Keynes, Keynesians and contemporary monetary theory and policy: an assessment

Abstract

There has been no Keynesian Revolution in economic theory but there has been an unacknowledged Keynes’s Revolution in economic policy. Keynes’s theoretical revolution rested on the adoption of monetary analysis and the application of the principle of effective demand to demonstrate the existence of multiple longperiod equilibria. Keynes’s policies – creating a role for ‘Big Government’ and the ‘Big Bank’follow from his theory and have changed the structure of the laissez faire economy. Many Keynesians fail to acknowledge either of these issues and continue the classical tradition of real analysis and the assumption of unique longperiod equilibrium. Real analysis, as a special case of Keynes’s monetary analysis, provides a distorted perspective of the responsibilities of monetary policy which largely accounts for the increasing fragility and volatility exhibited by financial markets over the past two decades.