Posted by: Dirk | October 26, 2008

Keynes and the financial crisis – nothing but the whole truth

I (start to) read a lot of newspaper articles, some of them brilliant, some of them bs, most just average. But then, I stumbled on an article named: “Keynes is dead, let’s bury him”.  Reading the article, I first thought of a joke. This cannot be true, I thought. However, in contrast to my blog post title, there is no irony in it at all. I struggled with myself whether I should “go public” with this. For economists who know a bit about Keynes this stuff is just, well, hair-raising. (For all others, you might be interested in my 12 page version of the General Theory which I have posted on my blog as well.) Here is an excerpt from the above mentioned article:

Theory meets crisis

But did Keynes really have a solution to the credit crunch, as he and his adherents claim?

Well, no. Enhanced equilibrium theory is designed to keep the economy flying straight in normal conditions. How about in a crisis?

Kindleberger said that credit crunches were alien to Keynes, and did not fit within his framework.

Regulatory economists such as Claudio Borio, the head of research at the Bank for International Settlements in Basle, spent time chatting with Kindleberger at MIT in the 1990s about this very thing, and in concert with economists from KPMG and Wharton, and folks such as Phil Lowe at the Reserve Bank of Australia, formulated the idea that the Depression was not an “insufficiency in demand” issue as Keynes said, but in fact a gigantic credit crunch. And they have written painstaking research to back it up.

One of these behind-the-scenes people, Andrew Boughton, claims that Keynes had no theory of business cycles at all, except to say in a postscript to his General Theory that since he had explained everything, he must have explained cycles.

“Contrary to popular myth”, says Boughton, “About the only people Keynes ever employed were economists”.

I will not bother to comment any of this, since this obscure Australian newspaper article does certainly not deserve any more attention. Just let me say that Charles P. Kindleberger, a  truly great economist who died in 2003, would not have approved of this. It is truly amazing what can happen when you google “Keynes financial crisis”. Actually, I did that to find out whether there are any good sources for a condensed financial-crisis focused General Theory. I’ve seen many excerpts on blogs, and published them myself, but it would be nice to have some longer original quotations that would bring Keynes’ point across. I’m still working on that. For now, I’ll leave you with another excerpt and a link to the foreword of the first German edition of the General Theory:

Fascist appeal

So what’s going on here? According to Boughton, Keynes’s core theory was much more radical than he pretended.

In the first German edition to the General Theory in the 1930s, Keynes said that Germany would be the ideal place in which to implement his plans.

Ah…that would be fascist Germany.



  1. Hey Dirk, you may care to read my latest article, ‘Three Cheers for the Ideals of Guided Capitalism’ in the “obscure” Sydney Morning Herald … and try reading Keynes properly instead of selectively. You may learn a thing or two.

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