Post-Keynesian Economics

Published Mar 22, 2024

Definition of Post-Keynesian Economics

Post-Keynesian economics is a school of economic thought that builds upon the ideas of John Maynard Keynes. It emphasizes the importance of demand in the economy, inherent market instability, and the role of government intervention to mitigate these instabilities. Post-Keynesians argue that markets do not naturally move towards full employment and that active fiscal policy is necessary to achieve this goal. This approach contrasts with classical and neoclassical economics, which tend to emphasize supply-side factors and market self-regulation.

Key Concepts in Post-Keynesian Economics

Post-Keynesian economics revolves around several core principles that differentiate it from other economic schools of thought:

• Effective Demand: The theory stresses the role of effective demand in determining output and employment levels. It posits that production and employment decisions are made based on anticipated demand rather than the availability of factors of production.
• Uncertainty and Expectations: Post-Keynesians highlight the importance of uncertainty and expectations in economic decision-making, noting that future market conditions cannot be predicted with certainty. This uncertainty affects investment and consumption decisions, impacting economic stability.
• Role of Money and Finance: Money is considered not just a medium of exchange but also a store of value that affects economic behavior. The financial sector is seen as having a crucial impact on economic stability, with financial markets capable of amplifying economic fluctuations through the provision or withholding of credit.
• Government Intervention: Post-Keynesians advocate for active government policies to stabilize the economy, including fiscal and monetary measures. They argue that without such intervention, economies can languish in prolonged periods of underemployment and underutilization of resources.
• Income Distribution: The distribution of income is considered an integral aspect that influences aggregate demand and overall economic performance. Post-Keynesians often support policies that promote more equitable income distribution.

Example

Consider a scenario where an economy experiences a downturn resulting in increased unemployment and decreased consumer spending. According to post-Keynesian principles, this situation is exacerbated by pessimistic expectations and reduced investment by businesses. In this context, post-Keynesians would advocate for government intervention, such as increased public spending or tax cuts, to boost demand and break the vicious cycle of declining demand and investment.

Why Post-Keynesian Economics Matters

Post-Keynesian economics offers an alternative view of economic dynamics that highlights the limitations of market self-correction mechanisms and the need for active policy measures. It is particularly relevant in times of economic crisis when traditional market forces appear insufficient to quickly restore full employment and economic stability. By focusing on demand, uncertainty, and the role of the financial sector, post-Keynesian economics provides a framework for understanding economic fluctuations and developing policies aimed at mitigating these fluctuations and promoting sustainable growth.

Frequently Asked Questions (FAQ)

How does post-Keynesian economics differ from classical Keynesianism?

While both post-Keynesianism and classical Keynesianism derive from the works of John Maynard Keynes, post-Keynesian economics further develops and diverges from some of Keynes’ original ideas. It places a greater emphasis on the role of uncertainty, the endogenous creation of money by the banking sector, and the importance of income distribution. Post-Keynesians also critique the neoclassical synthesis that attempted to incorporate Keynesian concepts into neoclassical economics, arguing it dilutes Keynes’ emphasis on market instability and the effectiveness of demand-side policies.

What policy recommendations do post-Keynesians typically advocate?

Post-Keynesians generally advocate for policies that enhance demand, such as increased government spending, especially in times of recession. They also support measures that reduce income inequality, regulate financial markets to prevent speculative bubbles, and maintain low levels of unemployment through direct intervention.

How is post-Keynesian economics viewed in the broader economic community?

Post-Keynesian economics is one of several heterodox schools of thought that challenge the dominant neoclassical approach to economics. While it is not the mainstream view, it has gained attention and respect, particularly in the wake of financial crises that have exposed the limitations of conventional economic models. Its focus on uncertainty, economic instability, and the importance of government intervention resonates with those seeking alternatives to the neoclassical emphasis on market self-regulation.

This overview of post-Keynesian economics highlights its significance as a critical perspective on economic theory and policy, offering insights into the complexities of modern economies and the multifaceted role of government intervention.