The Rise and Fall of Keynesianism after the GFC

by John Quiggin on January 8, 2018

International Studies Quarterly has just published a symposium responding to a paper by Henry and me, which has been released from behind the paywall for the occasion. Our paper has the fairly self-explanatory title “Consensus, Dissensus, and Economic Ideas: Economic Crisis and the Rise and Fall of Keynesianism ” In our paper we looked at the resurgence of fiscal Keynesianism in the immediate aftermath of the Global Financial Crisis and of the successful counterthrust leading to the adoption of austerity policies in the US and Europe.

The symposium has comments from a multidisciplinary group of political scientists, sociologists and economists: Abraham Newman, Andrew Baker, Elizabeth Popp Berman, Paul Krugman, Stephen K. Nelson along with a response from us. It’s great to get these different disciplinary perspectives all in one place, since they all have key pieces of the puzzle, and we are very happy they have chosen to engage with us.

{ 10 comments… read them below or add one }


bruce wilder 01.09.18 at 3:19 am

The Oxford Review of Economic Policy, Rebuilding macroeconomic theory issue
also briefly out from behind the paywall might be of interest as it touches on closely related problems


Martin Bento 01.09.18 at 10:26 pm

It does look suspiciously like Keynesianism held sway while it was necessary to save the financial industry itself and was abandoned once that was clearly achieved. Perhaps you dismiss the role of the financial industry as the third and perhaps decisive leg of the triad here, besides academic economists and formal policymakers, but if so I think you should argue that, rather than just assuming it


ardj 01.10.18 at 7:38 am

Curiously this comes just as I am rereading “The return of the Master”, so many thanks. And thanks too to Bruce Wilder (as a retired non-economist, anything free is wonderful – but I believe the Austrians argue that there are always opportunity costs) and I agree with Martin Bento


JohnR 01.10.18 at 3:13 pm

I have nothing substantive to add; I was merely struck by the opening of Nelson’s contribution: “In 1982 the renegade economist Hyman Minsky..”
I’m afraid the mental image of a “renegade economist” (particularly one named Hyman Minsky) caused me to aspirate my mid-morning caffeine solution, with near-fatal results. I’m sure it’s simply my fault; perhaps my memories of listening to The Ballad of Irving had some effect, but even now, thinking about “renegade economist Hyman Minsky” is causing me to giggle uncontrollably.


Mulp 01.10.18 at 7:31 pm

It seems to me the problem is the redefinition of Keynes-whatever thanks to free lunch economists, aka voodoo economists aka Reaganomics.

FDR and Keynes were clear that putting people to work required paying people to produce productive capital assets, until as Keynes put it, capital ceases to be scarce and returns to capital are only sufficient to cover all labor costs, including the business owners.

Building capital is typically done with debt to pay workers, ie debt to pay workers to build factories, highways, bridges, schools.

Free lunch economists mush together operations and investment as if the two are the same. This makes the free lunch equivalency of cutting taxes much more than investments are cut to argue that the Keynesian stimulus is bigger.

Ie, in 2008, the Bush tax cuts increased the deficits while largely promoting cuts in investing. Then in 2009, to win GOP votes (Snowe, Collins), investing was cut while tax cuts were increased. Then when the now reduced investing increase flowed to the States, they cut their investing, sometimes cutting taxes, so the net result was no increase or even decreased investing.

Building a transportation project with debt is not deficit spending, but it is very much Keynesian. Paying people to not work, ie, welfare, is deficit spending if done with debt, and it is not Keynesian to Keynes. FDR was very clear about the harm caused by paying people to not work.

And tax cuts since the 90s have all been focused on cutting investment in order to make capital scarce to promote rent seeking and monopoly power. Ie, they seek the opposite of Keynes prescription:

“Thus we might aim in practice (there being nothing in this which is unattainable) at an increase in the volume of capital until it ceases to be scarce, so that the functionless investor will no longer receive a bonus; and at a scheme of direct taxation which allows the intelligence and determination and executive skill of the financier, the entrepreneur et hoc genus omne (who are certainly so fond of their craft that their labour could be obtained much cheaper than at present), to be harnessed to the service of the community on reasonable terms of reward.”

In 2014, “capital ceased to be scarce” in oil production and the $50 a barrel range rents on oil vanished. OPEC has been trying to make capiital scarce by cutting investment, but in the US, too many investors and business people keep paying workers to build more productive capital, each trying to match the labor costs to the returns to capital to produce a reward for their risks. There is no rent seeking by these investors.

But the tax cuts reward generating capital gains, something that happens from high rents which requires making capital scarcer by blocking the building of capital assets.

If investments were made in transportation, whether rail as in the pre-WWII era or highways afterward, cheap housing could be built to eliminate the capital scarcity of housing, and that would cut rents, slash asset prices, and make returns on housing equal to the labor costs of building housing. There would be no capital gains (although prices will increase with inflation, a “gain” that should eliminated by indexing original cost for inflation).

Just because tax cuts generate huge deficits, they are NOT KEYNESIAN!

Tax hikes are probably Keynesian. Ie, Reagan hiking the gas tax 125% Jan 6, 1983 was very Keynesian. Bush hiking the gas tax in 1990 was half Keynesian because only half was paid to support investing in capital assets. A gas tax hike to 40-50 cents a gallon would be very Keynesian if it maintained the same local match as that tax revenue WOULD BE PAID TO WORKERS BUILDING TRANSPORTATION ASSETS. Investment by governments and the private sector would be massively increased. Ie, building new transportation would create lots of investments around each new access point: train stop, highway exit.


bruce wilder 01.11.18 at 5:11 pm

I have questioned whether I might, or might not, be able to formulate a comment of finite length and scope. In some ways, the most impressive thing about your paper is that you managed to take on a topic of such potential depth and scale while keeping it to readable length. From the internal evidence of the paper itself, I suppose that you have close on 5 years invested already, but I wonder if you are or were considering a book-length project. ?


John Quiggin 01.12.18 at 5:15 am

BW @6 That’s a nice vote of confidence, thanks. If I could only finish my current book project (also 5 years in the making) I might think about a new one.


Robert 01.12.18 at 6:12 pm

I assume the book I’m looking forward to is Economics in Two Lessons.

Last night, I read Krugman’s essay in the Oxford Review of Economic Policy. He explains, as he has blogged, that old-fashioned IS/LM Keynesianism came through the crisis fine and that this approach provides the intuition formalized in saltwater New Keynesian DSGE models.

I would like to ask him if he thinks this approach is basically fine, why was he exploring Kalecki and Minsky a few years ago? Did he think at the time that there were problems?

Krugman says economists did not anticipate the crisis because they failed to note the housing boom was a bubble in some areas, the rise of shadow banking with new forms of money, and some other empirical fact which I forget. I would think Post Keynesian proponents of endogenous money should get credit for having a theory that directs one to look for new forms of money. (I noted this in 2009.)

Would Post Keynesianism be the big idea that economists should have adopted after the crisis?


John Quiggin 01.16.18 at 8:10 am

Robert @8 “I assume the book I’m looking forward to is Economics in Two Lessons.” Yes

Krugman can speak for himself, but I’d suggest the view that IS/LM Keynesianism works as a guide to policy, in response to a depression, but that you need a Minsky-style theory of financial crisis to explain how (or at least one way) how depressions come about. Apart from mechanical multiplier-accelerator models, standard IS/LM Keynesianism never came up with that.

On Kalecki, the crucial point is not in economic theory, but in the political economy that explains why austerity policies prevailed. I read what Krugman wrote in the recent discussion as being consistent with this exchange from a few years back


bruce wilder 01.23.18 at 6:33 am

Apropos Robert’s comment above, Robert Skidelski has a column on Krugman’s essay.

Skidelski does not mention Minsky explicitly, but I think he is gesturing in a direction similar to JQ here, saying economics needs a theory that takes account of radical uncertainty (as opposed to well-behaved risk) and how and when and why the financial system is likely to prove periodically and globally unable to “price” risk or manage its realization.

Skidelski raises a potentially interesting ideational challenge to the Farrell & Quiggin thesis: he offers the view that the New Keynesian idea of fiscal policy as an emergency intervention comes with an expiration date built in. The theory could not sustain within its terms an argument for extended fiscal stimulus. Nor was there much of an agenda beyond short-term relief and reflation in the sudden wave of enthusiasm for fiscal stimulus circa 2008-9.

The austerity policy program was always and inherently aimed at restructuring economies. The New Keysenians have little to say in critique of the economy’s structure and Krugman in particular could be faulted for failing to adequately acknowledge that restructuring was a core aim of the austerity policymakers.

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