Introduction
Post-Keynesian economics emerged as a response to neoclassical interpretations of Keynesian thought, emphasizing uncertainty, historical time, and the role of effective demand. Unlike mainstream macroeconomic models that often rely on equilibrium conditions, post-Keynesians argue that economies are driven by dynamic, path-dependent processes. This article explores the key principles, theoretical foundations, and real-world applications of post-Keynesian economic thought, emphasizing its relevance to modern U.S. economic policy.
Table of Contents
Core Principles of Post-Keynesian Economics
Post-Keynesian economics is built upon several key principles:
- Endogenous Money Supply: Unlike the neoclassical view, post-Keynesians argue that money supply is determined by demand for credit, not controlled exogenously by central banks.
- Effective Demand: Demand, rather than supply, determines economic output in both short and long runs.
- Uncertainty and Expectations: Fundamental uncertainty plays a central role in economic decision-making, distinguishing it from probabilistic risk.
- Historical Time: Economic processes unfold over time, meaning past decisions shape present and future outcomes.
- Income Distribution: Income inequality and class structure influence aggregate demand and economic stability.
Effective Demand and Economic Output
The post-Keynesian view of demand-led growth builds on Keynes’ principle of effective demand. The core equation for aggregate demand is:
Y = C + I + G + (X - M)where:
- Y is national income,
- C is consumption,
- I is investment,
- G is government spending,
- X is exports,
- M is imports.
Unlike classical theories where supply creates its own demand (Say’s Law), post-Keynesians argue that insufficient demand leads to unemployment and stagnation.
Endogenous Money and Credit Creation
Post-Keynesians reject the traditional money multiplier model. Instead, they argue that loans create deposits, meaning money is created endogenously by commercial banks. The central equation representing this is:
M = L + Dwhere:
- M is total money supply,
- L is total bank lending,
- D is deposit creation through lending.
This framework has significant policy implications, as it suggests that monetary policy should focus on regulating credit supply rather than money supply.
Comparison of Post-Keynesian and Mainstream Economic Theories
| Feature | Post-Keynesian Economics | Neoclassical Economics |
|---|---|---|
| Money Supply | Endogenous, demand-driven | Exogenous, central bank-controlled |
| Demand | Determines long-term output | Only affects short-term fluctuations |
| Expectations | Subject to fundamental uncertainty | Rational expectations dominate |
| Policy Focus | Fiscal policy and income distribution | Monetary policy and market efficiency |
Investment, Saving, and Financial Stability
Post-Keynesian models emphasize the importance of investment in driving economic growth. Investment decisions depend on expected returns, which are influenced by business confidence and liquidity preferences. The key equation linking investment and savings is:
S = IHowever, in a demand-driven economy, increased saving does not automatically translate to increased investment, leading to the paradox of thrift. If all households attempt to save more simultaneously, aggregate demand falls, reducing overall output.
Case Study: The 2008 Financial Crisis
The 2008 financial crisis provides an example of post-Keynesian principles in action. Leading up to the crisis:
- Excessive private debt and credit expansion fueled asset bubbles.
- The collapse in demand following the housing market crash led to prolonged stagnation.
- Austerity policies in response to rising deficits exacerbated economic downturns, contrary to post-Keynesian prescriptions advocating for deficit spending to stimulate demand.
Fiscal Policy and Economic Stability
Post-Keynesians advocate for active fiscal policy, arguing that government deficits are necessary for sustaining demand, especially during downturns. The government budget constraint is expressed as:
G - T = \Delta B + \Delta Mwhere:
- G is government spending,
- T is tax revenue,
- ∆B is change in government bonds,
- ∆M is change in money supply.
This framework implies that fiscal deficits are not inherently problematic, as long as they contribute to growth and employment.
Conclusion
Post-Keynesian economics offers a compelling alternative to mainstream economic thought by focusing on real-world dynamics such as demand-driven growth, financial instability, and income inequality. As the U.S. continues to face economic challenges, incorporating post-Keynesian insights into policy-making can lead to more effective responses to recessions and financial crises.
