Did Keynes Make His Case?

Abstract

Abstract. Paper considers Keynes’ case for fiscal stimulus under depression conditions – a case that remains prominent in both policy and academic literature.  It highlights four specific real-history instances where, Keynes argued, monetary measures alone would not have restored prosperity and, hence, where fiscal activism would have been desirable.  These were: 1) the depression of the 1890s; 2) the onset of the Great Depression in 1930; 3) the Roosevelt Recovery in 1933; and 4) the 1937-38 contraction in the US.  But evidence from all four instances, gathered here, undermines Keynes’ claims...  Paper then shifts to Keynes’ theoretical rationale, where it turns out that the frequently-cited “liquidity trap” argument was only one of several he advanced for monetary policy ineffectiveness.  And it was not the one he most-often emphasized, while his own texts raise doubt about its coherence.  Keynes view of Depression was intertwined with the stagnationist temper of economic theory during the middle 1930s, and with his cultural and aesthetic distaste for “capitalist individualism.”  The weakness of Keynes’ real-history illustrations reflects in part Keynes’ flawed underlying critique of “classical” theory – a critique that, because it was so prominent, has often set back understanding.  Keynes did not make his case.

Keywords. International macroeconomics, Money demand, Keynesian macroeconomics, Macroeconomic history.

JEL. B22, B31, E12, E41, E52, N10.