Keynes on Economic Stagnation and Debt

Abstract

The purpose of this article is to explain how the failure of neoclassical economics to embrace Keynes’ arguments with regard to the long-run tendency of the economic system to trend toward stagnation and to ignore the problems endemic in the economics of debt facilitated the adoption of economic policies in the United States that contributed to the economic, political, and social problems we face today.

Keywords:

• Keynes
• stagnation
• macroeconomics
• debt
• financial crisis

JEL CLASSIFICATIONS:

• B22
• E2
• E4
• 00
• Z0

Notes

1 For a history of the interest in this subject see Backhouse and Boianovsky (2016).

2 Keynes’ long-period problem of saving also goes a long way toward explaining why developing countries with a high domestic propensity to save and concentration of income and a low balance of trade (i.e., low foreign-sector dissaving) have suffered from low productivity and economic growth while those countries in a similar situation with a high balance of trade (i.e., high foreign-sector dissaving) that have adopted mass-production technologies while pursuing a policy of export-led growth were able to grow relatively rapidly leading up to the Crash of 2008. At the same time, the long-period problem of debt goes a long way toward explaining why export-led growth has proved unsustainable in the long run as the institutions supporting employment in the importing countries led to an unsustainable increase in debt relative to income. It is not surprising to find that the recent economic crisis began in the United States while it was running a substantial current account deficit in the midst of a massive speculative bubble as debt increased dramatically relative to income or that this crisis hit hardest in those countries that were in a similar situation. See Blackford (2018, chaps. 1–4, 7–12, 2020b, 15–9), Crotty (1980, 2002); FCIC (2011), Tily (2010), and Stiglitz (2014).

3 In 1930 Keynes (1936, 326–31) argued that if we were able to control the population, place our trust in science, and avoid wars and civil disruptions technological advance and the growth of capital would make it possible to solve the human economic problem within 100 years. In the General Theory he argued that given the instability of the psychology in the investment markets a system of laissez-faire guided by monetary policy alone would not be able to overcome the long-period problem of saving. This led him to conclude that “a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment” (Keynes 1936, 378) which he saw as an additional prerequisite to our ability to solve the human economic problem. See Seccareccia (2011–2012), Blackford (2020a), and cf., Keynes (1936, 164, 217–18, 320, 375–7).

Additional information

Notes on contributors

George H. Blackford

George Blackford is an independent researcher based in Flint, Michigan, USA. He wishes to thank John Komlos, Gillian G. Garcia, Mario Seccareccia, and the two anonymous reviewers for insightful comments on earlier drafts of this paper and Elizabeth C. Blackford and Dolores M. Coulter for editorial assistance.