Steve Kates alledges that "Keynesian theory, so far as public policy  
is concerned, is dead in the water," and that "Keynesian theory has  
been an out and out failure." Professor Kates is surely entitled to  
his opinion. But he should be aware that a group of influential  
economists including Paul Samuelson (before he died), Robert Solow,  
Paul Krugman, Brad De Long, and others have stated that Keynesian  
ideas -- old fashioned Keynesianism as enshrined in Samuelson's  
Economics textbook, for example -- are more alive today than ever  
before and offer the best explanation of the financial crisis and its  
recessionary aftermath. Professor Kates does not speak for the whole  
economics profession.

Thomas M. Humphrey
On May 9, 2011, at 8:26 PM, Steve Kates wrote:

> Gordon Brady asked:
>
> "I  have heard several economists say they are part-time Keynesians,  
> part-time Monetarists, and part-time All-Schools-of-Thought. Under  
> what  conditions are Keynesian approaches relevant and good  policy?  
> What work is good on this?"
>
> It is interesting that this question has circled the world and come  
> to me here in Australia with only a small handful of responses when  
> to most queries by the time it reaches me there have usually been  
> many. And this is an interesting question although one not typically  
> looked at on an HET website. But it is something that does deserve  
> an answer, it is something that HET specialists should have a deep  
> interest in, and is certainly the central economic question of our  
> time.
>
> Part-Keynesian, part-monetarist and part-eclectic is the modern  
> paradigm since every economist takes in with their mothers' milk the  
> notion of aggregate demand and the strong positive utility of fiscal  
> policy during recessions. This is the Keynesian part. Monetarism as  
> designed by Milton Friedman worked off this same framework built  
> around aggregate demand but thought that fiscal policy was almost  
> useless and that the really strong policy lever was the money  
> supply, an approach which has now migrated over to adjustments in  
> the rates of interest but with the relevant concepts still centred  
> on the demand for money. The eclectic parts are the various strands  
> of thought that everyone picks up along the way but would mostly  
> revolve around microeconomic questions with a high level of interest  
> in game theory and externalities. And this is to give the benefit of  
> the doubt that there actually is a theory behind so much of the  
> econometric work that now populate our leading journals.
>
> The problem with the question asked - "Under what conditions are  
> Keynesian approaches relevant and good  policy?" -  is that the  
> answer is becoming more evident every day. There are no conditions  
> when Keynesian approaches are relevant and good for policy. A  
> Keynesian policy is a deficit-financed increase in public spending  
> during recessionary periods to hasten a return to strong growth and  
> full employment. It has never worked. Not during the New Deal, not  
> during the Stagflation of the 1970s, not in Japan in the 1990s nor  
> has it worked right up to this minute as embodied in the "stimulus"  
> packages that followed the Global Financial Crisis. Economic theory  
> is in crisis mode although no one goes around pointing it out. But  
> whatever we economists might teach in the classroom, no one actually  
> framing policy will ever again base what they do on the need to  
> restore aggregate demand through higher levels of public spending.  
> We may continue to teach it but no one will do it. Keynesian theory,  
> so far as public policy is concerned, is dead in the water.
>
> What work is good on this? Although I feel a bit embarrassed to say  
> so, in a month's time in June, Edward Elgar will be publishing my  
> "Free Market Economics - an Introduction for the General Reader".  
> The book is drenched in the History of Economics, has two major  
> chapters dealing with HET, but if it has a theme that exists from  
> cover to cover it is that Keynesian theory has been an out and out  
> failure, and that what is wrong with economics today was perfectly  
> well understood by every mainstream economist prior to the  
> publication of the "General Theory" in 1936. My book restates  
> classical economic theory for the twenty-first century, but to write  
> it requires you to go back to those pre-Keynesian economists of 75  
> years ago to find out just what it was they said. Even the title of  
> my book is laced with HET, taken as it is from Henry Clay's  
> brilliant 1916 introductory text, "Economics - an Introduction for  
> the General Reader". That is why in many ways it requires someone  
> steeped in the history of economic thought to take these issues on.  
> Hardly anyone else is able to because hardly anyone else can and  
> will read the business cycle literature pre-1936.
>
> But if I were to give a reading list of what one ought to read, I  
> would go back to the business cycle literature of the 1920s and  
> 1930s and start with Gottfried Haberler's "Prosperity and  
> Depression". The problem is that for those writing  before the  
> "General Theory" was published, the idea that aggregate demand  
> deficiency would sweep the world as the mainstream theory would have  
> been absurdly incomprehensible. To find a work with an overlap  
> between an understanding of the classical literature and the  
> Keynesian, there were a few but I don't think there has been one  
> published for forty years. Others might be able to suggest possible  
> sources on where to turn but that is where I believe you need to go.
>
>
> Dr Steven Kates
> School of Economics, Finance
>    and Marketing
> RMIT University
> Level 12 / 239 Bourke Street
> Melbourne Vic 3000
>
> Phone: (03) 9925 5878
> Mobile: 042 7297 529