Keynesian Revolution

Empirical methods Prescriptive and policy The Keynesian Revolution was a fundamental reworking of economic theory concerning the factors determining employment levels in the overall economy.

The rise of Monetarism, particularly in the 1970s and via the work of Milton Friedman, is considered the next major change in mainstream economic theory and practice, and has at times been described as the "monetarist revolution".

[8] When Keynes published his General Theory in 1936, the influence of free market economics on policy making had already declined substantially compared to the almost unchallenged ascendancy it had enjoyed in Britain during the 1840s - 1860s.

[13] Keynes was little influenced by the various heterodox economists of the 1930s, his General theory was written largely in a Marshellian framework though with some important points of dissent such as the idea that excessive savings can be harmful for the overall economy.

In chapter 23 of the General Theory Keynes traces the genesis of this idea to, among others, Mercantilist thinkers of the previous three centuries, to the Fable of the Bees and to the dissenting economist J A Hobson with his Physiology of industry (1889).

While working on the book, Keynes wrote to George Bernard Shaw, saying "I believe myself to be writing a book on economic theory which will largely revolutionize, not I suppose at once but in the course of the next ten years – the way the world thinks about economic problems … I don't merely hope what I say, in my own mind I'm quite sure"[15] Professor Keith Shaw wrote that this degree of self-confidence was quite amazing especially considering it took more than fifty years for the Newtonian revolution to gain universal recognition; but also that Keynes's confidence was fully justified.

[16] John Kenneth Galbraith has written that Say's law dominated economic thought prior to Keynes for over a century, and the shift to Keynesianism was difficult.

[17] Keynes's General Theory was published in 1936 and provoked considerable controversy, yet according to professor Gordon Fletcher it rapidly conquered professional opinion.

[3] For biographer Lord Skidelsky, the General Theory triggered a massive reaction immediately after its release, with extensive reviews in journals and popular newspapers all around the world.

[18] According to Murray Rothbard, an Austrian School economist strongly opposed to Keynes: the General Theory was, at least in the short run, one of the most dazzlingly successful books of all time.

From the late 1930s, a process began to reconcile the General Theory with the classical ways of viewing the economy – developments which included Neo-Keynesian and later New Keynesian economics.

For Dr Peter the revolution can be seen as dawning in 1924 which was when Keynes first started advocating public works as a means by which the government could stimulate the economy and tackle unemployment.

According to Lord Skidelsky, the revolution began in policy making terms as early as December 1930, with Keynes's participation in the Macmillan Committee on Finance and Industry.

[18] The Committee had been formed to make policy recommendations for Britain's economic recovery – while Keynes's plans for an interventionist response were rejected, he did succeed in convincing the government that the classical conception that wages would drop along with prices and thus help to restore employment after a recession was wrong.

[25][26] From the late sixties Keynes's influence was displaced following the success of "counter revolutionary" efforts by economists like Milton Friedman and others sympathetic to the free market.

[30] Such critics have held that Keynes's thinking was misunderstood or misrepresented by the revolution’s leading popularisers, the founders of neo-Keynesian economics such as John Hicks and Paul Samuelson.

For example, while initially popular, Lorie Tarshis's 1947 textbook introducing Keynes's ideas, The elements of economics was soon heavily attacked by those influenced by McCarthy.

According to Davidson, Samuelson failed to understand one of the key pillars of the revolution, the refutation ergodic axiom (i.e., saying that economic decision makers are always confronted by uncertainty – the past isn't a reliable predictor of the future).

[18] Professor Gordon Fletcher stated that Keynes's General Theory provided a conceptual justification for policies of government intervention in economic affairs which was lacking in the established economics of the day – immensely significant as in the absence of a proper theoretical underpinning there was a danger that ad hoc policies of moderate intervention would be overtaken by extremist solutions, as had already happened in much of Europe back in the 1930s before the revolution was launched.