Monday, March 18, 2013


The Keynesian revolution

Throughout the first three decades of the 20th century, the neoclassical paradigm conquered the economic theory “in a way, as full as the Inquisition to Spain” (8). But in 1929 happened an event that directly put in check the neoclassical system: the famous Great Depression of the American economy. It is in that difficult context that appears one of the greatest geniuses of the economy: John Maynard Keynes.

Keynes was a multi-faceted intellectual who achieved fame in mathematics, philosophy, and literature. In his famous book General theory of occupation, interest and money (1936) criticizes neoclassical economics (he calls it “classical”) claiming that its postulates “are only applicable to a particular case, and not in general, because the conditions posed are an extreme case of all positions of equilibrium” and even more so because “the characteristics of that special case are not the characteristics of economic society in which today live us, reason why its teachings are deceptive and are disastrous if we try to apply them to the real facts”. (9)

Moreover, being himself a great mathematician, criticizes the “mathematization” of economic analysis holding that “too much of recent mathematical economics is a simple mixture, as vague as the original assumptions that sustain it, which allows the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols”. (10)

In that sense, Keynes seeks to recover the epistemological approach of the classics, ie political economy recover and thereby writes that “the purpose of our analysis does not provide a mechanism or method of blind manipulation to give us an answer infallible but provide ourselves with an organized method of reasoning on specific problems”. (11)

The second neoclassical counter-revolution

After their first reaction from radical rejection of the theory of Keynes, the neoclassical economists were more “intelligent” and sought a containment mechanism considering all the General theory as a particular case which could be seamlessly integrated in the Walrasian schema. As Paul Davidson shows in Controversies in Post-Keynesian Economics (1994), these reactions faced the different generations of economists: “A more than one decade of the publication of the General theory of John Maynard Keynes, a controversy arose in the economics profession among the older neoclassical economists and the younger generation of advocates of Keynesian policies. The oldest were experts in neoclassical theory. Recognizing that the Keynesian analysis was logically incompatible with its own analytical model, the old economists despised the Keynes’s analysis as imperfect. The new generation had also been nourished by the neoclassical theory. They could have wanted any action to guide the economy in the great depression and could have looked for overthrowing their ancestors. But they did not want to entirely destroy the analytical structure because they had spent many years at school learning to know it. Therefore they tried to amalgamate the neoclassical theoretical analysis with the activist policies of Keynes and to develop an analytical framework which they called Neoclassical-Keynesian Synthesis. This synthesis attempted to integrate economic policies of the 20th century proposed by John Maynard Keynes with neoclassical theory of the 19th century that includes Say's law and the axiom of neutrality of money as a proposal in the long term”. (12)

The result of this attempt -summed up in the famous IS-LM diagram- maintained the exterior lines of the Keynes’s theory, but the essence is lost. Even so, despite all these characteristics, which did not have much to do with what Keynes had resulted in his General Theory, “it is told to the students, that they did not need to read the difficult and tedious General Theory, but that they could study the IS-LM model, which -as claim their teachers- includes all the Keynes's main ideas”. (13)

Thus, the economists, rather than strive to understand the complexity sobresimplificaron the Keynes’s ideas and, thus, they neutralized all the elements that could mean a return to the political economy and its multidisciplinary and realistic epistemology.

The conservative neoliberalism

The most famous episode of the origins of neo-liberalism is the formation, in 1947, in Switzerland, under the leadership of Friedrich von Hayek, of the Mont Pelerin Society, a group of large liberal intellectuals, among them were tam well Karl Popper, Ludwig von Mises and Milton Friedman, who were committed to the dissemination of the ideals of liberalism around the world in order to combat the advance of socialism. (14)

In this context, it is convenient to define politically neoliberalism comparing it historically with liberalism. When in the late eighteenth century liberalism advocated the legitimacy of capitalist society, it did from a revolutionary position against the status-quo, ie against the feudal and mercantilist privileges. In contrast, when in the middle oftwentieth century neoliberalism endorses the legitimacy of capitalist society, it does from a conservative position in favor of the status quo, ie, against any kind of society that could replace or overcome capitalism.

But neoliberalism is not only going to combat against socialism but also -sometimes - against Keynesianism and the position of this in favour of the intervention of the State in the economy. In this way, in the 1970s, the loss of dynamism in the developed economies, the fall of profit rates and stagflation were the perfect opportunity to neoliberalism in order to mount its attack on the welfare state. After years of Keynesianism, neoclassical economic theory regained its dominant role. With their mathematical models of growth and its macroeconomics models, also mathematical, based on rational expectations, neoclassical economic theory returned to "demonstrate" mathematically the self-regulating nature of the market. Milton Friedman and Robert Lucas were the exponents of this successful fight by the monopoly of the legitimate knowledge against Keynesianism and in favor of monetarism and the New Classical Macroeconomics, with its assumption of the “rational expectations”, did completely ineffective and unnecessary the Government Intervention in the Economy.


8. John Maynard Keynes, General theory of employment, interest and money (1936), Fondo de Cultura Económica, Mexico, 1992, p. 38 
9. John Maynard Keynes, General theory of occupation, interest, and money, op. cit., p. 15
10. Ibid, p. 286
11 Ibid., p. 285 
12. Quoted by: Mariel Manes, "Keynes method: an analysis of the general theory in the light of its methodology", note of class of the course of macroeconomics II, Universidad Nacional de la Plata, La Plata, August 2005, p.2.
13. Ibid.
14. See: R. M. Hartwell, A History of the Mont Pelerin Society, Ed. Liberty, Indianapolis, 1995.

You can contact the author of this article in: “Dante Abelardo Urbina Padilla” (Facebook) and (email)