Post-Keynesian economics

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Post-Keynesian economics refers to a collection of emerging schools within macroeconomics that are attempting to "go back to the basics" of the work of John Maynard Keynes (1883–1946). In the post-World War II era, after Keynes died, his theories merged with more neoclassical-oriented thought and became the separate schools called New Keynesianism[1] and neo-Keynesianism[2]. These schools sought to root Keynes' ideas in a microeconomic approach. Post-Keynesians, by focusing more on macro-effects, have in one way moved closer back to Keynes, but have also introduced many ideas not found in his work.

The years of 2008 and 2009 were labeled the 2008–2009 Keynesian resurgenceWikipedia because of the return to Keynes' work after the dominance of neoclassically oriented schools like New Keynesianism and the Chicago school. By 2010, however, even Keynesian economists like Brad DeLong admitted that this alleged resurgence was only a nine day wonder.[3][4]

Modern Monetary Theory[edit]

See the main article on this topic: Modern Monetary Theory

Economist Bill Mitchell coined the term, "Modern Monetary Theory" (MMT), in reference to Keynes' claim that for at least 4,000 years money has been "a creature of the state".[5]

Many Post-Keynesians either fall into the "circuitists" or the "neo-chartalists" (more often called "modern monetary theory"), though these two groups aren't mutually exclusive and there is a good deal of overlap. Both reject the idea of neutral money. Circuitists generally emphasize the role of credit money (loans made by banks) while neo-chartalists also emphasize the role of high-powered money (hard cash and credit lent to banks by a country's Central Bank). Circuitists base their theories on Augusto Graziani's Theory of the Monetary Circuit as well as Keynes. Neo-chartalists base their theories on the original chartalist ideas of Abba Lerner and their later reformulation and extension by Warren Mosler as MMT.

General beliefs[edit]

Although the Post-Keynesians are a diverse group, many share similar beliefs, some of which may include:

  • A focus on effective demand and the rejection of Say's Law. Demand creates supply, and a lack of demand will lead to underemployment and unemployment of labor and resources.[6]
  • A focus on how inflation is created by distributional conflict between classes.[6]
  • Free trade can harm poorer countries by not allowing them to have competitive manufacturing sectors.[6]
  • Financial transactions always create an offsetting liability. There are always three parties, not two, involved in a transaction: buyer, seller, and bank. This is because all money is credit. Cash ("high-powered money") is a liability of the Federal Reserve, credit (like credit cards) is a liability of your bank, and that credit is created by loaning out against the bank's reserve of high-powered money. Some post-Keynesians add the government as the insurer and protector of transactions and property rights being a fourth party.[7]
  • Rejection of "crowding out". Government spending does not crowd out monetary resources because spending "creates" more money.[7]
  • Rejection of the money multiplier. Banks can loan reserves to each other or get money from the Fed's discount window, making the money multiplier a formality without much real meaning.[7]
  • Rejection of equilibrium. Post-Keynesians believe the market is dynamic and rarely if ever in equilibrium; markets might be above or below equilibrium level at any given time.[7]
  • Rejection of a natural level of unemployment and the natural accelerating inflation rate of unemployment.[8]
  • Rejection of both the Phillips Curve and the Expectations Augmented Phillips Curve.[7][8]
  • Rejection of homo economicus.[7]
  • Belief that the economy should be viewed in historical time and with uncertainty of future expectations.[7]
  • Importance of the credit cycle as part of the business cycle. Mostly modeled off of Hyman Minsky's "Financial Instability Hypothesis" which states that excessive credit given out "endogenously" over long periods of stability will necessarily lead to riskier investments, and therefore instability. This continues until speculators realize an asset's price is artificially inflated, causing them to sell it all at once, causing the asset price to fall to the ground. That results in what is called a "Minsky moment", and thus financial crisis.[7]
  • The money supply is endogenous and is not controlled by the central bank.[9]
  • Government Deficit = Private Sector Surplus. Every time the U.S. government has tried to balance the budget, there has been a subsequent recession. This is because when a government stops deficit spending, they are pulling money out of the economy that the private sector thrives on.[10][6]

MMT Specific Beliefs[edit]

People who believe in MMT have a few differences from other non-MMT Post-Keynesians:

  • The government as a sovereign issuer of money. This is a commonly known fact, but important especially to neo-chartalists as they draw many implications from it. They believe that most people, the government included, act as if the nation still ran on the gold standard.[11]
  • The government doesn't collect taxes in order to subsequently spend them. Taxes "destroy" currency and spending "creates" currency because fiat currency is only backed by the government's faith. So taxing money out of the economy is the same as destroying that money.[11]
  • Government spending is limited by high levels of inflation, not tax revenue.[12]
  • Since taxes destroy currency, the government must first create it. After all it is impossible for money that was never created to be destroyed. Governments can create currency either via minting coins, printing paper money, or increasing numbers in bank accounts.[11]

Monetary Sovereignty[edit]

Countries that have monetary sovereignty have the following characteristics:

  • The government issues currency and requires taxes to be paid in that currency.
  • The government's currency is neither pegged to a resource nor another currency. The currency operates via a floating exchange rate (The value of the currency is determined via supply and demand relative to other currencies)
  • The government owns minimal debt in foreign currency.[13]

Countries that have monetary sovereignty will only experience dangerous levels of inflation when the government attempts to increase deficit spending when the full capacity of resources within a monetarily sovereign country are used. This does mean that developing countries may be constrained by inflation, as they often won't have enough resources and will need to import them at the cost of borrowing from a foreign currency. However, countries like the U.S, Japan, U.K., China, and Australia are capable of maintaining high deficits that by themselves, won't cause inflation. Additionally, it is possible for all of these countries to pay back any debt they owe.

Countries That Don't Have Monetary Sovereignty Are Financially Constrained[edit]

  • Countries that don't issue their own currency are incapable of paying off their own debt. A good example of this are the countries within the European Union. When the Great Recession happened, E.U. countries were unable to pay back their own debts without outside assistance. This lead to the European Debt CrisisWikipedia.
  • Countries that peg their currency are vulnerable to price shocks. A great example of this is Venezuela. Venezuela pegged their currency to the U.S. Dollar and they were highly dependent on oil exports. Unfortunately, when oil prices dropped, the value of Venezuela's currency also dropped as oil exports were no longer as valuable to sell in the U.S. dollar.[14]
  • Countries that own foreign debt in other currencies cannot repay that debt instantly without their currency losing value. For example, after World War I, the Weimar Republic gained a lot of foreign debt. They tried to instantly repay that debt, but were unable to and eventually defaulted. Eventually production slowed, devaluing the currency, and forced to still pay the debt, the Weimar Republic started printing money. This increase in the money supply didn't really lead to an increase in productivity, and so it devalued the currency even more.[15]

What Caused Stagflation?[edit]

MMTers believe that stagflation was caused because the government attempted to solve a supply side inflation problem (cost-push inflation) by treating it as a demand side inflation problem (demand-pull inflation). When the OPEC countries created a price shock for oil, inflation occurred (creating a supply side problem). The government, which still used the Phillips Curve, believed that inflation could be reduced by increasing unemployment (decreasing demand). This didn't fix the inflation issue, and just lead to more people being unemployed. What really solved the inflation problem was when governments like the U.S. and Australia found alternative sources of oil.[16]

Doesn't Printing Money Cause Inflation?[edit]

Countries that are printing money usually own debt in foreign currencies, and end up devaluing their own currency.[15] An increase in the money supply does not necessarily mean hyperinflation occur. A great example of this is when the U.S. did quantitative easing during the Great Recession and COVID-19 Pandemic.[17][18] Many inflation hawks feared that these increases in the money supply were going to lead to hyperinflation within the U.S. However, we know today that these efforts to increase the money supply in fact did not cause hyperinflation.

Circuitism Specific Beliefs[edit]

Circuitism is a brand of Post-Keynesian economics with a guy named Steven Keen as the figurehead. Steve argues that the business cycle is primarily due to waves of private sector debt and bank loans, rather than primarily government deficits per se. He also believes he can computer model these private sector debt waves to provide a detailed understanding of the global economy.


The above has, in turn, led many Post-Keynesians to support policies such as:

  • Full employment at all times. Keynesianism on 'roids. Some support a job guarantee, whereby the government hires unemployed workers either directly or indirectly through private contracting.[11]
  • Limitations on private debt since overleveraged and strained balance sheets lead to financial crisis.[7]
  • Adjustable credit controls and asset side regulations to regulate demand from bank lending instead of interest rate hikes which lead to more government payments to the financial sector.[7]
  • Lower taxes or higher spending except in cases of increased inflation to "destroy" excess currency.[12]
  • Fiscal deficits as a counter-cyclical policy with adjustments being made to counter excess or lack of spending by the non-government sector (preferably automatically and regionally targeted). [7]
  • Deficits when unemployment is high, lower deficits or surpluses when inflation is high. Zero-interest rate on government bonds to avoid unnecessarily handicapping fiscal policy.[12][19]
  • Restructuring credit markets and debt (debt-to-equity swaps).[7]
  • Intervening in markets to prevent inflation. Since they argue real resources, including human resources (people), are what matter, not money, some Modern Monetary Theory economists have argued that the government should intervene to prevent or half inflation on an industry-by-industry basis, on the basis of an informed analysis of the real constraints affecting those industries, rather than on the basis of some abstract economic model that bears no relationship to the real world. For example, if there is a shortage of computer programmers and computer programmers' salaries are rising at an unsustainable rate, the government could expand the labour supply by making it easier for programmers from other countries to obtain a visa (as the UK is able to do under its "shortage occupations" visa system), and/or advertise for people in shortage occupations to move to the country (as Australia has done). Alternatively, or in addition, the government could slow down or cancel government computerisation projects, to reduce the demand for programmers.[7]

Post-Keynesians and the establishment[edit]

As of 2019, MMT has become the most prominent post-Keynesian school of economics, and with MMT, the American establishment has moved beyond the "first they ignore you" stage into the "then they ridicule you" stage of fighting a new idea. Awkwardly, however, elements of the Anglo-American establishment have actually already endorsed key theoretical conclusions of MMT:

  • The Bank of England has admitted that, just as MMT says, ordinary bank deposits are not "lent out", but rather, loans create deposits.[20] (Unlike American banks, British banks no longer have any reserve requirements, so the old simplistic theory of banking is unable to even get off the ground in the UK anyway.)
  • Alan Greenspan — despite being a right-wing former devotee of Ayn Rand — candidly admitted that there is no limit to the amount of money the US federal government can create, and even spelled out, as MMT explains, that what matters is the "real assets" (not money or financial assets, but factories, goods, employable people, etc.) in the economy.[21]

Meanwhile American ally Japan is actually following a policy approach similar to what MMT would recommend, while furiously denying it and saying that of course, an MMT approach wouldn't work. If deficits scolds were correct, Japan should have been bankrupted long ago.

Let's not even talk about China, which has been achieving impressive economic growth by essentially deficit-spending its way to development.

See also[edit]

External links[edit]


  1. See the Wikipedia article on New Keynesian economics.
  2. See the Wikipedia article on Neo-keynesianism.
  3. Three years on, the markets are masters again
  4. Keynes & Co. have lost the stimulus argument
  5. Matthews, Dylan (February 18, 2012). "Modern Monetary Theory is an unconventional take on economic strategy" (in en-US). Washington Post. 
  6. 6.0 6.1 6.2 6.3 Exploring Economics on Post-Keynesian Economics
  7. 7.00 7.01 7.02 7.03 7.04 7.05 7.06 7.07 7.08 7.09 7.10 7.11 7.12 [1]
  8. 8.0 8.1
  9. Science Direct on Post Keynesian's Theory of Endogenous Money
  11. 11.0 11.1 11.2 11.3
  12. 12.0 12.1 12.2
  15. 15.0 15.1