1
Andrew Lovsin
Dr. Rochon
Econ 3437
Was the Keynesian Revolution Truly Keynesian?
I: Introduction
With the publication of The General Theory of Employment, Interest and Money, John
Maynard Keynes (1936) immediately set forth a wave of economic enquiry that changed the
scene of economics. Faced with the affliction of the Great Depression, Keynes set out to provide
answers that might solve the rampant unemployment and return the world to growth. Traditional
methods proved underwhelming.
Keynes's General Theory was a self-professed journey of escape from neoclassical
theory, or as he says, “from habitual modes of thought” (1936, vii). He set forth to create a
revolution that would change how economists practised their science forever. Keynes stated as
much in a letter he wrote to George Bernard Shaw on January 1, 1935, “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 its economic problems”
(Keynes 1973B, pp. 492-93). Keynes was dissatisfied with the ability of the discipline to meet
the concerns of the real world. Therefore, he had to change the way economists approached the
subject altogether.
From the outset, there were many separate interpretations of Keynes's work. John Hicks
(1937) incorporated his interpretation of Keynes into the combination of the goods and money
market, in what is now known as the IS-LM model. Paul Samuelson (1948) introduced
Keynesian economics into textbooks, paving the road for a new generation of economists.
2
Whether they were supporting or refuting Keynes's work, many had a hand in its analysis. What
followed has now become known as the Keynesian Revolution.
While the ideas underpinning the revolution may have been inspired by Keynes, many
question just how 'Keynesian' the revolution was. In the flurry to understand the bombshell that
was The General Theory, Keynes himself may have been misplaced along the way. Many
economists claim to have expanded upon Keynes's work, however, the infusion of their own
ideas or understanding into the literature misrepresents the original meaning. Joan Robinson
(1975) labelled them “Bastard Keynesians”. Along the line, the distinction between Keynes and
the others has become lost, synonymized in the minds of many.
The purpose of this paper is to investigate Keynes himself and those who followed, in
order to establish how true to Keynes the Keynesian Revolution actually was. This will be
accomplished by first recounting key elements of Keynes's theories, then examining the
interpretations of Keynes by those who followed, and finally by highlighting any disparities or
similarities present in history. Suggestions will also be offered regarding changes that would
need to occur in order to make a revolution more truly Keynesian.
II: Key Elements of Keynes's Theories
At its heart, the General Theory sought to present an alternative way of thinking. Keynes
tackled this issue by providing a number of ideas that had previously been unexplored or not
taken seriously. Separately, many of these ideas could have warranted their own book. By
presenting them together, Keynes made clear his intent to reshape economics. It is not the goal of
this paper to analyze all of his ideas in detail, but to highlight the ones which were most
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fundamental to the revolution that Keynes proposed.
One needs to only look as far as the title of the General Theory to begin to understand
where Keynes was headed. In Chapter 1, Keynes (1936, pp. 3) states that he places emphasis on
the word general, in order to establish his views of the presiding beliefs. Neoclassical theory
states that markets are self-adjusting and provide the optimal outcome automatically. If there
happens to be a disequilibrium effect, such as unemployment, then markets will self-correct
themselves back to equilibrium. Keynes on the other hand, believed that neoclassical equilibrium
is a special case. He thought it possible for an economy to exist in a persistent equilibrium below
full employment.1
Keynes's primary goal was to end the Great Depression. In order for this to occur, he
believed it necessary to restore economic growth by returning to full employment. Neoclassical
theory predicted that unemployment occurred in the labour market, due to inflated wages. If
wages were allowed to fall, then firms could afford to hire more workers. It also believed in
Say's Law, that supply creates its own demand. Keynes believed that unemployment occurred in
the goods market, due to under-consumption, or lack of aggregate demand. In Keynes's words,
“For the engine which drives Enterprise is not Thrift, but Profit” (Keynes, 1930, pp. 149). During
the Great Depression, companies were not hiring because there was not enough demand for their
products. If they were able to sell more products, then they could afford to hire more workers,
and expand production to meet the increased demand, thereby ending unemployment. The
problem then became how to solve for lack of aggregate demand.
Keynes proposed that it was the role of government to intervene where private parties
1
While this belief is similar to that of Marx, Keynes was not a Marxist or a socialist. Skidelsky (2000, p. xvii) calls
Keynes's beliefs a New Way, not to be confused as a middle way between laissez-faire capitalism and socialism.
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alone could not guarantee optimal conditions.2 As central governing bodies, governments possess
both the authority and the funds to take meaningful actions. If governments spent enough
through expansionary fiscal policy, they could create sufficient demand to restore full
employment. Once that occurred, they could reduce expenditures to let the market take its place.
This ensured that governments only played an interventionist role.
Further to the effect of fiscal policy, is the additional rounds of private spending that
occur to stimulate the economy beyond the initial expenditure. Keynes called this the multiplier
effect.3 A multiplier greater than one indicates that the effect of a dollar spent by the government
creates more than a dollar of total output for the economy. Therefore, a government is able to
increase aggregate demand by an amount greater than the initial spending. This accelerates the
return to full employment.
Excessive government budgets pose a concern for many economists, as they are typically
funded through borrowing. Keynes's answer lay in the increased incomes that governments
would receive as aggregate demand increased. Deficits would exist in the short-run, and be
eliminated through the growth of tax collection from rises in consumer income and expenditure.
The multiplier effect further increases the rate at which governments would repay the deficit, as
the additional rounds of spending are each subject to tax. Therefore, taxes would not need to be
raised, and may in fact be lowered in order to generate more spending.
Another theory that Keynes emphasized is the role of expectations in the direction of the
economy, which he called “animal spirits” (Keynes, 1936). For example, consumers can choose
According to neoclassical thought, government intervention was seen to interfere with the market and lead to
inefficient outcomes. Keynes faced harsh criticism from neoclassical economists like Pigou (1936) for
suggesting otherwise. Indeed, Pigou was a primary target of Keynes throughout The General Theory.
3
While the multiplier is a key element of Keynes's theories, he was not the originator of the theory. Kahn, a close
friend of Keynes, introduced the theory in relation to economics in an investigation which attempted to make the
case for public works (Kahn, 1931).
2
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to spend or save, with each decision having different outcomes for the economy. They base their
decisions upon, “a spontaneous urge to action rather than inaction, and not as the outcome of a
weighted average of quantitative benefits multiplied by quantitative probabilities” (Keynes,
1936, pp. 161-62). In other words, decisions made in the present are influenced by future
expectations that are not necessarily the result of rationalization.
Keynes believed that investment drives a capitalist economy. However, investment
decisions are made by private parties, and subject to their own profit-driven interests. Therefore,
they can fluctuate depending on the level of optimism. This leads to self-fulfilling outcomes.
Pessimism drives further pessimism, leading to deeper recessions. It is inherent to market-driven
capitalism.
In order to reduce the harmful effects of expectations, Keynes (1973B, pp. 378) proposed
that, “a somewhat comprehensive socialisation of investment will prove the only means of
securing an approximation to full employment”. By guiding investment, governments can
provide stability where private interests cannot. This would largely prevent harsh fluctuations in
the business cycle. Skidelsky (2011, pp. 11) notes that Keynes did not call for the nationalization
of investment, rather a cooperation between public and private interests. Public investment
would provide stability, while private investment would continue to represent the market. As
long as uncertainty exists, the benefit of public investment would outweigh the inefficiencies.
Keynes also advocated for income redistribution, based upon appropriate tax policy and
higher wages. Aside from humanitarian reasons, this is due to the difference in the marginal
propensity to consume of the rich and the poor. Poorer families tend to spend larger proportions
of their incomes than rich ones. Therefore, redistribution would result in more consumption.
Production relies upon the ability of an economy to consume. Without redistribution,
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wealth accumulates to the rich few, and the purchasing power of the economy declines. If
consumption is unable to maintain pace, growth will halt. This also impacts investment, as an
“increase in the habitual tendency to consume will in general serve to increase the inducement to
invest” (Keynes, 1973A, pp. 373). Companies will not invest if consumers are not able to buy
their products. In the long-run, polarization of wealth cripples the consumption ability of the
economy.4
The role of money was also prevalent in Keynes's theories, and the main focus of his
earlier publication A Treatise on Money (Keynes, 1930). Keynes believed that money played an
active role in the economy, contrary to the neoclassical belief that money is neutral. Knowledge
of the movement of money is required in order to make any predictions. The real world is a
monetary economy moving through historical time with a known past and an uncertain future.
(Keynes, 1973C, pp. 409). Money plays an active part in the decision-making process since it is
used to create contracts, which production processes are based upon (Davidson, 1984, pp. 56971). Money cannot be ignored.
Keynes also refutes Say's Law in the monetary market, or that savings dictates
investment. Individuals have preferences towards liquidity, or holding money, and do not
necessarily utilize all of it. Specifically, “Given the state of expectation of the public and the
policy of the banks, the rate of interest is that rate at which the demand and supply of liquid
resources are balanced. Saving does not come into the picture at all.” (Keynes, 1937, pp. 668).
Therefore, money is endogenous. The central bank controls the interest rate, or price of money,
rather than the supply. It then becomes the role of the central bank to create equilibrium as,
4
Joseph Stiglitz has revived this theory in light of the Great Recession (Stiglitz, 2012). His analysis further
emphasizes the dangers of inequality, stating the impact it has on democracy and policy. He also discusses
globalization, which has largely occurred after Keynes's time.
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“Credit is the pavement along which production travels, and the bankers if they knew their duty,
would provide the transport facilities to just the extent that is required in order that the
productive powers of the community can be employed at their full capacity.” (Keynes, 1971, pp.
197).
The interest rate has great implications for investment as a whole. Businesses will only
invest when the rate of return of their investment is greater than the interest rate which they
borrow at. Again, expectations play a role. Any future rate of return is unknowable, but firms can
guess what they might be based upon their level of optimism. Together, the expected rate of
return and the interest rate determine investment (Pressman, 2014, pp. 143). By maintaining an
equal level of saving and investment, central banks could ensure stability.
According to Keynes, stability is required in the international market as well. Keynes's
theories toward international policy were largely affected by his observations during the Great
Depression. Nations devalued their currencies because they wanted to increase exports.
Similarly, they adopted protectionist policies to reduce imports. In other words, nations
attempted to export unemployment (Pressman, 2014, pp. 143). When every country acts in
similar fashion, trade cripples and output falls globally.
Much of Keynes's international policy prescriptions were on display during the Bretton
Woods Conference of 1944. Keynes (1980) proposed a fixed exchange rate and an International
Clearing Union, where trade surpluses and deficits would be minimized. This would limit large
trade imbalances, and the exportation of unemployment. It was also assumed to prevent
expectations from affecting exchange rates. The goal was to provide stability of international
interactions. In the end, Keynes did not achieve all that he wanted to due to harsh opposition, but
a more stable fixed exchange rate system was created.
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Davidson (2007, pp. 26-35) summarizes Keynes's beliefs as the rejection of the classical
neutrality of money, gross substitution, and ergodic axioms. If neoclassical economics is a
special case, then the economy is not self-adjusting to a full-employment equilibrium. Successful
government intervention works to bring economies to the full-employment equilibrium, and
smooths the rough edges of the business cycle. Together, market and government forces work in
tandem to create a stable capitalist system.
III: Keynes and Keynesianism
When Keynes published the General Theory he sparked an intense international debate.
Many economists attempted their hand at interpreting Keynes's theories, or outright disproving
them. However, Keynes suffered a heart attack a year later, and the outbreak of the Second World
War largely interrupted the ability of economists to make theoretical arguments. The war finally
ended in 1945, but Keynes only lived until 1946. As a result, Keynes was only able to spend a
limited amount of time defending and further explaining his theories. This allowed for a number
of separate interpretations and outcomes. Leijonhufvud (1968) labelled this distinction as
Keynesian economics, and 'economics according to Keynes'.
Collander and Landreth (1996) chronicle the arrival of Keynes into the United States.
Much of the separation between Keynes and mainstream Keynesianism began with Samuelson,
the author of the first popular textbook to include Keynes (Samuelson, 1948). They cite Robert
Bryce's influence on Samuelson as a key factor. Bryce studied in Cambridge, then brought his
ideas to Harvard and Samuelson. According to Davidson, (2007, pp. 5-6) “Bryce's presentations
at the LSE and Harvard were supposed to make Keynes's ideas readily understandable”,
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however, Bryce's understanding was made, “without having read The General Theory”.
Samuelson intended to do the same with his textbook, and while he did eventually read the
General Theory, he found it difficult to understand (Collander and Landreth, 1996, pp. 159). As a
result, he based his interpretation more upon the Bryce lectures than Keynes himself.
While Keynes set himself apart by rejecting axioms associated with neoclassical
economics, Samuelson placed the axioms back into the picture. Samuelson reinstates the
neutrality of money and gross substitution axioms when he states, “in a purely competitive world
it would be foolish to hold money as a store of value as long as other assets had a positive yield”
(Samuelson, 1947, pp. 122-4). He also argued that, in order for economics to become a hard
science, the ergodic axiom becomes necessary (Samuelson, 1969, pp. 12). In other words, the
General Theory, was no longer, in fact, general for Samuelson.5
Samuelson's (1948) textbook interpreted Keynes into a neoclassical synthesis. Keynesian
unemployment was seen as a special case due to sticky-wages, or the unwillingness of workers to
accept lower wages. This is despite the fact that Keynes (1936, pp. 257) stated in chapter 19 that
the unemployment equilibrium is not dependent upon rigid money wages. According to
Davidson, (2007, pp. 9-10) “Samuelson became a Keynesian by convincing himself not to worry
about Keynes’s actual analytical framework.” Without taking the time to understand Keynes,
Samuelson departed on a Keynesian analysis. As a result, Keynes became relegated into a
imperfectionist model of the neoclassical theory, rather than the new general case. In one broad
stroke, Samuelson erased Keynes's views of money, investment and uncertainty, yet maintained
the brand of Keynesianism for himself.
While Samuelson was a fundamental factor in the misinterpretation of Keynes, he is not
5
Davidson (2007) provides a more rigorous explanation of Samuelson's approach economics than is presented here,
specifically in regards to the neoclassical axioms.
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the only contributor. Brazelton (1981) outlines some of the problems associated with the IS-LM
model, which has historically been accepted as a Keynesian view of the combination of the
money and goods market. As previously discussed, Keynes placed much emphasis on the role of
uncertainty. However, Brazelton (1981, pp. 257) notes that the textbook version of IS and LM
more or less replaced uncertainty with certainty.
Further, the IS-LM model depended upon a fixed money wage. Keynes never accepted
this for his own theories, however, he did note its importance to the development of Hicks's
model (Keynes, 1937B, pp. 80). The IS-LM model oversimplified Keynes's beliefs, but it
conveniently allowed for real analysis without the need for the complications of monetary
analysis (1986, Kohn, pp. 1216-17). Over time, this contributed to the rigidity of wages, and
gave more merit to Samuelson's view of an imperfectionist model of sticky-prices.
Between Samuelson and Hicks, Keynes became enveloped into neoclassical theory. The
price mechanism was once again used to describe unemployment, only modified by some
imperfections. As noted in section II, when Keynes proposed the theory of aggregate demand, he
was specifically attempting to break free of prices. If wages were allowed to drop, or not rigid
according to the imperfectionist view, then consumption would also drop, leading to further
unemployment. Therefore, rigidity could not be the cause of unemployment, and was not the
economics of Keynes.
Despite this fact, economists such as Samuelson and Hicks continued to call themselves
Keynesians. They have taken the mantle of 'neo-Keynesians', due to their neoclassical synthesis
interpretation of Keynes. Their ideas were inserted into the mainstream, but Keynes himself was
largely ignored.
Some elements remained, such as the importance of government intervention in cases of
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crisis. They were based on different foundations than Keynes, however, being rooted in the
labour market. Within the neoclassical synthesis, governments could surpass the rigidness of
prices and restore employment where imperfections existed. As such, it become the role of
governments to manage the imperfections. While the conclusions may have been similar, they
were for the wrong reasons.
Alongside the neo-Keynesians, another school of economists arose, more dedicated to the
economics of Keynes. These are the post-Keynesians. Members include some of the most
dedicated defenders of Keynes against the neoclassical synthesis, such as Joan Robinson and
Paul Davidson. Skidelsky, the biographer of Keynes, notes that the post-Keynesians have
remained most true to the economics of Keynes (Skidelsky, 2009, pp. 42).
The post-Keynesians continued to analyze economics as Keynes did. This includes the
importance of theories such as aggregate demand, expectations, and the role of money, all set in
historical time. These economists maintain the true vision of Keynes. Their goal is to supplant
the neoclassical general case with Keynes's. Unlike the neo-Keynesians, the foundation remains
more or less the same. While Keynes was largely unable to continue his work beyond the
General Theory, he remains the inspiration.
During the 1970s, many of the world's economies entered a period of stagflation, or the
existence of unemployment alongside excess inflation, which the neo-Keynesians were unable to
explain.6 As a result, neo-Keynesianism largely disappeared from the mainstream. More recently,
the school of new-Keynesianism has emerged, largely in reply to the criticisms that neo-
6
Stagflation directly contradicted one of the key foundations that neo-Keynesianism and government policy was
based on. The Phillips Curve explained that there was a trade-off between employment and inflation. Stagflation
proved that both could exist at the same time. Therefore, governments could not respond as they normally would
have, with either expansionary or contractionary policies. This contradiction is the result of inconsistencies
within neo-Keynesianism, not Keynes himself.
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Keynesianism faced from monetarists during the stagflation period. They seek to answer the
questions that the neo-Keynesians could not.
While neo-Keynesianism was largely proven ineffective at policy, new-Keynesianism has
not progressed the theory back towards the economics of Keynes. They maintain many of the
same foundations of neo-Keynesianism, and miss many of the key elements that Keynes argued.
According to Davidson (1996, pp. 48), “New-Keynesians apparently take pride in never having
to read or understand the General Theory”. Since they stem from the school of neoKeynesianism, and indeed have had neo-Keynesians as teachers, new-Keynesians continue to
bear the name of Keynes without actually advancing the economics of Keynes.
Post-Keynesianism has largely been held out the mainstream, despite having attributed
itself most closely to the economics of Keynes, whereas neo-Keynesianism came to dominate the
mainstream. Indeed, Davidson (pp. 49) states, “Keynes' theoretical legacy cannot be found in any
branch of mainstream Keynesianism”. Overall, the economics of Keynes was excluded from
mainstream theory.
Keynes's name has been ascribed to many theories and views, but in most cases, they are
Keynesian in name only. Many economists who studied Keynes had difficulties interpreting the
General Theory, and developed schools of Keynesian economics that did not reflect Keynes at
all. Indeed, the neoclassical synthesis was much more neoclassical than it was Keynesian. All
branches of Keynesianism might have been inspired by Keynes, however, only postKeynesianism retains the economics of Keynes.
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IV: The 'Keynesian' Revolution
The Keynesian Revolution can be dated back to the publication of the General Theory,
but most of the revolutionary aspects did not get underway until after the Second World War. The
process was accelerated by Samuelson's texts and Hick's IS-LM model, as well as the lasting
negative impression of the Great Depression. The period of the Keynesian Revolution has also
been called the Golden Age, characterized by a prolonged period of economic prosperity. It
lasted until the early 1970s, where the collapse of the Bretton Woods system and the emergence
of stagflation brought about a counter-revolution.
While history may have irrevocably named the Keynesian Revolution after Keynes, very
little of it can actually be attributed of the economics of Keynes. Davidson (1984, pp. 562) states
that, “the Keynesian revolution was almost immediately shunted onto a wrong track”. Robinson
(1975, pp. 177) believed that, “the Keynesian revolution still remains to be made both in
teaching economic theory and forming economic policy”. To the post-Keynesians, history has
misrepresented Keynes, and inaccurately depicted his vision. It is their belief that a true
Keynesian revolution has yet to occur.
Colander and Landreth (1996) outline textbook, theory and policy revolutions as the three
main components of the Keynesian Revolution. It is along these three lines that the historical
Keynesian Revolution will be assessed, in contrast to the economics of Keynes.
The first component, the textbook revolution, has largely been discussed in section III.
Samuelson's textbooks were based upon a misinterpretation of Keynes, and promoted a version
of Keynesianism which was not Keynes's. Samuelson incorporated ideas such as the IS-LM
model and the three neoclassical axioms, which helped create the neoclassical synthesis. As a
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teaching tool, Samuelson's textbooks perpetuated a cycle where students learned Keynesianism
without ever actually learning Keynes.
Tarshis published the first textbook to introduce Keynes, a year prior to Samuelson's
(Tarshis, 1947). As an interpretation of Keynes and the General Theory, it was closer to the truth
than Samuelson's more popular textbook. However, it was quickly attacked by many in the
United States as being sympathetic to communism. Samuelson noted the developments
surrounding Tarshis's book, and carefully wrote his textbook so that it would be less prone to
similar attacks (Collander and Landreth, 1996, pp. 172). Therefore, textbook Keynesianism
failed to successfully introduce the economics of Keynes.
The second component, the theory revolution, was largely influenced by the textbook
revolution. The neoclassical synthesis of Samuelson became the basis for neo-Keynesianism, the
theory of the Keynesian Revolution. The IS-LM model, devoid of expectations and historical
time, was believed to be a successful integration of the money market into the goods market. The
inadequately researched Phillips Curve created shortcomings in full-employment policy
(Robinson, 1975, pp. 174-75). Altogether, the theories poorly represented Keynes.
According to Dimand (2010, pp. 18) the theory revolution, “was a manufactured idea”, as
it did not replace previous orthodoxy, rather synthesized with it. A truly Keynesian revolution
would have used the theories of Keynes to lay down a foundation. Instead, most of Keynes's
theories were removed in favour of the synthesis. The price mechanism was still used to explain
unemployment. The economy was still seen to be more or less self-adjusting, requiring only the
occasional bump from government. Say's Law continued to explain supply and demand. Overall,
the inclusion of the three neoclassical axioms relegated Keynes into a special case of the existing
neoclassical theory.
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The third component, the policy revolution, is further removed from the first two, as it
represents actual government commitment as opposed to intellectual debate. During the period of
the Keynesian Revolution, economies around the world experienced some of the highest levels
of growth since the Industrial Revolution. But can this Golden Age actually be contributed to
Keynes and a second revolution?
Skidelsky (2003, pp. 419-426) dates the beginnings of Keynes's influence in economic
policy to the beginning of the Great Depression. Keynes was actively involved in plans for the
recovery of the British economy, and contributed to the New Deal in the United States. The
nature of the problem of the Great Depression begged for some kind of government intervention,
so it would be a stretch to consider this the beginnings of a Keynesian revolution. World War
Two also presents a difficult scenario, as governments were more focused on the war effort than
anything else. Like the first two components of the revolution, analysis must begin after the War.
The situation after the War was dire, as much of the productive capacity of industrial
nations was destroyed or geared towards armament production. The Marshall Plan outlined much
of the policy decisions regarding the reconstruction of Europe, including a high degree of central
planning and investment. The decades after proved to be wildly successful, as Europe was
returned to prosperity relatively quickly given the circumstances.
While much of the prescriptions of the Marshall Plan seemed Keynesian in nature, such
as fiscal stimulus and centralized planning, they were more a result of communist opposition
than adoption of Keynes's policies. It is reasonable to assume that Keynes would have agreed
with many aspects of the Marshall Plan given his views on the Treaty of Versailles, but that does
not make it Keynesian.7
7
See Keynes, 1919.
16
Keynes might not have been able to advise the Marshall Plan, but he did actively
participate in the creation of the Bretton Woods system. The final product did bear some
representation of Keynes, but it was not as liberal as Keynes would have liked (Pressman, 2014,
pp. 147). An International Clearing Union was vital to the international monetary system that
Keynes wanted to create, however, it was not implemented. Keynes wanted to prevent the
exportation of unemployment and disallow large trade imbalances. Bretton Woods allowed for
stability, but it did not accurately depict all that Keynes wanted.
One of the few things that Keynesianism and the economics of Keynes have in common
is the role for government intervention, despite having different theory explanations. Generally,
governments did adopt a more interventionist policy as a result of the Keynesian Revolution.
Management of employment levels was the main focus, accomplished through government
policy. The goal was to lessen the harshness of economic downturns.
While governments did somewhat change their view on actively managing the economy,
even this aspect of the revolution fell short of Keynes. Expansionary fiscal policy during a
recession can be helpful, but it only addresses the symptoms of the problem. Keynes was seeking
a method of prevention and the management of expectations. To accomplish this, he proposed a
socialization of investment to provide a guaranteed level of investment and promote optimism.
Governments may have been swayed from a laissez-faire approach to the economy, but they did
not go far enough.
In order for a truly Keynesian Revolution to occur, a number of factors would need to be
different from the course of history. Firstly, post-Keynesianism would have to become
mainstream theory. This includes the rejection of neoclassical axioms which neo-Keynesianism
accepts. Keynes's general case of less than full-employment would replace the neoclassical
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general case of full-employment. Insufficient aggregate demand, not inflexible wages, would
explain unemployment. It would be understood that the only way to maintain full-employment is
through government intervention, in tandem with market forces. Economic theory would be
completely overhauled.
Secondly, governments would need to take a much more active role in managing the
economy.8 Full-employment policy would continue, but go much further to ensure this goal.
Governments would not simply act in reactionary fashion. They would establish themselves as a
central planning mechanism, curtailing the negative aspects of the market, while allowing
individuals to continue to pursue profit. A truly New Way of capitalism would emerge.
Skidelsky (2011) outlines Keynes's political economy as having three main objectives,
measures to stimulate investment, measures to stimulate consumption, and a reform of the
international monetary system.
Investment would be stimulated through the establishment of a permanently low longterm interest rate, and a socialization of investment. This would manage the expectations of
private investors, and would ensure a constant level of investment.
Consumption would be stimulated through tax policy, creating a more equal income
distribution. The poor would be allowed more money because they tend to have a higher
marginal propensity to consume. This allows for a higher purchasing power of the population,
which prompts higher levels of production.
A reform of the international monetary system would ensure a greater stability in
8
In this respect, China provides an interesting model. While Keynes opposed Communism, and this paper certainly
does not advocate it, China's economic accomplishments through a government managed economy are
undeniably impressive. Much of the rest of the world tends to gloss over this fact, employing arguments such as
currency devaluations. While the Chinese model may not be based upon Keynes, it is a testament to the viability
of government involvement in the pursuit of economic growth.
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international markets. Trade imbalances would be prevented, and global reserves, a harbour
against uncertainty, would no longer be needed. Nations would not be allowed to export
unemployment to one another.
Finally, the distinction between Keynes and Keynesianism would have to be more
universally established. Given the existing Keynesian Revolution, any true revolution would
have to distinguish itself from the neoclassical synthesis version. Keynes's legacy may have been
tarnished, but it would not be impossible to correct.
Overall, the Keynesian Revolution fell short of implementing the economics of Keynes.
If anything, it was a neoclassical synthesis revolution. In terms of textbook, theory and policy,
Keynes was little more than a footnote. If he were alive today, there is little doubt that Keynes
would find little correlation to the revolution that he originally envisioned. Misinterpretation and
the strength of the prevailing orthodoxy overpowered the heart of Keynes's message, resulting in
a revolution that hardly reflected Keynes at all.
V: Conclusion
The existence of a Keynesian revolution may already be established in the minds of
many, but a truly Keynesian revolution has yet to occur. The developments following the Second
World War may have represented a change in economic theory and policy, but they were not built
upon the economics of Keynes. Misinterpretations led to the establishment of a school of
Keynesianism which did not correspond to the beliefs of Keynes. Keynes was certainly an
inspiration for many, however, his name has come to represent many theories that he never
envisioned, or in some cases outright denied. Keynes set out to create a revolution, but what
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resulted was not as he envisioned.
The Keynesian Revolution was more closely a neoclassical synthesis revolution than one
of Keynes. The most telling fact is that a new general case was not established. Rejections of
axioms that were core to Keynes's beliefs were reintroduced. Neoclassical theory simply
absorbed Keynes as a special case. Overall, the mainstream came to represent very little of
Keynes's General Theory.
Further, governments did not go far enough in changing their policies. Keynes wanted
governments to take an active role in guiding their economies. The policy revolution was almost
strictly reactionary, rather than preventionary. Keynes wanted to prevent the harshness of future
cyclical patterns, not merely address them when they arose. Governments tend to be Keynesian
when it suits them during a crisis, then abandon such policies afterward. An active and continual
change in policy never happened.
Despite the inability of Keynes and his closest followers to establish a revolution based
upon the economics of Keynes, there are many important aspects of his legacy. The fact that his
work was largely misrepresented does not make him irrelevant.
Keynes opened the door for legitimate government intervention in an age which
previously held to laissez-faire. While the neoclassical synthesis fell short in many aspects, it did
promote this belief of Keynes. Governments have changed in a real way as a result. Keynes
showed that capitalism is able to operate alongside interventionist policies, and is in fact,
bettered by it. Strictly capitalist or socialist societies are not the only option. It was his goal to
save capitalism, and in many ways he has done that.
On a more general level, Keynes showed the importance of questioning traditional views
and the existing authority. Neoclassical theory dominated for many years, yet Keynes was not
20
satisfied with maintaining the status quo. Even Pigou, one of the fiercest opponents of Keynes,
noted this, stating, “All economists whether followers or not [of Keynes], owe to the stimulus to
thought which his book [The General Theory] gave, even to the controversies that it aroused, a
very great debt” (Pigou, 1950, pp. 66). Keynes provided many valuable insights by raising
questions, even though he did not have all of the answers.
These insights do not strictly adhere to economics. Human advancement has come by the
continual study of reality and asking the right questions. For example, Keynes was influenced by
Einstein, and got the idea to name his book the General Theory after Einstein's relativistic
revolution. (Togati, 2001). Likewise, Keynes has provided a lasting impression through the
reevaluation of the prevailing doctrine. While he has certainly not been the first to do so, he can
(and has been) the source of inspiration of new thinkers to extend beyond the traditional
framework. There is a need for all disciplines to build off of the work before them in order to
come closer to the real truth.
The Keynesian Revolution might have fallen short of Keynes, but it did impart many
valuable lessons. As with any new outlook, the strength of the prevailing orthodoxy can be
overpowering. Keynes understood this when he set out on his own path. He maintained the
importance of evaluation of the real world, not convenient models. Keynes might not have
accomplished all that he wanted, but he did provide a useful framework of critical analysis for
others to follow.
21
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