IDEAS home Printed from
   My bibliography  Save this article

Post-Keynesian Theory and a Policy for Managing Financial Market Instability and its Relevance to the Great Recession


  • Paul Davidson

    (The Journal of Post-Keynesian Economics)


For more than three decades, orthodox economists and policymakers, motivated by some variant of classical economic theory, have insisted that (1) government regulation of markets and large government spending policies are the cause of all our economic problems and (2) ending big government and freeing especially financial markets from government regulatory controls is the solution to those problems. In response, governments around the world have been freeing up financial markets and trying to reduce their involvement in economic matters. Yet, in 2007-8, the global economy experienced an alarming financial market meltdown that led to the Great Recession in which we are still enmeshed. To those who profess the belief that free markets produce socially optimum solutions, this paper explains why the facts do not support this conclusion. Keynes’s liquidity theory and the Post-Keynesian theory that developed from Keynes’s analysis can explain (a) why free financial markets cannot be efficient and (b) how to develop policies and institutions to reduce the possibility of financial market instability.

Suggested Citation

  • Paul Davidson, 2012. "Post-Keynesian Theory and a Policy for Managing Financial Market Instability and its Relevance to the Great Recession," Ekonomi-tek - International Economics Journal, Turkish Economic Association, vol. 1(3), pages 1-24, September.
  • Handle: RePEc:tek:journl:v:1:y:2012:i:3:p:1-24

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Paul Davidson, 1988. "A Modest Set of Proposals for Resolving the International Debt Problem," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 10(2), pages 323-338, January.
    2. Williamson, John, 1987. "Exchange Rate Management: The Role of Target Zones," American Economic Review, American Economic Association, vol. 77(2), pages 200-204, May.
    3. Lucas, Robert E, Jr, 1981. "Tobin and Monetarism: A Review Article," Journal of Economic Literature, American Economic Association, vol. 19(2), pages 558-567, June.
    Full references (including those not matched with items on IDEAS)

    More about this item


    Post-Keynesian theory; efficient market theory; financial market instability; uncertainty; international payments system; international monetary clearing union;

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • F2 - International Economics - - International Factor Movements and International Business
    • F3 - International Economics - - International Finance


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tek:journl:v:1:y:2012:i:3:p:1-24. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ercan Uygur). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.