Kingston University Becoming an Economist Lecture 04: The Post Keynesians

“Can “It”-a Great Depression-happen again? And if “It” can happen, why didn’t “It” occur in the years since World War II? These are questions that naturally follow from both the historical record and the comparative success of the past thirty-five years. To answer these questions it is necessary to have an economic the


ory which makes great depressions one of the possible states in which our type of capitalist economy can find itself.”

Post Keynesians diverged from the Neoclassical mainstream in 1937, response to the mainstream adopting John Hicks’s IS-LM model as a “convenient summary” of Keynes. Post Keynesians argued that this threw out what was new in Keynes, and preserved the Neoclassical ways of thinking about the economy that he was trying to replace.

Their approach to economics is much more inductive than either Neoclassicals or Austrians: they observe events, like the fact that marginal costs fall for the vast majority of firms, or the fact that the Great Depression occurred, and go in search of explanations of those facts.

This lecture looks at the data for the Great Depression and the “Roaring Twenties” decade that preceded it, and asks what can possibly explain this data? I focus especially on the “Roosevelt Recession” of the late 1930s, when unemployment, which had fallen to 11% by 1936 after peaking at 26% in 1933, suddenly rose again to 20% just after Keynes’s “General Theory” was published.

The best contemporary explanation of the Great Depression was given not by Keynes but by Irving Fisher, with his “Debt deflation theory of Great Depressions”. This led to Hyman Minsky’s “Financial Instability Hypothesis”, which is one major strand in Post Keynesian economics today. The other major strand is what is known as “Stock-Flow Consistent Modeling”, which began with Wynne Godley and plays a major role in Modern Monetary Theory.

Post Keynesians pay a great deal of attention to the monetary system, in contrast to the mainstream Neoclassical schools, which ignore money in their macroeconomic modelling. I show why money does matter to macroeconomics, and demonstrate the Minsky system dynamics program I designed. I also demonstrate how the economy can be modelled without assuming that it is in equilibrium.