THE CONTINUING POLICY RELEVANCE 
                OF KEYNES’S GENERAL THEORY
                             Jan Kregel
                       Director of Research Levy Economics Institute
            Director, Levy Economics Institute Master of Science in Economic Theory and Policy MA
                    Introduction
    • Today, the General Theory is primarily considered as part of the history of 
      economics, rather than as a guide to economic policy for the new Millennium. 
    • This is primarily the result of what were considered to be the theoretical errors 
      and weaknesses in the theory that Keynes put forward in the book. 
    • Most of these criticisms appeared in the immediate postwar period
    • Paradoxically in this period Keynesian “policy” was being applied in almost all 
      developed countries 
    • Indeed, it was the foundation for the restructuring of the post-war international 
      trade and financial system.
            Three Early Misinterpretations
       • An early criticism was that the General Theory was designed to combat the 
        high levels of unemployment experienced during the Great Slump of the 
        1920s and 1930s. 
       • It was thus only “depression economics” without application outside rare 
        periods of extremely depressed global economic activity. 
       • It was not useful for the reconstruction and boom that followed the war.
              Ignored Monetary Factors
      • The second criticism was that Keynes’s analysis was undertaken in “real terms”
      • It dealt with levels of real output, investment, consumption  measured in wage units 
        and so forth. 
      • It thus had no explanation of the level of nominal prices, and in particular the 
        impact of money on prices, that is inflation, since in the Slump the problem was not 
        considered important – rather the opposite. 
      • It was thus considered as incapable of dealing with the problems of inflation.