An assessment of the impact of the ideas and activities of John Maynard Keynes on the development of the international economy

John Maynard Keynes was arguably the most influential economic thinker of the twentieth century. His ideas and theories have generated academic discussion and debate. As with all landmark scientific achievements in human history Keynesian economics too has had mixed fortunes in its journey so far. The following quote from Knut Wicksell succinctly expresses this condition,

“…there is no single doctrine taken to be a scientific truth without the diametrically opposite view being similarly upheld by authors of high repute … in other fields of science these conflicts usually come to an end … It is only in the field of economics that the state of war seems to persist and remain permanent.” (Dillard, 1948)

This observation by Knut Wicksell is perfectly applicable to the impact and interest Keynesian economics has generated in the last seventy years or so. The rest of this essay is an attempt to assess the impact made by the Keynesian school of thought in the context of international economy.

John Maynard Keynes’ seminal work, the General Theory, has had a profound effect on the way macroeconomic thought had evolved ever since. It divided the fraternity of economists into two groups. On one side were those who believed that a capitalist market economy does not need governmental interference as it is intrinsically regulated by underlying price mechanisms. The other group questioned this supposed self-equilibrating economy’s ability to minimize unemployment rates. This was a widely debated topic during the 1950s and 1960s. Ironically, economists resorted to the neoclassical analysis for settling this argument. As it stands, some form of reconciliation seem to have been achieved between the two viewpoints, but not a convincing one. The economic mechanism behind unemployment rates is of interest to both politicians and businesses alike (Dillard, 1948). In this context, Keynes had made a significant contribution in deciphering and helping understand these key economic processes that concern public representatives and common citizens. To quote,

“The theoretical debate relating to the consistency of macroeconomic equilibrium with an excess supply of labour appeared to have been won by supporters of the invisible hand view, but as a practical matter it was accepted that the self-righting properties of the market were too weak and needed the helping hand of fiscal and monetary policies in order to achieve and maintain the primary stated objective of full employment. Keynesians of all persuasions accepted the possibility of widespread and frequent ‘effective’ demand failures together with prolonged involuntary unemployment.” (Eichner, 1979)

The General Theory suffered a temporary setback during the late 1960s and early 70s when the microeconomic underpinnings of the supply side of Keynesian models were proved inaccurate with the breaking down of the Phillips curve. Scepticism over the veracity of Keynesian thought grew in 1973 when the OPEC went through a turbulent economic phase. This was one of the low-points of Keynesianism when many academics denounced it and opted to adopt the new classical model proposed by Robert Lucas. But it is a testament to the robustness of the Keynesian thought that it survived these sporadic aberrations and continues to be studied and expanded even to this day.

More than thirty years after the publication of The General Theory, the vibrancy and vitality of the Keynesian school had led to the development of New Keynesian Economics. This new avatar was founded on need to “search for rigorous and convincing models of wage and/or price stickiness based on maximizing behaviour and rational expectations” (Eichner, 1979). This meant that Keynesians started focusing on the following areas of economics that were not properly understood:

1. Nominal wage stickiness
2. Nominal price stickiness
3. Real rigidities
4. Co-ordination failures

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