Post-Keynesian Economics: Origin, Emergence and Implications

Read this article to learn about the origin, emergence and implications of Post-Keynesian economics.

Origin of Post-Keynesian Economic:

Post-Keynesians argue that the interpretation of Keynesian theory has been highly different because it had the effect of pushing Keynes’ contributions back into a classical mold.

Post-Keynesians (having their scholarly journal called Journal of Post-Keynesian Economics) maintain contemporary macroeconomic theory is different because it fails to integrate into the theory key insights into aggregate behaviour that are explicit in the general theory.

The most significant of these is ‘uncertainty’ and its impact on economic decisions.

It ignores the fact that economic process taken place in real, historic time and finally the crucial role played by economic, social and political institutions. Post-Keynesians are critical of economic theory that neglects the impact that market power has no economic behaviour, especially in the explanation of inflation. They have, however, yet to develop an agreed macroeconomic model of the economy, strictly in the post-Keynesian framework.

Monetarism, the new-classical economic and supply-side economics—all reject the Keynesian relationship embodied in the income- expenditure approach developed by Keynes—even if the overall framework of his analysis is accepted. Further, they represent a return in one form or another to classical economics; to belief in the inherent stability of a market economy and its self-core-acting nature.

In contrast to the above dissenters of the after World War II macro economy, there are also post- World War II macroeconomists called—’Post-Keynesians’. Not only do they reject vehemently all attempts to revive classical economics as applied to the whole economy as being both unrealistic and unworkable; they are also highly critical of the standard post-World War II interpretations of Keynes— particularly the ‘new-classical synthesis’.

The latter they regard as an attempt to push the ideas of Keynes into a classical framework, thus denying the Keynesian revolution of all significances. The Post-Keynesians argue that their insights and theories are essentially Keynesian in their origin and inspiration but there is much more than an attempt to update the General Theory to meet the contemporary problems of stagflation, etc.

Emergence of Post-Keynesian Economics:

The Post-Keynesian economists are a diverse group of economists, more so, perhaps, than the monetarists, the new-classical economists or the supply-siders. In one such sub-group, particularly, but not wholly located at Cambridge University in England—which concentrated on the dynamics of full- employment growth, paying special attention to the linkages between income distribution and growth, we include the well known economists like late Prof. R.F. Harrod, late Prof. N. Kaldor, late Prof. Joen Robinson and Prof. Jan Keregal, as well as Alfred Eichner of Rutgers University (USA).

In the second sub-group we find, economists like Robert Clower, and Alexis L. Leijonhufved of the University of California, Los Angles; who have challenged the Walrasian system of general equilibrium, which is one of the two basic elements in new-classical economics.

Finally, there is another such sub-group whose interests are directed toward the workings of the real-world market economy, not an ideal vision of market economy such as is found and advocated in the new-classical economics. The real world market economy operates in historic time, is characterised by a high degree of uncertainty, and is one in which both financial institutions and power of organised groups play an important role. Important economists of this group are Prof. Paul Davidson of Rutgers University, Hyman Minsky of Washington University, the late Sidney Weintraub of University of Pennsylvania and J.K. Galbraith of Harvard University and at one time ambassador of USA to India.

In the United States most of writers are grouping around the Journal of Post-Keynesian Economics (JPKE) which is edited enthusiastically by Paul Davidson and Sidney Weintraub. Cambridge Journal of Economics (CJE) is the outlet of these writers who belong to English and European groups. P. Sraffa, P. Garegnani, Krishna Bharadwaj, M. Kalecki and Joan Robinson are the other writers who provide the classical-Marxist roots to the present controversy.

Donald Harris is another writer who has been able to combine the classicals and Marx with Keynes, Kalecki, Robinson, Kaldor and Harrod into a comprehensive framework.’ The Post-Keynesians draw their inspiration from ‘Thames Papers’ in Political-Economy! a series which has appeared three times a year for over a decade and has enjoyed a small but increasing circulation amongst interested readers. ‘Thames Papers’ in Political Economy have investigated theoretical and policy questions in political economy always from a non-neoclassical perspective and tried to contribute to the construction and development of an alternative theory to the dominant concept of neoclassical theory. This alternative, to the development of which these series mostly contributed, is that of Post-Keynesianism.

This small group of economists has attempted to formulate the hard core of the economic theory in a more realistic manner. Although it is hardly a cohesive group yet they have certain important features in common, giving rise to an awareness what these common features are—the group prefers to be called as Post-Keynesian economists. They include as described above American institutions—lists and the continental Marxists as well as Keynes closest associates.

As such, it is their work taken together which offers a comprehensive and coherent alternative to existing orthodox economic theory. Their Post-Keynesian economic framework includes different type of analysis in various subject areas of economics—macro-dynamics, income distribution, pricing, international trade, tax incidence, labour and natural resources.

They would include, besides Keynes, Kahn (multiplier concept), Joan Robinson (imperfect competition), N. Kaldor (income distribution), R. Harrod (economic growth), P. Sraffa (Ricardo’s restoration) and M. Kalecki (Polish Marxist). It is, however, difficult to say who in the succeeding 50 years after the General Theory exerted the greater influence on the development of Post-Keynesian economics. Keynes himself or Kalecki? Together, they lead to two separate strands in classical Keynesianism: one strand focus on the monetary perspective of Keynes and the other on real sector analysis of Kalecki.

The first lays stress on uncertainties revolving round investment in a monetarised economy, the second the distributional and other effects of investment and savings—with both strands essential for a complete analysis of production over time in a money using economic system. Harrod’s work on growth dynamics in 1930 vis-a-vis Keynes’ macro-static analysis marked the beginning of Post-Keynesian theory.

The later studied how an economic system assumed to be initially at rest reached a new equilibrium when and if it was disturbed from without—what was required, Harrod argued, was a body of theory to explain what caused the observable movement of economic system to change over time.

However, it was not until nearly two decades later that Harrod’s pioneering work bore fruit leading to the development of a relatively robust Post-Keynesian theory. 1956 work of Joan Robinson (The Accumulation of Capital) and an article by Kaldor (Alternate Theories of Distribution—Review of Economic Studies) marked the state of a distinct Post-Keynesian economics. Simultaneously, in USA which had largely replaced Great Britain as the dominant world power, a new ‘neoclassical synthesis’ had emerged based on the work of Paul Samuelson, Robert Solow (MIT) and T. Swan in Australia in 1956.

Post-Keynesian Economics—Policy Implications:

Distinguishing features of Post-Keynesian economics apart; the critical question still goes a begging that is what are the policy implications of Post-Keynesian economics? Are they conservative, liberal or radical? Conservatives, for example, will not be happy with the conclusion that the distribution of income can be significantly allowed without impairing the productive efficiency.

Liberals, likewise will not be happy with the notion that competitive markets are not essential to the efficient working of the system and radicals will not be happy with the idea that the system may be Stable even without a fundamental transformation of institutions. However, it is important to emphasize that at this stage of its development, Post-Keynesian economics remains far from a settled body of economic doctrine.

If there is one area on which economists with a Post-Keynesian perspective would agree is that inflation or stagflation cannot be controlled through conventional instruments of fiscal and monetary policy because inflation is not the result of ‘excess demand’ ; but due to more fundamental conflict over the distribution of available income and output.

The conventional policy instruments by reducing the level of economic activity, simply reduce the amount of income and output available for distribution thereby heightening the social conflict underlying the inflationary process and shifting the emphasis that inflation is more a social phenomena than a pure economic or monetary phenomena—that is why Post-Keynesian economics concentrate on how incomes policy can be made to work more effectively, equitably and adequately.