Post-Keynesian Economics

What Is The Post-Keynesian Economics (PKE)?

Post-Keynesian Economics (PKE) refers to a set of ideologies in economics that considers effective demand as the key driving force in an economy. Since it is based on the Principle of Effective Demand, it states that demand steers performance in an economy. Propagators of PKE believe that the future (of an economy) is fundamentally uncertain.

This branch of economics covers short-term and long-term macroeconomic factors, such as unemployment, inflation, growth, and output. According to PKE, an economy’s robustness (wages, labor, policies, etc.) is heavily affected by demand. PKE emphasizes the importance of demand, behavioral economics factors, social conflict, and expenditure in an economy. This results in significant shifts in the various parameters reviewed to measure an economy’s growth.

• Post-Keynesian economics is an economic paradigm based on the principle of effective demand and fundamental uncertainty.
• The theory originated from the General Theory of John Maynard Keynes, with further contributions from Michał Kalecki, Joan Robinson, Nicholas Kaldor, Sidney Weintraub, Paul Davidson, Piero Sraffa, and Jan Kregel from 1975 to 1978.
• The New Keynesian Economics replaced it later, from the early 1990s to the financial crisis of 2008.
• The Paradox of Thrift is a common phenomenon that explains the significance of PKE in an economy.

Post-Keynesian Economics Explained

Post-Keynesian economics focuses on the principle of effective demand, signifying the importance of demand and economic performance as its core determinant. The school of thought suggests that the future is fundamentally uncertain, and a capitalist economy is majorly demand-driven. It stresses the importance of analyzing consumer behavior, rationality (the basis of rational behavior), and social conflict.

The post-Keynesian economics new foundations originate from the works of British economist John Maynard Keynes and state that no in-built mechanisms can ensure total employment and complete resource utilization. It further emphasizes that economic activity depends on income distribution, consumption, investment, consumer spending, government spending, import-export figures, monetary policy, etc. Any fluctuation and movement in these aspects leads to a shift in the aggregate demand. Also, it is worth noting that PKE does not assign any importance to the General Equilibrium theory, which states how demand and supply bring an equilibrium across prices in an economy.

According to PKE, aggregate demand impacts an economy in the short term and across long periods. It does not account for labor market and wage flexibility. Post-Keynesian economics propagates the idea of the future of an economy being uncertain and argues that government intervention can rebuild or stabilize it. Therefore, according to PKE, the three main measures a government can implement are debt management, interest rates, and market regulation.

These economists also believe in the endogenous money supply theory, which states that the money supply in an economy is governed by many economic variables and entities and not just by the central bank of a country.

This branch of economics diverges from the theories proposed by neoclassical economists in many ways, particularly because they do not accept a simplified view of the factors that affect economic conditions in the real world. PKE does not believe in the assumptions neoclassical economists proposed while explaining how an economy works or progresses.

History

Post-Keynesian economics was introduced by American economists Alfred Eichner and Jan Kregel in 1975, which led to the publication of the Journal of Post-Keynesian Economics in 1978. Before this, economics was associated with The General Theory of Employment, Interest, and Money by John Maynard Keynes.

Hence, PKE is considered to have originated from it. The school of economic thought saw major contributions by Michal Kalecki, Roy Harrod, Joan Robinson, Nicholas Kaldor, and others. Hence, it is referred to as the heterodox approach to economics, as commonly accepted theories and beliefs were challenged by the propagators of PKE.

The idea of being or following post-Keynesian ideologies gained ground majorly because certain economists disagreed with previously proposed economic ideas and theories. In the period after 1970, concepts like endogenous money theory, behavioral economics, and modern monetary theory came into light.

The evolution of PKE revolves around the approach adopted by economists to combat the perceived shortcomings of classical, neoclassical, and Keynesian economic theories. After the 1990s, New Keynesian Economics came into the picture, which primarily dealt with the effects of short-term economic changes on prices and wages.

Examples

Below are two examples of post-Keynesian economics.

Example #1

Consider a small town with a reasonable population, where every resident decided to start saving. The entire town reduced its spending and maximized savings. Nothing was deposited in the banks either.

Even if the reason for this decision is the fear of recession, such mass savings eventually hurt the town’s economy. Since there is a dramatic decline in the demand for goods and services, the market sees a drastic decrease in cash flows, which makes it stagnant.

This phenomenon is referred to as the Paradox of Thrift, popularized by John Maynard Keynes, who was also responsible for the introduction to post-Keynesian economics, He linked these ideas and presented a more comprehensive picture. His theories showed that a decrease in aggregate demand eventually sabotages the market and, consequently, the economy. Due to this, investments see lower-than-usual returns in a slowing economy. Therefore, effective demand is important to keep the market running for the economy to function properly.

Example #2

Suppose ABC & Co. selling jeans of a specific type gained popularity in the early 2000s and made huge profits. However, it refused to innovate with time. The company failed to consider customer behavior and demand. In the late 2010s, ABC & Co. was no longer found selling jeans as people shifted to other brands that aligned with current fashion trends.

The failure of the company to boost its sales was primarily due to its inability to consider future uncertainty—an idea propagated by PKE. The company also ignored the effect of expenditure on demand, human or consumer behavior in changing times, and the interplay of other social conventions affecting consumer decisions.

Post-Keynesian Economics vs New Keynesian Economics

The key differences between Post-Keynesian and New Keynesian economics are:

• Post-Keynesian economics is based on effective demand and the idea of fundamental uncertainty. On the other hand, New Keynesian economics focuses on rational expectations and assumptions of market inefficiencies.
• PKE states prices and wages are not fully flexible in the short term. In contrast, New Keynesian economics believes adopting a more microeconomic approach to wages and prices is possible.
• Post-Keynesian economics gained momentum after 1970, while New Keynesian economics was dominant from the late 1990s until the financial crisis in 2008.

Frequently Asked Questions (FAQs)

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