The Bastardisation of Keynes

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Bill Mitchell gives a concise account of how the real Keynes was removed from the economic curriculum and replaced by a forgery that turned Keynesian economics into a branch of neoclassical economics.

While neoclassical economists argue that the economy is naturally tending toward equilibrium, thanks to sub-markets (in the context of the below, especially the labour market) that tend toward equilibrium themselves while creating overall equilibrium in the economy by interacting with each other, Keynes showed that no matter how flexible wages are (no matter how well the neoclassical labour market works), the economy's ability to create a full employment equilibrium breaks down when effective demand is insufficient.

When I started studying macroeconomics we were told by mainstream lecturers that the work of John Maynard Keynes (in the General Theory) was really just a special case of Neoclassical theory and was operational when wages and prices were downwardly rigid (that is, didn’t fall when their was excess supply). 

As a consequence of this ‘conclusion’, mass unemployment was due to excessive real wages and could be cured if money wages were allowed to fall in the face of the excess supply (unemployment). 

The orthodoxy had distilled Keynes’ ‘radical’ rejection of Neoclassical theory – its monetary origins, its conception of the labour market, its flawed concepts of saving, and more – down to being a meagre ‘special case’, which is triggered when some assumptions (price flexibility) are altered. 

And until Monetarism emerged in the late 1960s, the so-called Neoclassical Synthesis dominated. 

Of course, Keynes himself had rejected the ‘special case’ tag and was at pains to show that his anti-Neoclassical results held (effective demand, involuntary unemployment etc) even if wages and prices were flexible in both directions. 

But in dealing with Keynes in this way, the Neoclassical (dominant) school of thought was able to abstract from all the conceptual and theoretical differences that Keynes had advanced to show the fatal flaws in the dominant paradigm in economics. 

And they were able to reduce the debate down to a matter of wage and price flexibility. And so, mass unemployment was seen to be a problem of minimum wages, excessive trade union power, other legal constraints on wage cuts etc. 

All of the insights that Keynes provided on uncertainty, institutional reasons for downwardly rigid wages and more were essentially lost to several generations of students. 

If students had read the core works they would have concluded that Keynes was proposing a radical departure from the mainstream economics of his day. 

They would have known that the dispute was about a fundamentally different understanding of the economy and that the mainstream approach was logically flawed and as a result could not represent a plausible explanation of reality. 

But the mainstream textbooks, which have evolved into the likes of Mankiw etc, pushed the Synthesis approach and so modern New Keynesians still consider that fiscal policy has some function because wages and prices are ‘sticky’ (rigid) – so the ‘special case’ sort of reasoning. 

But they then revert to full Classical thinking that fiscal policy is totally ineffective in the ‘long run’ once wages and prices adjust up or down.

The source.