defining ‘Keynesian’

Jonathan Portes argues that the label ‘Keynesian’ has become politicised, resulting in sterile political debate and needlessly high levels of unemployment. He describes three definitions of ‘Keynesian’.

Definition 1 is ‘anyone who doesn’t believe the Treasury View’, the doctrine that it is impossible for fiscal policy to affect aggregate demand “because the government needs to get the extra money from somewhere, whether through taxes or borrowing”. Mr Portes used to believe this, but no longer does. Nor does anyone else, so everyone is a Keynesian by this definition.

Definition 2 is “someone who believes that as an empirical matter, fiscal policy does have a substantial impact on aggregate demand; in contrast to those who believe that ‘Ricardian equivalence’ means that changes to government spending and borrowing will be substantially or wholly offset by changes to private sector spending and saving”.

Definition 3

So under Definitions 1 and 2 I’m a Keynesian, but then so is pretty much everyone else whom one would take seriously. The final definition, then, of a Keynesian, appears to be a much more ‘political’ one – someone who thinks that slowing fiscal consolidation would be a sensible policy decision in the current UK (or US) economic context. But this definition seems to me to be misconceived ….

[T]he main argument between those of us who favour slowing fiscal consolidation in the UK and those who think that this would be a dangerous mistake is not about whether the direct impact would be positive. It is whether the price of this direct positive impact would be ‘credibility’ with financial markets, and hence a damaging rise in long-term interest rates that would more than offset the gains.

I think this risk is hugely exaggerated, … but … this debate really has nothing to do with Keynes at all. It’s about a lot of things – how policymakers should deal with potential market irrationality, the role of the credit rating agencies, multiple equilibria, etc. But I don’t see that taking one side or the other of these arguments makes you a Keynesian (or not).

Jonathan Portes, “Fiscal policy: What does ‘Keynesian’ mean?“, Vox EU, 7 February 2012.

Jonathan Portes (born 1966) is director of the National Institute of Economic and Social Research, a London-based, independent research institute.


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