supply (monetary policy

Monetary policy

Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...

) – the prevailing orthodoxy prior to that point was the Treasury view

Treasury View

In macroeconomics, particularly in the history of economic thought, the Treasury view is the assertion that fiscal policy has no effect on the total amount of economic activity and unemployment, even during times of economic recession. This view was most famously advanced in the 1930s by the staff...

that government action could not change the level of unemployment.

The driving force was the economic crisis of the Great Depression

Great Depression

The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...

and the 1936 publication of The General Theory of Employment, Interest and Money by John Maynard Keynes

John Maynard Keynes

John Maynard Keynes, Baron Keynes of Tilton, CB FBA , was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of governments...

, which was then reworked into a neoclassical framework by John Hicks

John Hicks

Sir John Richard Hicks was a British economist and one of the most important and influential economists of the twentieth century. The most familiar of his many contributions in the field of economics were his statement of consumer demand theory in microeconomics, and the IS/LM model , which...

, particularly the IS/LM model

IS/LM model

The IS/LM model is a macroeconomic tool that demonstrates the relationship between interest rates and real output in the goods and services market and the money market...

of 1936/37. This synthesis was then popularized in American academia in the very influential textbook Economics
Economics (textbook)
Economics is an influential introductory textbook by American economists Paul Samuelson and William Nordhaus. It was first published in 1948, and has appeared in nineteen different editions, the most recent in 2010. It was the best selling economics textbook for many decades and still remains...

by Paul Samuelson

Paul Samuelson

Paul Anthony Samuelson was an American economist, and the first American to win the Nobel Memorial Prize in Economic Sciences. The Swedish Royal Academies stated, when awarding the prize, that he "has done more than any other contemporary economist to raise the level of scientific analysis in...

from 1948 onward, and came to dominate post-World War II economic thinking in the United States. The term "Keynesian Revolution" itself was used in the 1947 text The Keynesian Revolution by American economist Lawrence Klein

Lawrence Klein

Lawrence Robert Klein is an American economist. For his work in creating computer models to forecast economic trends in the field of econometrics at the Wharton School of the University of Pennsylvania, he was awarded the Nobel Memorial Prize in Economic Sciences in 1980...

. In the United States, the Keynesian Revolution was initially actively fought by conservatives during the Second Red Scare (McCarthyism

McCarthyism

McCarthyism is the practice of making accusations of disloyalty, subversion, or treason without proper regard for evidence. The term has its origins in the period in the United States known as the Second Red Scare, lasting roughly from the late 1940s to the late 1950s and characterized by...

) and accused of Communism

Communism

Communism is a social, political and economic ideology that aims at the establishment of a classless, moneyless, revolutionary and stateless socialist society structured upon common ownership of the means of production...

, but ultimately a form of Keynesian economics became mainstream; see textbooks of the Keynesian revolution.

The Keynesian revolution has been criticized on a number of grounds: some, particularly the freshwater school and Austrian school, argue that the revolution was misguided and incorrect; by contrast, other schools of Keynesian economics

Keynesian economics

, notably Post-Keynesian economics

Post-Keynesian economics

Post Keynesian economics is a school of economic thought with its origins in The General Theory of John Maynard Keynes, although its subsequent development was influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor and Paul Davidson...

, argue that the "Keynesian" revolution ignored or distorted many of Keynes's fundamental insights, and did not go far enough.

Theory of employment

A central aspect of the Keynesian revolution was a change in theory concerning the factors determining employment levels in the overall economy. The revolution was set against the orthodox classical economic

Classical economics

Classical economics is widely regarded as the first modern school of economic thought. Its major developers include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill....

framework, and its successor, neoclassical economics

Neoclassical economics

, which based on Say's Law

Say's law

Say's law, or the law of market, is an economic principle of classical economics named after the French businessman and economist Jean-Baptiste Say , who stated that "products are paid for with products" and "a glut can take place only when there are too many means of production applied to one kind...

argued that unless special conditions prevailed the free market would naturally establish full employment

Full employment

In macroeconomics, full employment is a condition of the national economy, where all or nearly all persons willing and able to work at the prevailing wages and working conditions are able to do so....

equilibrium with no need for government intervention. This view held that employers will be able to make a profit by employing all available workers as long as workers drop their wages below the value of the total output they are able to produce – and classical economics assumed that in a free market workers would be willing to lower their wage demands accordingly, because they are rational agents who would rather work for less than face unemployment.

Keynes argued that both Say's Law and the assumption that economic actors always behave rationally are misleading simplifications, and that the classical economics was only reliable at describing a special case. The Keynesian Revolution replaced the classical understanding of employment with Keynes's view that employment is a function of demand, not supply.

Prior to Keynes

Professor Harry Johnson has written that economics in its modern form can be seen as dawning with the Smithian
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...

Revolution against mercantilism

Mercantilism

Mercantilism is the economic doctrine in which government control of foreign trade is of paramount importance for ensuring the prosperity and security of the state. In particular, it demands a positive balance of trade. Mercantilism dominated Western European economic policy and discourse from...

. Prior to Keynes there were five other major developments in economic thought rapid enough in pace to be characterised as revolutions, most notably the Ricardian
David Ricardo
David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...

. Another noted revolution is the marginalist revolution, which is taken to mark the transition from classical economics

Classical economics

to neoclassical economics

Neoclassical economics

in the 1870s. Collectively, these fashioned the classical economic orthodoxy that Keynes attacked.

Note however that in economic practice, as opposed to economic theory, the behavior of industrializing nations in the 19th century has frequently been described as mercantilist or embodying economic nationalism

Economic nationalism

Economic nationalism is a term used to describe policies which emphasize domestic control of the economy, labor and capital formation, even if this requires the imposition of tariffs and other restrictions on the movement of labor, goods and capital. It opposes globalization in many cases, or at...

, as in the American School

American School (economics)

The American School, also known as "National System", represents three different yet related constructs in politics, policy and philosophy. It was the American policy for the 1860s to the 1940s, waxing and waning in actual degrees and details of implementation...

of 19th century American economic practice.

After Keynes

The rise of Monetarism

Monetarism

Monetarism is a tendency in economic thought that emphasizes the role of governments in controlling the amount of money in circulation. It is the view within monetary economics that variation in the money supply has major influences on national output in the short run and the price level over...

, particularly in the 1970s and via the work of Milton Friedman

Milton Friedman

Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...

, is considered the next major change in mainstream economic theory and practice, and has at times been described as the "monetarist revolution". The stagflation

Stagflation

In economics, stagflation is a situation in which the inflation rate is high and the economic growth rate slows down and unemployment remains steadily high...

of the 1970s led to a loss of influence by classical Keynesian economics, and continuing tensions between Keynesian economics and neoclassical economics led in the 1970s to the division between New Keynesian economics

New Keynesian economics

New Keynesian economics is a school of contemporary macroeconomics that strives to provide microeconomic foundations for Keynesian economics. It developed partly as a response to criticisms of Keynesian macroeconomics by adherents of New Classical macroeconomics.Two main assumptions define the New...

and New classical macroeconomics

New classical macroeconomics

New classical macroeconomics, sometimes simply called new classical economics, is a school of thought in macroeconomics that builds its analysis entirely on a neoclassical framework. Specifically, it emphasizes the importance of rigorous foundations based on microeconomics...

; these are also referred to as the saltwater school and freshwater school, due to the American universities with which they are associated. In development economics

Development economics

Development Economics is a branch of economics which deals with economic aspects of the development process in low-income countries. Its focus is not only on methods of promoting economic growth and structural change but also on improving the potential for the mass of the population, for example,...

, this period is referred to as the Washington Consensus

Washington Consensus

The term Washington Consensus was coined in 1989 by the economist John Williamson to describe a set of ten relatively specific economic policy prescriptions that he considered constituted the "standard" reform package promoted for crisis-wracked developing countries...

period, and the economic expansion of the 1980s, 1990s, and early 2000s has been referred to as The Great Moderation

The Great Moderation

In economics, the Great Moderation refers to a reduction in the volatility of business cycle fluctuations starting in the mid-1980s, believed to have been caused by institutional and structural changes in developed nations in the later part of the twentieth century...

.

Within academia the post WWII high point of free market economics occurred in the 1990s, with several free market economists winning the Nobel Prize

Nobel Prize

The Nobel Prizes are annual international awards bestowed by Scandinavian committees in recognition of cultural and scientific advances. The will of the Swedish chemist Alfred Nobel, the inventor of dynamite, established the prizes in 1895...

. Increased skepticism concerning the free market consensus was fueled by the 1997 Asian financial crisis and the Dot com crash. The financial crisis of 2007–2010 saw a resurgence of interest in Keynesian economics, the 2008–2009 Keynesian resurgence

2008–2009 Keynesian resurgence

In 2008 and 2009, there was a resurgence of interest in Keynesian economics among policy makers in the world's industrialized economies. This has included discussions and implementation of economic policies in accordance with the recommendations made by John Maynard Keynes in response to the Great...

Background

When Keynes published his General Theory in 1936, the influence of free market economics on policy making had already declined substantially compared to the almost unchallenged ascendancy it had enjoyed in Britain during the 1840s - 1860s. By the mid 1930s much of the first and second world was already under the sway of communism or fascism, with even the US departing from economic orthodoxy with the New Deal

New Deal

The New Deal was a series of economic programs implemented in the United States between 1933 and 1936. They were passed by the U.S. Congress during the first term of President Franklin D. Roosevelt. The programs were Roosevelt's responses to the Great Depression, and focused on what historians call...

. There had not been a corresponding decline for neoclassical economics in the academic sphere however. According to economic historian Richard Cockett, within academia the prestige of free market economics was still near its peak even in the 1920s.
In the 1930s neoclassical economics began to be challenged within academia, though at first by various diverse schools which apart from Marxism were mostly of only local influence - such as the Stockholm school

Stockholm school (economics)

The Stockholm school, or Stockholmsskolan, is a school of economic thought whose antithesis is the gold standard centered Austrian School of Economics. It refers to a loosely organized group of Swedish economists that worked together, in Stockholm, Sweden primarily in the 1930s...

in Sweden or in the US the Administered price

Administered price

An administered price is in general a price which is either set by legal statute or by a standard procedure formulated as an official policy, instead of being determined directly by supply costs and market demand. Even if supply and demand conditions change, the administered price may therefore...

theorists
Keynes was little influenced by the various heterodox economists of the 1930s, his General theory was written largely in a Marshellian

Alfred Marshall

Alfred Marshall was an Englishman and one of the most influential economists of his time. His book, Principles of Economics , was the dominant economic textbook in England for many years...

framework though with some important points of dissent such as the idea that excessive savings can be harmful for the overall economy. Keynes asserts that when savings exceed available investment opportunities it makes it impossible for business as a whole to make a profit and so lay offs and increased unemployment will result. In chapter 23 of the General Theory Keynes traces the genesis of this idea to, among others, Mercantilist thinkers of the previous three centuries, to the Fable of the Bees and to the dissenting economist J A Hobson

John A. Hobson

John Atkinson Hobson , commonly known as John A. Hobson or J. A. Hobson, was an English economist and critic of imperialism, widely popular as a lecturer and writer.-Life:...

with his Physiology of industry (1889).

The course of the revolution

argue that there are three components to the Keynesian revolution: a policy revolution, a theoretical (or intellectual) revolution, and a textbook revolution. These are addressed in turn.

Intellectual

Keynes's revolutionary theory was set out in his book General Theory of Employment, Interest and Money, commonly referred to by the abbreviated title General Theory. While working on the book, Keynes wrote to George Bernard Shaw, saying "I believe myself to be writing a book on economic theory which will largely revolutionize, not I suppose at once but in the course of the next ten years – the way the world thinks about economic problems … I don't merely hope what I say, in my own mind I'm quite sure" Professor Keith Shaw wrote that this degree of self-confidence was quite amazing especially considering it took more than fifty years for the Newtonian revolution to gain universal recognition; but also that Keynes's confidence was fully justified. John Kenneth Galbraith

John Kenneth Galbraith

John Kenneth "Ken" Galbraith , OC was a Canadian-American economist. He was a Keynesian and an institutionalist, a leading proponent of 20th-century American liberalism...

has written that Say's Law dominated economic thought prior to Keynes for over a century, and the shift to Keynesianism was difficult. Economists who contradicted the law, which inferred that underemployment and underinvestment (coupled with over-saving) were virtually impossible, risked losing their careers.

Keynes's General Theory was published in 1936 and provoked considerable controversy, yet according to professor Gordon Fletcher it rapidly conquered professional opinion.

For biographer Lord Skidelsky, the General Theory triggered a massive reaction immediately after its release, with extensive reviews in journals and popular newspapers all around the world. While many academics were critical, even the harshest critics recognised there was a case to be answered. As with other theoretical revolutions, the young were most receptive with some older economists never fully accepting Keynes's work, but by 1939 Keynes's view had broadly gained ascendancy both in Great Britain and the US.

According to Murray Rothbard

Murray Rothbard

Murray Newton Rothbard was an American author and economist of the Austrian School who helped define capitalist libertarianism and popularized a form of free-market anarchism he termed "anarcho-capitalism." Rothbard wrote over twenty books and is considered a centrally important figure in the...

, an Austrian School

Austrian School

The Austrian School of economics is a heterodox school of economic thought. It advocates methodological individualism in interpreting economic developments , the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have...

economist strongly opposed to Keynes:

Rothbard goes on to describe that by the end of the 1930s every single one of Friedrich Hayek

Friedrich Hayek

Friedrich August Hayek CH , born in Austria-Hungary as Friedrich August von Hayek, was an economist and philosopher best known for his defense of classical liberalism and free-market capitalism against socialist and collectivist thought...

's followers at the LSE was convinced by Keynes's ideas – all economists who had previously opposed Keynes's advocacy of state intervention in the economy.

Despite Keynes's early success, the revolutionary effect on theoretical economics was soon diminished. From the late 1930s, a process began to reconcile the General Theory with the classical ways of viewing the economy – developments which included Neo-Keynesian

Neo-Keynesian Economics

and later New Keynesian economics

New Keynesian economics

.

An alternative take was advocated at the dawning of the revolution by Dennis Robertson, who Fletcher has described as the most intellectually formidable of Keynes's contemporary critics. This view held that the great excitement triggered by the General Theory was unjustified – that genuinely new ideas presented were overstated and not supported by evidence, while the verifiable ideas were merely well-established principles dressed up in new ways. According to Hyman Minsky

Hyman Minsky

Hyman Philip Minsky was an American economist and professor of economics at Washington University in St. Louis. His research attempted to provide an understanding and explanation of the characteristics of financial crises...

, this position eventually became dominant in mainstream academia, though it is by no means unchallenged.

Origins

Lord Skidelsky has written that Keynes's motivation for the revolution arose from the failure of the British economy to recover from its post World War I recession in the manner predicted by classical economics – throughout the 1920s British unemployment remained at historically high levels not previously seen since a brief period in the aftermath of the Napoleonic Wars

Napoleonic Wars

The Napoleonic Wars were a series of wars declared against Napoleon's French Empire by opposing coalitions that ran from 1803 to 1815. As a continuation of the wars sparked by the French Revolution of 1789, they revolutionised European armies and played out on an unprecedented scale, mainly due to...

. Skidelsky notes a December 1922 lecture to the British Institute of Bankers where Keynes noted that wages no longer fell with prices in the classical fashion, due in part to the power of unions and wage "stickiness". Keynes recommended government intervention as the cure for unemployment in this circumstance, a position he never deviated from though he was to refine his thinking on what sort of intervention would work best. For Dr Peter the revolution can be seen as dawning in 1924 which was when Keynes first started advocating public works as a means by which the government could stimulate the economy and tackle unemployment.

Policy

While much attention is given to the impact on academic economics, the revolution also had a practical dimension. It influenced decision makers in governments, central banks and global institutions like the International Monetary Fund

International Monetary Fund

The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...

(IMF). According to Lord Skidelsky, the revolution began in policy making terms as early as December 1930, with Keynes's participation in the Macmillan Committee on Finance and Industry. The Committee had been formed to make policy recommendations for Britain's economic recovery – while Keynes's plans for an interventionist response were rejected, he did succeed in convincing the government that the classical conception that wages would drop along with prices and thus help to restore employment after a recession was wrong. The first government to adopt Keynesian demand management policies was Sweden in the 1930s.
Keynes had some influence on President Roosevelt's

Franklin D. Roosevelt

Franklin Delano Roosevelt , also known by his initials, FDR, was the 32nd President of the United States and a central figure in world events during the mid-20th century, leading the United States during a time of worldwide economic crisis and world war...

1933–1936 New Deal

New Deal

, though this package was not as radical or as sustained as Keynes had wished. After 1939 Keynes's ideas were adopted in the late 1940s, 1950s, and most of the 1960s, this period has been called the Age of Keynes. From the late sixties Keynes's influence was displaced

Post-war displacement of Keynesianism

The Post-war displacement of Keynesianism was a series of events which from mostly unobserved beginnings in the late 1940s, had by the early 1980s led to the replacement of Keynesian economics as the leading theoretical influence on economic life in the developed world...

following the success of "counter revolutionary" efforts by economists like Milton Friedman

Milton Friedman

Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...

and others sympathetic to the free market. Following the financial crises in 2008, there has been a revival in Keynesian thinking among policy makers in favour of robust government intervention, which the Financial Times

Financial Times

The Financial Times is an international business newspaper. It is a morning daily newspaper published in London and printed in 24 cities around the world. Its primary rival is the Wall Street Journal, published in New York City....

has described as a "stunning reversal of the orthodoxy of the past several decades".

Textbooks

The importance and history of textbooks is less-studied than other aspects of the Keynesian revolution, but some argue that it is of fundamental importance.

In the United States, the 1948 textbook Economics
Economics (textbook)
Economics is an influential introductory textbook by American economists Paul Samuelson and William Nordhaus. It was first published in 1948, and has appeared in nineteen different editions, the most recent in 2010. It was the best selling economics textbook for many decades and still remains...

by Paul Samuelson

Paul Samuelson

was the key textbook that spread the Keynesian revolution. It was not however the first Keynesian textbook, being preceded by the 1947 The Elements of Economics, by Lorie Tarshis

Lorie Tarshis

Lorie Tarshis was a Canadian economist who taught mostly at Stanford University. He is credited with writing the first introductory textbook that brought Keynesian thinking into American university classrooms, the 1947 The Elements of Economics. The work swiftly lost popularity after it was...

. Tarshis's book, the first American textbook to discuss Keynesian ideas, was initially widely adopted, but was subsequently attacked by American conservatives (as part of the Second Red Scare, or McCarthyism

McCarthyism

), donors to universities withheld donations, and subsequently the text was largely withdrawn. Tarshis's text was subsequently attacked in the 1951 God and Man at Yale
God and Man at Yale
God and Man at Yale: The Superstitions of “Academic Freedom” is a book published in 1951 by William F. Buckley, Jr., who eventually became a leading voice in the American conservative movement in the latter half of the twentieth century....

by American conservative William F. Buckley, Jr.

William F. Buckley, Jr.

William Frank Buckley, Jr. was an American conservative author and commentator. He founded the political magazine National Review in 1955, hosted 1,429 episodes of the television show Firing Line from 1966 until 1999, and was a nationally syndicated newspaper columnist. His writing was noted for...

Samuelson's Economics was also subject to "conservative business pressuring" and accusations of Communism

Communism

, but the attacks were less "virulen[t]" and Economics became established. The success of Samuelson's book is attributed to various factors, notably Samuelson's dispassionate, scientific style, in contrast to Tarshis's more engaged style. Subsequent texts have followed Samuelson's style.

The revolution that never was

According to post Keynesian economists and some others such as Charles Goodhart

Charles Goodhart

Charles Albert Eric Goodhart, CBE, FBA is an economist. He was a member of the Bank of England's Monetary Policy Committee from June 1997-May 2000 and a professor at the London School of Economics . He is the developer of Goodhart's law, an economic law named after him...

, in the academic sphere the so called revolution failed to properly get off the ground, with neo Keynesian economics being Keynesian in name only. Such critics have held that Keynes's thinking was misunderstood or misrepresented by the revolutions leading popularisers, the founders of neo Keynesian economics such as John Hicks

John Hicks

and Paul Samuelson

Paul Samuelson

. The post Keynesians felt neo Keynesianism excessively compromised with the classical view. For Paul Davidson

Paul Davidson (economist)

Paul Davidson is an American macroeconomist who has been one of the leading spokesmen of the American branch of the Post Keynesian school in economics...

the revolution was "aborted"
in its early years; for Hyman Minsky

Hyman Minsky

it was "still born"; while for Joan Robinson

Joan Robinson

Joan Violet Robinson FBA was a post-Keynesian economist who was well known for her knowledge of monetary economics and wide-ranging contributions to economic theory...

the revolution led to a "bastard Keynesianism".

A suggested reason for the distortion is the central role John Hicks

John Hicks

's IS/LM model

IS/LM model

The IS/LM model is a macroeconomic tool that demonstrates the relationship between interest rates and real output in the goods and services market and the money market...

played in helping other economists understand Keynes's theory – for post Keynesians, and by the 1970s even Hicks himself, the model distorted Keynes's vision.

A second reason offered is the attacks on the more progressive expressions of Keynes's views that occurred due to McCarthyism

McCarthyism

. For example, while initially popular, Lorie Tarshis

Lorie Tarshis

's 1947 text book introducing Keynes's ideas, The elements of economics was soon under heavily attacked by those influenced by McCarthy. The book's place as a leading text book for Keynes's ideas in America was taken by Paul Samuelsons Principles of Economics. According to Davidson, Samuelson failed to understand one of the key pillars of the revolution, the refutation ergodic axiom (i.e. saying that economic decision makers are always confronted by uncertainty – the past isn't a reliable predictor of the future).

Economists Robert Shiller

Robert Shiller

Robert James "Bob" Shiller is an American economist, academic, and best-selling author. He currently serves as the Arthur M. Okun Professor of Economics at Yale University and is a Fellow at the Yale International Center for Finance, Yale School of Management...

and George Akerlof

George Akerlof

George Arthur Akerlof is an American economist and Koshland Professor of Economics at the University of California, Berkeley. He won the 2001 Nobel Prize in Economics George Arthur Akerlof (born June 17, 1940) is an American economist and Koshland Professor of Economics at the University of...

re-asserted the importance of recognising uncertainty in their 2009 book Animal Spirits
Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism
Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism is a book written to promote the understanding of the role played by emotions in influencing economic decision making...

.

Another reason for the distortion of Keynes's views was his low level of participation in the intellectual debates that followed the publication of his General Theory, first due to his heart-attack in 1937 and then due to his busyness with the war. It has been suggested by Lord Skidelsky that apart aside from his busyness and incapacity, Keynes didn't challenge models like IS/LM as he perceived that from a pragmatic point of view they would be a useful compromise.

Significance

Professor Gordon Fletcher stated that Keynes's General Theory provided a conceptual justification for policies of government intervention in economic affairs which was lacking in the established economics of the day – immensely significant as in the absence of a proper theoretical underpinning there was a danger that ad hoc policies of moderate intervention would be overtaken by extremist solutions, as had already happened in much of Europe back in the 1930s before the revolution was launched. Almost 80 years later in 2009, Keynes's ideas were once again a central inspiration for the global response to the Financial crisis of 2007–2010.

Summary

Theory of employment

Prior to Keynes

After Keynes

Background

The course of the revolution

Intellectual

Origins

Policy

Textbooks

The revolution that never was

Significance

See also