Keynesian economics and the economics of Keynes

Below is the beginning and end of a post by Carleton University economist Nick Rowe. It is a long and wonkish post, but Nick writes with exceptional clarity and (compared to other economists!) with minimum jargon. Read the entire post by clicking on the link.

If we lived in a world of barter exchange, or in a world where people could use barter exchange at minimal cost, Keynesian macroeconomics would make no sense whatsoever.

That is not, of course, a criticism of Keynesian macroeconomics. We do live in a world where people use monetary exchange, not barter. And people (usually) use monetary exchange because barter is (usually) very costly.

But do Keynesians understand this?

[Not fully ….]

The trouble with Keynesians is that they aren’t radical enough. They need to look at their own models and see the root of the problem, and recommend policies to get at the root of the problem. The root of all Keynesian recessions is monetary.

Just like Milton Friedman said.

Nick Rowe, “Do Keynesians understand their own models?”, Worthwhile Canadian Initiative, 18 March 2011.

Friedman actually said that inflation is a monetary phenomenon. Nick shows that this insight applies also to recessions.

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