The case for launching the new ‘Review Of Keynesian Economics’ Journal – by Louis-Philippe Rochon

Bank of EnglandIt is widely recognized that economic crises can sometimes trigger enormous change, both with regard to economic theory and the politics of governance.  Today, the global economy is struggling with the fall-out from the financial crash of 2008 and the Great Recession of 2007-09. The economic crisis that these events have generated, combined with the failure of the mainstream economics profession, has again put the question of change on the table.

With regard to the economics profession, it stands significantly discredited owing to its failure to foresee the recession and the financial crash; its repeated over-optimistic forecasts of rapid recovery; and lack of plausibility surrounding its attempts to explain events. Reasonable people do not expect economists to predict the daily movements of the stock market, but they do expect them to anticipate and explain major imminent economic developments. On that score the profession failed catastrophically, revealing fundamental theoretical inadequacies.

John Maynard Keynes Русский: Джон Мейнард Кейн...

John Maynard Keynes (Photo credit: Wikipedia)

The crisis associated with the Great Depression of the 1930s inspired John Maynard Keynes to write The General Theory of Employment, Interest and Money, a book that explained the persistence of unemployment in monetary economies. Keynes’s emphasis on effective demand triggered a remaking of macroeconomics, and offered practical policy recommendations. It inspired new policies that contributed to twenty-five years of unprecedented prosperity, now widely referred to as “The Golden Age” of capitalism or “The Age of Keynes”, which came to an end with the collapse of Bretton Woods (1971), the first oil crisis (1973) and the stock market crash of 1973-74.

Yet the demise of Keynesian economics was not caused by profound logical flaws or lack of supportive empirical evidence. Keynesianism was accused of lacking micro-foundations, when in reality it had micro-foundations but rejected micro-foundations predicated on the implausible assumptions of homo economicus. That characterization fundamentally misrepresents economic reality, and assumes institutions that do not exist, and ignores institutions that do exist. As such, it ignores the macro-foundations of the real world.

But, in the late 1970s, monetarism and the counter-revolution recaptured control of macroeconomics. Their success was driven by a range of factors including their own intellectual imagination and innovation, intellectual staleness among Keynesians; the Cold War, which promoted laissez-faire ideology; and inflation and political conflict triggered by income distribution conflicts fostered first by full employment and then by the oil shocks of the 1970s.

The inflationary pressures of the 1970s, and the rise of the Reagan-Thatcher movements, were instrumental in the revival of classical macroeconomics and the repression of Keynesian economics. These forces have locked-in a legacy that is hard to reverse, as notions such as the natural rate of unemployment are entrenched in macroeconomics discussions and in teaching manuals.

The consequences of the return of classical macroeconomics have been enormous. It meant an era of neoliberal policy dominance that has contributed to wage stagnation and massive income inequality, which is significantly responsible for the Great Recession.

In the years after World War II Keynesianism was ascendant, but since the late 1970s classical macroeconomics has been ascendant. Such ebbs and flows are reasonable, and even desirable, in an open society. However, what troubles us is that the period of classical re-ascendance has been characterized by what we think is a closing and monopolization of intellectual space, whereas the period of Keynesian ascendancy was marked by intellectual pluralism.

This closing of economics is significantly attributable to the laissez-faire ideological predispositions of new classical macroeconomics. It has also has been driven by economists’ disdain for epistemological concerns, which has fostered intellectual intolerance and over-reach. Competing theoretical paradigms have been framed inappropriately in terms of truth versus error, a frame that inevitably drives exclusion of the paradigm labeled as being in error.

Review of Keynesian Economics; launched 2012

The intellectual failure of the profession at large has prompted me to launch the Review of Keynesian Economics, with my friends and colleagues, Matias Vernengo and Thomas Palley. A journal devoted to Keynesian economics is needed both to correct this narrowness and because events have once again confirmed the profound relevance of Keynesian theory.  We believe indeed, that the current policies of austerity cannot make any significant impact on economic growth.  Rather, they will have the opposite effects by depressing aggregate demand.

Indeed, I fear that we are headed toward even worse times, before things get better again: 2013 will see very little improvement in economic performance, with anemic growth being the general economic condition.

This crisis was 25 years in the making, the result of bad economic policies that deregulated markets and worsened income distribution.  Today, bad economic policies are preventing a full recovery. It’s time to cast aside neoclassical theory and adopt better, Keynesian policies of aggregate demand and wage increases.

This is a shortened version of an article entitled ‘Economics and the economic crisis: the case for change‘, originally published in the inaugural issue of ROKE.

Louis-Philippe Rochon is Associate Professor of Economics at Laurentian University, in Canada, where he is the Director of the International Economic Policy Institute. His main area of research are macroeconomics, monetary policy and theory, and post-Keynesian Economics. He has published over 90 book and journal articles, and has been a Visiting Professor or Scholar in Mexico, France, Italy and Australia.

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