This is one of a series of posts that will ask what the most pertinent question raised by a prominent influencer of political economy might have been, and what the relevance of that question might be today. There is a list of all posts in the series at the end of each entry. The origin of this series is noted here.
After the first two posts in this series, the topics have been chosen by me, and this is the first of those. This series has been produced using what I describe as directed AI searches to establish positions with which I agree, followed by final editing before publication.
The Keynes Question
John Maynard Keynes remains, in my opinion, the most important economist of the twentieth century. His 'General Theory of Employment, Interest and Money', published in 1936, was written in the depths of the Great Depression. Its central message was revolutionary in economic terms: Keynes suggested that markets are not self-correcting, that demand can fail for prolonged periods, and that when that happens the state must intervene as a spender of last resort.
Keynes overturned the economic orthodoxy. Until he wrote, the consensus had been that supply creates its own demand, as Say's Law suggested. If workers were unemployed, it was assumed their wages were too high or they were insufficiently flexible. Keynes challenged this logic. He showed that when demand collapses, unemployment can persist indefinitely, even if workers are willing to work for less. Without state intervention, there is no automatic recovery.
And yet, almost a century later, governments repeatedly ignore him. That then leads to the Keynes Question: if the economics of public intervention in a slump is so clear, why do governments so often refuse to spend when they are most needed?
1. The paradox of thrift
Keynes based his explanation of recession on what he called the paradox of thrift. If one household tightens its belt, that may be prudent. But, he said, if all households cut spending at once, total demand falls, incomes shrink, and the ability to save collapses. What is rational for one household in isolation becomes ruinous if it is done by all, simultaneously.
This paradox applies to governments, too. When recessions strike, tax revenues fall and welfare payments rise. Cutting spending in response simply deepens the downturn. In that situation, only the government can expand demand to offset private retrenchment.
2. Multipliers that matter
Keynes also identified the multiplier effect. Government spending does not simply add one-for-one to GDP. It triggers further rounds of spending as wages are paid, suppliers are contracted, and consumption rises. In a depressed economy, the multiplier is large. A pound of public spending can generate far more than a pound in economic output.
That means state spending is not only necessary to fill the demand gap; it is also highly effective. Stimulus works best when the economy is weakest.
3. Hysteresis: the cost of delay
Keynes stressed that unemployment is not just a temporary inconvenience. It inflicts long-term scars. Workers who are unemployed lose skills. Young people who cannot find work suffer permanently lower lifetime incomes. Business delays or cancelled investments leave the economy weaker in the future.
This is what economists now call hysteresis: temporary slumps can permanently reduce potential output. In other words, refusing to spend now means condemning future generations to lower prosperity.
4. The politics of refusal
Despite the clarity of the Keynesian case, governments time and again retreat to austerity. After the financial crash of 2008, the UK government under George Osborne slashed spending at the very moment it was most needed. The result was the slowest recovery in modern history and a decade of wasted potential.
Why do they do it? Keynes himself suggested one reason: austerity appeals to a false sense of morality. Politicians and media insist that “belt-tightening” is virtuous, while borrowing is sinful. The household analogy — governments must live within their means, just like families — has immense political force, even though it is false.
But the deeper reason is structural. Austerity disciplines labour. By maintaining a pool of unemployed or insecure workers, wages are held down and labour's bargaining power is weakened. At the same time, austerity shrinks the state, leaving more space for private capital. Austerity may be bad economics, but it is useful politics for elites.
5. Keynes's unfinished revolution
Keynes gave us the tools, but his revolution was never fully secured. The post-war Keynesian consensus did create decades of full employment and social progress. But from the 1970s onwards, neoliberal economists attacked Keynesianism and neo-Keynesianism (and they are not the same thing) as dangerous, inflationary, and irresponsible. They restored the myths of balanced budgets and self-correcting markets.
Today, even self-described progressive politicians talk of “fiscal responsibility” and “living within our means.” The Keynesian lesson — that the state must spend when demand collapses — has been buried under neoliberal dogma.
6. What answering Keynes would mean today
To take Keynes seriously today would require:
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Rejecting arbitrary fiscal rules. Stop binding governments to debt and deficit ratios that ignore real needs.
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Embedding automatic stabilisers. Ensure that public investment, welfare spending, and local government funding expand automatically when unemployment rises.
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Targeting real resources, not financial myths. The true constraint is the availability of labour, skills, and ecological capacity, not an accounting balance.
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Investing in the future. Spend on green transition, care, housing, and education to prevent hysteresis and build resilience.
Inference
The Keynes Question remains hauntingly relevant: if the state must act as spender of last resort, why do governments refuse to spend when private demand fails? The economics is clear. The refusal is political. It reflects ideology, vested interests, and the enduring power of myths about money.
Keynes showed us how to escape slumps. The real puzzle is why we still choose not to follow him. Until economics confronts that refusal, recessions will keep scarring lives, and austerity will keep eroding society in the name of lies.
Previous posts in this series
- The economic questions
- Economic questions: The Henry Ford Question
- Economic questions: The Mark Carney Question
Taking further action
If you want to write a letter to your MP on the issues raised in this blog post, there is a ChatGPT prompt to assist you in doing so, with full instructions, here.
One word of warning, though: please ensure you have the correct MP. ChatGPT can get it wrong.
Comments
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In the name of greed there is a constant effort to ensure citizens lack an effective lie-detector. For example, it’s untrue the majority of households and businesses balance their banks they always have liabilities on their books in the form of bank loans, corporate bonds, etc. plus they have the biggest one of all taxation. Another example is governments have no legal authority to declare that government has a financial black hole given, for example in the UK 1866 and 2000 Parliamentary legislation states it doesn’t have to wait for receipts before it creates its spending money from nothing. Clearly the financial industry which also has the power to create money from nothing and deal in government securities has to put it mildly an incentive to be “economical with the truth” namely profit!
Correct
Keynes’ “paradox of thrift” is an example in a different field of the “Tragedy of the Commons”, And we know this is false and akin to neo-liberal ideas, and Elinor Ostrom has shown the way out of this is collective action and group self-regulation. Just another way of looking at the same question.
“The real puzzle is why politicians (we) still choose not to follow him”….. I’d suggest that the political system has evolved on the same basis as the comment from Chomsky to Marr (you would not be sitting here interviewing me etc) – politicos that could articulate a diff economic path are either weeded out early or are sidelined (or demonised e.g. Corbyn & Palestine). The political system has evolved to be, sort of, self correcting in the interests of finance.
Form follows function. Canaletto’s paintings of cities showed who called the shots in the 18th century. Look @ the London skyline today or any other city, (apart from Dresden – now restored to what Canaletto saw +/-) and it is very clear – who calls the shots.
Hazarding a guess: if politicos did try to call the shots wrt the BoE (i.e. assert control) there might be some interesting “events”.
I direct readers attention to Col Smithers comment a few months back ref: Goldman Sacks monthly “catch-up” with the BoE. We have an inter-locking finance system optimised for the likes of G-S – not for citizens. The other interesting point is that not one single politician in ANY party has articluated this or, I’d suggest is even capable of doing so. Does the political selection process (in its broadest terms) ensure that those that could question finance are selected out?
I’m not suggesting a conspiracy, I’m suggesting an evolved process – just like the one that put Marr (=safe pair of hands) in front of Chomsky. Systems.
I do see a feedback loop which is at the core of our economic and other problems. Put a little crudely:
– Economic Policies of the last 30 plus years that have privileged Finance and the Treasury, at the expense of other sectors/departments/regions
– Excessive growth of the Finance Sector (and its bailing out), leading to financialisation and concentrations of Wealth at the top
– That Wealth leading to concentrations of extreme Power, individual and corporate – most obviously in USA but also in UK
– The Power (and Wealth) being used to influence Politics in its own interests
– Politics choosing to adopt particular Economic Policies that benefit the Wealthy, boosting asset prices cutting public expenditure … and so on
The nexus of Westminster, City, Treasury, BofE, Tufton Street, et al …
It points towards where multiple interventions might be needed to change things:
– Redirecting Finance, at least the banking elements, towards the wider economy and restraining its ’socially useless’ activities. Another Glass Steagall. Rebuilding regional banking
– Potentially splitting Treasury and/or changing its make up, outlook and culture to consider the whole economy and country. Not just the narrowest of cost/benefit considerations
– Tackling extreme wealth, most probably through taxation but perhaps corporate reward structures
– Reducing the influence of big money and corporations on politics, tightly restricting donations
– And – leading to changed economic policies that aim to benefit the wider country and society
In other words, it needs recognition of the underlying system and the linked series of changes needed to it, not just the odd intervention. I see no sign of that yet from Labour
Noted, thanks
Some people think Michal Kalecki was the greatest economist of the 20th century, partly because the young Polish economist arrived at some of Keynes’ most important conclusions before 1936 but never received the same credit. As Joan Robinson, who knew both men, wrote:
“Michal Kalecki’s claim to priority of publication is indisputable. With proper scholarly dignity (which, however, is unfortunately rather rare among scholars) he never mentioned this fact. And, indeed, except for the authors concerned, it is not particularly interesting to know who first got into print. The interesting thing is that two thinkers, from completely different political and intellectual starting points, should come to the same conclusion.”
http://pombo.free.fr/jrkk1964.pdf
This claim is disputed by some but Kalecki (pronounced Kalesky) undoubtedly made major contributions to our understanding of how the economy works.
Thanks
As Joan Robinson reveals nothing much has changed in the UK in a hundred years:-
“According to accepted theory the price level was determined by the quantity of money. But the suggestion that the depression might therefore be relieved by increasing the quantity of money was confined to cranks. In the orthodox view it would create a dangerous inflation.”
The rich have been highly successful in removing the lie-detector from the minds of most UK voters.
She was good and under appreciated, of course.
Keynes shouldn’t be seen in isolation, his was the voice that cut through on the biggest scale, but he didn’t emerge fully formed, his ideas developed and were influenced by others and influenced others, indirectly as well as directly, he was of his time in every sense. As well as not being consistent over time, he could also be inconsistent at the same time and temper his ideas to political pragmatism as this article suggests
Was Keynes a Keynesian or a Lernerian? https://community.middlebury.edu/~colander/articles/was_keynes_keynesian.pdf
He was also influenced by Chartalism,
“To-day all civilized money is, beyond the possibility of dispute, chartalist” – Treatise on Money (1930) and many others
INFLUENCING KEYNES: THE INTELLECTUAL ORIGINS OF THE “GENERAL THEORY”
https://www.jstor.org/stable/23724550
Agreed, entirely. His positions were volatile and heavily influenced by events. But is that a sin? Doesn’t the wise person change their mind?
The primary reason why conservatives (small c) don’t follow him is because it contradicts their morality.
In the ‘strict father’ moral frame, the world is regarded as fundamentally dangerous and competitive. Good and bad are seen as absolutes, children have to be brought up to be good, including obedience to moral authority. Self-discipline is also considered essential for prosperity in a competitive world so people who prosper financially are self-disciplined and therefore morally good, those that are not disciplined and are not moral and so deserve their poverty.
A strict father gives his children an allowance, the amount is likely to be what he thinks is morally correct, not what he could afford, having more is not permitted How can you have more, if you’ve spent your allowance?”
The Markets are turned into a god-like strict father who must be obeyed, although it’s actually the strict father’s interpretation of them that has to be obeyed, they imagine their gods in their own morality.
The thing they might make an exception for is weapons/war because their morality says the world is dangerous.
For the strict father if he reluctantly agrees that the ill-disciplined and therefore poor should receive support then only those deemed deserving should receive, particularly those who show a desire to become disciplined and therefore self-maintaining, and ideally it should be through charity which assess deservedness, not as a right which the ill-disciplined could demand.
They see the world as fundamentally competitive, interfering in that, for instance controlling markets, is to interfere in “god’s” natural order so pointless and wrong.
All their economics is constructed on top of these beliefs to reinforce and justify them
This worldview is morally based and people will tend to believe their morality before they believe facts, progressive politicians failing to sway believers with facts alone then tend to try to fit into this moral worldview.
In the case of Keynes, the argument & evidence presented was so strong that many with this conservative worldview did partially acquiesce for a while, but they were always going to eventually revert to type if they could.
Progressives have a different worldview and many people are bi-conceptual in many variations, they do a bit of both and can be swayed more towards one or the other, conservatives have long been more focused on and far better at swaying people.
Much to agree with.
Did you meet my father?
“In the ‘strict father’ moral frame, the world is regarded as fundamentally dangerous and competitive.”
Simply revealing limited intellectual and emotional intelligence capacity to figure out that life forms mitigate this by working together:-
http://ndl.ethernet.edu.et/bitstream/123456789/42836/1/380.pdf#page=546
https://ankara.lti.cs.cmu.edu/11780/sites/default/files/BacterialLinguisticsandSocialIntelligence.pdf
The total difference between what macroeconomic (state level) action may do, and what one should do at the microeconomic (household) level lies at the heart of this. Almost all individuals only have experience of how scarcity affects them on a household level, so Keynesian thinking is counter-intuitive to the vast majority of the population. I am not sufficiently eloquent to explain this difference, and I am grateful for all your efforts in this sphere.
I suppose that leads on to another pertinent question, which is why more academics and almost all politicians don’t articulate Keynesian thinking. For both groups I am sure it is quite simply because, politically, it doesn’t suit them to do so. There may also be an element of ignorance on the part of politicians, but ultimately most politicians will never admit to the existence of a magic money tree, for fear everybody will want to give it a shake.
Neoliberalism- dedicated as it is to fair competition – cancelled Keynes. That is the short and long answer.
You might be interested in a recent post by Blair Fix “Insights from the Lotka-Volterra Model “. Mathematical modelling of predator-prey balance, predicts alternate population boom and crash, rather than a natural equilibrium. So why would the same type of model not apply to supply-demand economics?
https://economicsfromthetopdown.com/2025/09/15/insights-from-the-lotka-volterra-model/
“A key feature of the Lotka-Volterra model is that it gives rise to cycles of booms and busts”
Same with money it’s a flow that constantly needs modulating to optimise economies (note the use of the plural term). The next question is to identify what agency or agencies can do this and be readily available to do it. Currently most human beings don’t have the intellectual capacity or social intelligence to provide these answers. Put simply they need educating!
Actually on reflection this paper is extremely good reading between the lines. It tells us several things
– the main importance of Keynes’s work was to stress that given there was no such thing as automatic equilibrium as Neo-Classical economic theory tries to preach it’s necessary to pay attention to feedback effects
– the rich of course are interested in feedback effects only in as much as it affects their wealth because they lack social intelligence
– Henry Ford was an exception with his understanding that adequate wages allowed the worker producers to consume what they produced
– inequitable taxation of course means that “net” wages for worker producers interfere with this feedback loop
– political parties in the UK now operate on the premise of offering the Earth to get into office then break their “feedback manifesto” by declaring there’s a “black hole” in the government’s finances (Reform will be no exception)
– “black holes” are declared with absolutely no legislative authority
– the 1866 and 2000 legislation etc. was implemented purposefully to provide a feedback loop!
Thanks
Keynes and Kaleckil wrote about national economies and governments. But the neoliberal campaign to remove controls on international capital movements have created a different kind of space to get to terms with.
Correct we are now getting the feedback effect of Trump and his tariffs policy which in turn will have uneven feedback effects.
Terrific. Thank you, Richard. Gary Stevenson has, three days ago, recorded a talk called ‘How to be the best trader in the world” which he introduces by saying, “I’ll teach you how to be the best trader in your country if you help me stop your country collapsing.” He is talking about his own life before and since leaving City Bank in 2014 and what effect he has had. Your words about Keynes describe the isolation that happens when people will not believe evidence offered them, The talk ends with what Stevenson witnessed in a very poor part of Yorkshire in the first week of the Ukraine war when the people gathered food to send in vans to drive to Ukraine themselves.
I thought it was a very odd video. He wanted to make people rich using what he acknowledged to be gambling whilst arguing for wealth taxation. I am defeated by the logic of that.