6.8 Summary

In Section 6, a lot of time has been spent on placing Keynes’s aggregate demand approach in its historical context: from the austerity of the 1920s and 1930s, to the golden age of Keynesian economics in the 1950s and 1960s, to the obsession with deficits since the 1990s. This is for two main reasons. First, it is important to have a feel for where ideas come from, and why economists and policymakers have considered them to be important – to give you a foundation in the discipline of macroeconomics and its place in political economy. Unemployment was the key prewar illness, and Keynes is the economist said to have developed the required medicine, which became the basis for postwar policy. This is the backdrop to modern macroeconomics as we know it.

Second, the spectre of unemployment has come back with a vengeance since the economic crisis of 2008, and Keynes also has made something of a comeback. His ideas are suddenly relevant again. The debates that took place in Keynes’s time – about whether fiscal policy can work, the fiscal stabilisers available to the government, whether governments can afford to stimulate aggregate demand, and whether they should instead cut spending in order to reduce the deficit – are all highly relevant to recent debates throughout the world.