The Economic Orthodoxy of John Maynard Keynes

The second great revolution in economic thought was by John Maynard Keynes. His General Theory of Employment, Interest and Money bequeathed to academia a different way of looking at the aggregate economic universe. Aggregation was not derived from the notion of sum-ranking of individual preferences at the institutional level. Likewise, markets do not exist in Keynesian analysis. It is only that aggregate market effects are analyzed at the institutional level. There are no decision-makers; even government is not a decision-maker in Keynesian analysis. It is only that the economy-wide effects of decision-making taken elsewhere, are analyzed aggregatively. Consequently, Keynes gave an idea of economic and social aggregation different from its classical and neo-classical meaning. 

Instead, in Keynesian economics aggregation of economic variables and activities is associated with large institutions that already find their place in society and economy for protecting the interest of citizens in democratic and free-market capitalism. Consequently, while to the utilitarians Government is a representation of aggregate preferences of optimal individuals and is in turn charged to look after and promote the same preferences, to Keynes the idea of Government in economic analysis is an institution entrusted to safe-guard the national economy. General Theory thus marked a new way of conceptualizing a general system of equilibrium interrelationships and analysis within this framework for the common good. 

Keynes was thus a deep epistemologist like Smith in developing this paradigm of aggregate and systemic view of social relations (O�Donell 1989). However, even in this structure of economic and social thought and despite the fact that Keynes like Smith was moved by the central role of ethics in economic matters, he was unable to explain a value system in his economic analysis. Problems arise due to the absence of decision-makers in Keynesian aggregate economics. Likewise, Keynes� general equilibrium analysis being premised on the explanation of systemic causality among large institutions in key sectors, is not centered on the explanation of visibly human interactions. Thus once again, like the classical and neo-classical economic schools, Keynesian general equilibrium had to be attained on the assumption that economic equilibria exist conjointly in four principal sectors of the economy with or without economic policy impact. These sectors are the product market, the labour market, the money market and the expenditure sector. The expenditure sector is simply the result of the other three sectors. 

When Keynes considered economic policy in his general equilibrium framework for these sectors, he launched a new idea beyond the stable equilibrium concept of the neo-classicists. Keynes thought of an inevitable existence of under-employment equilibrium and downward inflexible price levels even in the best performing capitalist economy. He then set to improve such an under-employment to full employment by activating national output. Economic entropy and its correction is thereby inherent in Keynes� vision of the social and economic universe. Consequently, principal policy variables, such as, government expenditure (fiscal policy) and monetary policy for attaining full-employment equilibrium were meant to improve the state of the economy by improving the equilibria in the four sectors, to a full-employment output level beyond under-employment equilibrium. 

Price stabilization was not a pre-occupation of Keynes, for full-employment was attainable in his general equilibrium system by a mobilization of under-utilized resources into productive ventures using fiscal and monetary policies (other policies can be tied to these). It was then these productive ventures that subsequently generated the income multiplier for attaining full-employment output. Full employment, government expenditure for social economic stimulation, productive investments, need for low interest rates, economic policies and the general equilibrium framework based on these conditions, were essential elements of Keynes� ethico-economics. Keynes as an ethicist wrote in his Essays on Persuasion (1930): : A somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands down over with a shudder to the specialists in mental disease."

What then was the flaw in the aggregate economics (macroeconomics) with respect to Keynes� ethical epistemology in economics? The absence of ethical perceptors (preferences) needed to perform the ethical acts created the ethical dysfunction. Consequently, there was no human discourse and hence no interaction toward explaining a systemic process. We referred to this problem earlier in relation to the predicaments of the classical and neo-classical schools, wherein ethics remained exogenous to economic matters. Because of a similar ethical exogeneity in Keynes�s economic system, one cannot decipher the ethical elements of productive ventures into which resources are to be directed for attaining simultaneous general equilibria in the four sectors earlier mentioned.