The Ongoing Crisis: Questions for Keynesian Theory

The financial crisis and the 2008-2009 recession is now an ongoing crisis that is far from being resolved. It poses fundamental questions of theory and policy and they are not much addressed in the current debate and research. The paper asks the question of the nature of the crisis and why it is indeed different from those of the last thirty years. Because of that it is hardly manageable by the tools of standard theory and also by traditional anti-cyclical Keynesian policies. Thus the second point is that it requires reconsideration of the role of government. In the US the Federal Reserve despite criticism pursues a policy of monetary easing that reflects the concern for a persisting high unemployment. In Europe the reestablished doctrine of fiscal austerity intersects with the conflicting interests within the euro-zone that seem at times to call into question the very existence of the common currency. Both approaches have severe limitations. The main question for a sustained recovery is that of a new possible growth pattern. The paper discusses that by focusing on the leading sectors that are most promising in the way of a growth of private investment, which has close links to technological development. Reacting to the criticism by prominent Keynesian such as Krugman, who has argued for a much stronger stimulus the paper argues that any recovery driven by private investment need a change in the role of government. Indeed the crisis calls for a rethinking of Keynesian theory and policy.