Inflation: The Downfall of Keynesian Economics

Abstract

The downfall of Keynesian economics resulted from it being blamed for the inflation of the 1970s. In part this is because it had an inadequate theory of what caused inflation, having relied too heavily on the Phillips curve -- an idea found nowhere in Keynes' writings. In fact, Keynes was very clear that deficits caused inflation and budget surpluses were the cure. He was also well aware of the connection between deficits and monetary policy. Those who accuse Keynes of being weak on inflation are quite wrong, although the same cannot necessarily be said of his followers. Keynesian economics was also blamed for the failure of counter-cyclical policy, which became derided as fine-tuning. In fact, there are serious institutional and political problems that plague counter-cyclical policies, ironically causing them to be pro-cyclical.