Keynesian and Heterodox Theories of Financial Crises

The scholarship of John Maynard Keynes marks a revolutionary turn in the 20th century development of economic theory. His macroeconomics of effective demand became an alternative to micro-level economics of the individual and his preferences, and facilitated a policy reform that helped the USA and Western Europe recover from the Great Depression. A major part of Keynes’ political economy was his vision of finance and investment. Being aware of the in-built volatility and speculative drive of financial markets, Keynes believed in strong, pro-active governmental policy of regulation and control over financial markets, investment flows, and international monetary affairs. His design for the Bretton Woods regime of international economic cooperation included a world central bank (ICU — International Clearing Union) and a global neutral currency (bancor). These institutional mechanisms were supposed to alleviate current account imbalances, and promote global distribution of savings and investment in accordance with the flows of trade and services. Although Keynes’ vision of the Bretton Woods system was never implemented due to the opposition of the US side, his conceptual insights into the nature of finance, speculation and monetary and fiscal policies continue to shape alternative approaches to finance and financial crises to this day.