Home > Economic policy, Economics - General > The Rise and Fall of Keynesianism after the GFC

The Rise and Fall of Keynesianism after the GFC

January 9th, 2018

International Studies Quarterly has just published a symposium responding to a paper by Henry Farrell 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.

  1. Robert Banks
    January 9th, 2018 at 16:10 | #1

    John

    in relation to your discussion of the “ideational” dimension to how the Keynesian debate has played out, there is some discussion in the interview at this link of the importance of narratives, stories and social learning:

    http://evonomics.com/how-to-creative-collective-intelligence-david-wilson-mulgan/

  2. January 9th, 2018 at 23:22 | #2

    IIRC there are cases in tribal societies where battles are preceded, and occasionally avoided, by prior contests between the two sides’ in-house bards. The pattern can also be seen in the relationship between fans, owners and players in professional sports, going back to the Blues and Greens of imperial Byzantium. Climate denialist sponsors have had a harder time finding reputable apologists, but they solved the problem by elevating charlatans to professional status.

  3. Ikonoclast
    January 10th, 2018 at 09:09 | #3

    There is always the issue of dishonesty and bad faith. The following hypothesis conforms to Occam’s Razor. The most powerful actors are the billionaire capitalist individuals. The next most powerful are CEOs and boards. Then there are are the major political parties (whose policies are bought by donations), especially that party in power at a given time and especially the executive (ministers) in that party in power.

    The most powerful among the currently powerful political and economic actors;

    (1) Know that Keynesianism works.
    (2) Generally don’t want it to work and thus will not implement it.
    (3) Will temporarily resort to it in a severe crisis when nothing else will work and provided that the stimulus goes to capital interests and not to labor interests.

    Following Keynesianism prescriptions more systematically would (a) remove the unemployed army, (b) decrease inequality, and (c) decrease relatively and probably even absolutely the wealth of rich capitalists. This is the situation wealthy capitalists want to avoid.

    The economic arguments employed by the self-aware anti-Keynesians are fig leafs. The “high priests” of any mystifying religion or oppressive ideology know their dogma is bunkum. The “acolytes” below them are the useful fools who actually believe in the dogma and can be relied upon to exhaust and deflect opponents with their endless fanaticism and rationalized fabrications.

  4. kyle marc
    January 10th, 2018 at 14:48 | #4

    @Ikonoclast in my experience billionare capitalists are some of the biggest supporters of keynesianism. just look at how corporate yuppie types lapped up to red ken in this country. the rich always welcome inflation because its good for their asset prices; not so good for the worker on stagnent wages.

    the only viable solution is to nationalise the australian financial industry and throw pratt and co. into the gulag

  5. Ernestine Gross
    January 10th, 2018 at 20:09 | #5

    JQ, you made what is IMHO the most important point amounting to saying that whether or not ‘stimulus spending’ is a good thing or not depends on the circumstances and in particular on the time frame.

    Keynesianism, as it was practised after WWII and until the US dollar hit a hurdle in the early 1970s, is not a feasible unconstrained policy option because the international monetary and financial system has changed significantly. Therefore ‘stimulus spending’ could only be a short term response to the GFC.

    In a sense, the rise and fall of Keynesianism since thee GFC is therefore implied by your premise as to when and under which conditions ‘stimulus spending’ is appropriate.

    It is, however, interesting to see how sociological economics describes some ultimately presumed dynamics between the economic profession and politicians.

  6. Ikonoclast
    January 10th, 2018 at 22:03 | #6

    @Ernestine Gross

    “Therefore ‘stimulus spending’ could only be a short term response to the GFC.”

    Your conclusion does not follow from your premise: “the international monetary and financial system has changed significantly.”

    The system has changed but why do these changes prevent long term stimulus? Can governments with a sovereign currency now not “print money” (albeit electronically)? Can money not be printed in a recession characterised by underutilised capacity without incurring excessive inflation dangers? Or is there some other obstacle?

  7. Greg Pius
    January 11th, 2018 at 06:32 | #7

    @ Ikonoclast
    Ernestine is being logically consistent within the economic paradigm. I spent many years in the 1970s struggling with what Ernestine has put down so succinctly. The long term stimulus dream is just that a dream. The 1970s in Australia demonstrated the dangers of an out of control multiplier effect. My Professor of Economics, John Neville, tried to rescue it with a super multiplier effect theory. It did not work in the real world of wage rigidity downwards labour awards made in legal settings.
    Professor Pitchford came up with the answer. His twin deficit theory pointed out that long term stimulus is not possible in Australia because of the impact on Australia’s Balance of Payments. Our Foreign Debt was escalating as our domestic savers failed to cover our National Debt. Unlike the USA we cannot just keep printing money. Even in recessions our balance on current account deficit impacts badly on our balance on capital account.
    Finally the floating of our dollar in 1984 let the currency speculators take over our external shocks scenarios. The Aussie dollar became the fourth most traded currency because of the small volume of our currency on world money markets. This allowed hedge funds to manipulate our exchange rate with small $10 million dollar trades.

  8. Greg Pius
    January 11th, 2018 at 06:45 | #8

    @ Ikonoclast
    Ernestine is being logically consistent within the economic paradigm. I spent many years in the 1970s struggling with what Ernestine has put down so succinctly. The long term stimulus dream is just that a dream. The 1970s in Australia demonstrated the dangers of an out of control multiplier effect. My Professor of Economics, John Neville, tried to rescue it with a super multiplier effect theory. It did not work in the real world of wage rigidity downwards as our labour awards were made in legal settings.
    Professor Pitchford came up with the answer. His twin deficit theory pointed out that long term stimulus is not possible in Australia because of the impact on Australia’s Balance of Payments. Our Foreign Debt was escalating as our domestic savers failed to cover our National Debt. Unlike the USA we cannot just keep printing money. Even in recessions our balance on current account deficit impacts badly on our foreign debt accumulation.
    Finally the floating of our dollar in 1984 let the currency speculators take over our external shocks scenarios. The Aussie dollar became the fourth most traded currency because of the small volume of our currency on world money markets. This allowed hedge funds to manipulate our exchange rate with small $10 million dollar trades.
    The obstacle that seems the current one is our narrow capital base. This causes our deficit units to seek overseas loans and debt facilities often written in US dollar terms. That ties our dollar to the Us dollar in many hidden ways. It is not just commodity prices as is portarayed by media journalists.
    As in all things in the capitalist economic system the devil is in the detail.

  9. sunshine
    January 11th, 2018 at 07:31 | #9

    Being well connected ,Trumps father made his money from government contracts after the great depression and WWII. Trump would have far more money now had he just put his inheritance in gov’t bonds. The Koch’s father made his (and their) fortune building oil facilities for Stalin and the Nazis .No popular socialist movement could convince the 1% to redistribute the spoils. Socialists might soon get elected somewhere in the West but the 1% wont cooperate.

  10. Nevil Kingston-Brown
    January 11th, 2018 at 10:30 | #10

    It would be interesting to take this line of thinking further and examine how debate amongst economists and policymakers feeds back into the economic outcomes they are studying. I am thinking of Sraffa’s demonstration that the distribution of GNI between wages and profits is exogenous to the distribution of resources and prices within the economy, and is therefore determined by other factors such as social and bargaining power. The feedback loop in operation in the US seems like a good demonstration: “free market” ideologies -> lower taxes on the wealthy and regressive social policies towards unions and other wage determiners e.g. low minimum wage rates -> higher profits, lower wages -> more financial support from the wealthy for economists and policymakers who push “free market” ideologies. A positive feedback loop that would take significant external shocks to dislodge. Similarly we could imagine a Keynesian ideological feedback loop occurring in the 40s-70s in which unions and social democrat governments supported economists and policymakers who advocated higher wages and lower profits, strengthening unions and social democrat parties who then funded those economists.

  11. may
    January 11th, 2018 at 13:32 | #11

    i love this blog.

    sometimes i can actually make head or tails about what is being discussed!

  12. Ikonoclast
    January 11th, 2018 at 13:59 | #12

    Hmmm, I did a post which disappeared. An attempt at re-posting says “duplicate post”. It’s there and not there, like Schrödinger’s cat I guess.

  13. DebbieAnne
    January 12th, 2018 at 17:55 | #13

    @may
    Me too 🙂

  14. Ikonoclast
    January 13th, 2018 at 09:22 | #14

    The following passage, from an essay I have just read, is on-topic, incisive and amusing in a sadly black-humour sort of way.

    “Neoliberal Newspeak: Monopoly Is Competition

    The left embrace of monopoly (theory) at the heart of its critique of capitalism was hardly emulated by mainstream economists. To the contrary, over the course of the 1970s and certainly by the early 1980s, the field went in precisely the opposite direction. The neoliberal (claimed) shift to a “leaner, meaner” capitalist system brought the “free market” economics of the Chicago School into a position of dominance. The ideas of Hayek, Friedman, George Stigler, and a host of other conservative economists now ruled the profession. Traditional Keynesians and institutionalists—those more sympathetic to reality-based assessments of monopoly—not to mention left economists, found themselves marginalized.

    The victory of neoliberal economics was not the result of superior debating techniques or stellar research. It is best viewed as the necessary political-economic policy counterpart to the rise of monopoly-finance capital. More specifically, it can be described as a response to the changes in accumulation and competition associated with a new phase of stagnant accumulation in the capitalist core, and to the associated financialization of the global economy.” – Monopoly and Competition in Twenty-First Century Capitalism – Monthly Review, John Bellamy Foster et. al.

    I laughed out loud at “—those more sympathetic to reality-based assessments of monopoly—not to mention left economists, found themselves marginalized.”

    And at: “The victory of neoliberal economics was not the result of superior debating techniques or stellar research.”

    The above are gems. However, the authors then briefly account for the victory of neoliberal economics. “It is best viewed as the necessary political-economic policy counterpart to the rise of monopoly-finance capital. More specifically, it can be described as a response to the changes in accumulation and competition associated with a new phase of stagnant accumulation in the capitalist core, and to the associated financialization of the global economy.”

    Whether this insight can be melded to J.Q.’s “ecology” theorising or whether it obviates the necessity for that kind of theorising, I leave to others to decide. I admit I am not sure myself. If by “ecology”, in the context of J.Q.’s theorising, he means “systems” (and systems of systems) then it may just be about which lexicon (of terms) is being employed for the analysis.

  15. ZM
    January 13th, 2018 at 20:18 | #15

    I think governance is the key issue.

    There was roughly a 40 year post-War consensus on Keynesian economics that was followed by both sides of politics in the Anglo countries, and had very strong support in the public services.

    The consensus started fraying in the 70s with the oil crisis and stagflation and a return to conservativism in the right which the events of WW2 had dented.

    But it wasn’t until the mid-80s that government policy turned to neoliberal reform.

    I would classify that as a transitional period of around 10 years from the mid-80s to the mid-90s.

    From the mid-90s onwards the tables were turned and we entered a 20 year period of neoliberal consensus, shared by both sides of politics in all the Anglo countries, and generally shared by the public service which had undergone restructuring in the 90s.

    With that we have seen deindustrialisation, a rise in low paid service work, higher personal costs for education, the increasing use of “weasel words” in a public service that has lost the ethos of being of service to the public, a decrease in the dole payment making it impossible to live on for more than very short periods of unemployment, increased inequality and homelessness and crime, fracturing of social bonds and the idea of a shared public life, and increased instability and volatility in government, accompanied by, dare I say it, Fake News where the media are no longer reliable at presenting what’s going on in our nation and cities.

    The 10 years of reforms followed by the 20 year period of neoliberal consensus goes from say ~1985 to ~2015 , it arguably would have ended sooner than 2015 if the Obama and Rudd governments hadn’t artificially propped up the economic bubble as it started to burst from 2006 as the GFC began with the collapse of the USA housing bubble.

    ~2015 is also when the Limits To Growth forecast an economic downturn due to resources becoming less accessible. Many policy makers would have read LTG in the 70s and along with the oil crisis and stagflation resource constraints were one argument for why the Keynesian welfare state couldn’t continue after the 40 year consensus period following the Allied win in WW2.

    Over the 20 year neoliberal consensus period in Australia we saw the mining boom transform our economy while it lasted, as well as participating in American led wars in the Middle East that many defence experts say were fought over oil resources, and which Kim Beazley admitted to committing Australia to in a conversation with America in the 80s, meaning the wars were planned since the 80s.

    There has been insuffiicient action on climate change over the 20 years of neoliberalism, as well as insufficient action on other environmental sustainability issues.

    On the plus side however, neoliberalism was accompanied by pro-globalisation policies that allowed economic growth in second world and third world countries, and lifted millions of people out of poverty.

    I see the key issues preventing a return to a post-war Keynesian welfare state consensus in the Anglo countries as:

    1. Resource limitations
    2. Environmental degradation
    3. Climate change
    4. Global equality and poverty eradication
    5. Resistance by social subgroups who want greater diversity including conservatives and Muslims resistant to central government control
    6. Feelings of social stagnation and government or bureaucratic control when committed to long term Keynesianism in economic policy settings
    7. Resistance by business owners and oligarchs who wish to increase profits and wealth and don’t like an empowered working class

    I think a return to a Keynsian consensus isn’t workable for these reasons, although I don’t think neoliberalism as enacted from the mid 90s to ~2015 is workable either.

    The Keynesian welfare state consensus was a response to the specific conditions of the post-War era, I think the next long term economic policy consensus will have to be in response to the current social and economic conditions.

  16. Ernestine Gross
    January 13th, 2018 at 20:59 | #16

    @ZM

    I tend to agree with your conclusion as stated in your last 2 paragraphs.

  17. Ikonoclast
    January 14th, 2018 at 06:05 | #17

    @ZM

    I agree with quite a bit of what you say but I would add a couple of caveats.

    1. “a public service that has lost the ethos of being of service to the public”

    It’s true except the caveat I would place on this is that it was not the workers in the public service who lost the ethos of being of service to the public. It was the government and their new band of public service heads on contracts who destroyed this ethos. Public service workers had their pay, conditions and staffing levels severely attacked. They were forced to implement policies they often conscientiously disagreed with or they were forced out.

    2. “The Keynesian welfare state consensus was a response to the specific conditions of the post-War era…”

    If one is talking politically, this is certainly correct. Large wars taught working men (who ended up in the armies) and working women (who ended up as workers in factories and on farms) that working people as masses when banded together are very, very strong and will sweep everything in their path. Post-war governments were afraid of the masses of men who had come home and had to be demobilised. And they were afraid of the women who had the vote, who also now understood what it was like to be workers and who would support their demobilised men. The working class got a good deal after WW2 because the governments were seriously frightened of the power of the masses which had been so convincingly demonstrated industrially and militarily in WW2.

    If one is talking economically, there is also some truth in what you say. WW2 had seen a great deal of destruction and then reconstruction had to occur. The need for reconstruction meant a great need for economic stimulus and employment. This is rather typical of capitalism. On suffering a crisis of depression, one of capitalism’s rather typical responses is to generate large wars which enable a re-stimulus the economy the venting of a possible new round of over-production andi then unemployment by destruction and killing.

    However, it is wrong to draw the lesson that stimulus and welfarism are now not possible. This is an analysis which plays right into neoliberal hands and is objectively, materially false. During war crises, a great deal of productive capacity is built and diverted to military requirements. During an ecological and climate crisis, which we are now in, a great deal of productive capacity could be diverted to saving the biosphere and climate. This could be done at a large net saving of energy and materials. Mass transit is more efficient than cars. Electric cars are more efficient than petrol cars and so on. Solar panels rather than automobiles should be rolling of the assembly lines.

    Yet this complete reorganisation of the economy would inescapably require of lot of human work, not just a lot of robot work. Machines cannot yet redirect an entire economy, only a large human effort can do this. The net effect of re-tooling a whole economy and then re-directing it to sustainability would in fact be a great increase in available work for people.

    This would cover a sizeable transition period, very probably a generational time of 25 years or so. What happens after that? If the climate challenge remains severe (because so much climate change is already baked in now) then there will no shortage of work for humans. If materials and energy are short then direct human labour once again becomes an important part of the mix. Even in such a “Long Emergency”, as Kunstler terms it, there would be an equitable, socialist way to handle hardships or a barbaric way. We have to decide, socialism or barbarism.

Comments are closed.