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

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  • Paul Davidson

    (The Journal of Post-Keynesian Economics)

Abstract

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
    as

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    References listed on IDEAS

    as
    1. Vasilev, Aleksandar & Maksumov, Rashid, 2010. "Critical analysis of Chapter 23 of Keynes’s Notes on Mercantilism in The General Theory of Employment, Interest and Money (1936)," EconStor Research Reports 155318, ZBW - Leibniz Information Centre for Economics.
    2. 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.
    3. Williamson, John, 1987. "Exchange Rate Management: The Role of Target Zones," American Economic Review, American Economic Association, vol. 77(2), pages 200-204, May.
    4. 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.
    5. David C. Colander & Harry Landreth (ed.), 1996. "The Coming Of Keynesianism To America," Books, Edward Elgar Publishing, number 451.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

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

    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

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