Keynesian Economic Theory

“[T]he ideas of economists and political philosophers, both when they are right and when they are wrong, are more p owerful than is commonly understood. Indeed, the world is ruled by little else” (John Maynard Keynes, The General Theory of Employment, Interest and Money, 1936, p. 383, cited in Palley, (2005), p. 1). Very briefly, Keynesian economics emerged from the experience of the great depression of the 1930s due to the need to explain what had happened to world economies and how to fix them. Previous economic theories, including classic liberalism, had few tools to explain involuntary unemployment and the failure of market mechanisms to promote economic stability (De Vroey & Malgrange, draft version 2011, final version in press). Keynesian models of macroeconomics are complex. However, most Keynesians believe that markets are inherently unstable, leading to periodic crashes and unemployment, and that government oversight and intervention are necessary to stabilize these cycles. Another important concept is that government policies and investments are an important factor in economic growth, leading to a tendency to positive attitudes toward government programs (Palley, 2005).

One important investment arena emphasized by post-WWII economic planners was education. Many macroeconomists argued that educational levels in a given nation directly influenced or even determined the wealth of that nation. As people with higher levels of education tend to earn more money than people with less education, it was reasoned that nations with higher aggregate educational levels would be wealthier than nations with lower levels. Education, therefore, functioned as a kind of national “capital,” dubbed as “human capital,” a term first used in this era. In his seminal paper from 1964/1993, Gary Becker defines human capital as follows:

People differ substantially in their economic well-being, both among countries and among families within a given country. For a while economists were relating these differences primarily to differences in the amount of physical capital, since rich people had more physical capital than others. It has become increasingly obvious, however, . . . that factors other than physical resources play a larger role than formerly believed, thus focusing attention on less tangible resources like the knowledge possessed. A concern with investment in human capital therefore, ties in closely with the new emphasis on intangible resources. (p. 9)

The following citation from the macro economists Harbison and Meyers shows how, in the emerging sense of the importance of human capital theory, the idea of human capital or human resource development became related strongly to national development and national economic welfare.

Countries are underdeveloped because most of their people are underdeveloped, having had no opportunity of expanding their potential capabilities in the service of society. (1964, p. 13)

At first the idea that wealthy nations automatically had sufficient human capital was taken for granted. Gradually, however, the idea of capital “deficits” and risk began to spread to discussions of education within the developed, or “First” world. In the United States the concept of deficit, or “potential risk” was used to justify social programs such as Head Start, based on the idea that the nation had an internal “Third World” or “underdeveloped population” that was holding back economic development (Lightfoot, 2001). For many years there was a great deal of confidence worldwide that government investment in education was not merely a necessary mechanism of economic intervention but was a surefire route to prosperity. For three decades after WWII, the developed world experienced unprecedented levels of prosperity and levels of economic growth. There was little reason to question the tenets of Keynesian economic planning.

As time went on and global economic competition increased, the world encountered a series of economic crises that undermined faith in previous economic models. This resulted in a series of challenges to Keynesian economic theories by more laissez-faire, market- driven economic theories. Within this changing environment, global conceptions of human capital development and planning began to shift in important and substantive ways. However, Keynesian concepts did not totally disappear with this shift but instead continue to exist in a complex and uneasy relationship with market-driven (neoliberal) ideas. Current understandings of the relationship between educational investment, education, and human capital comprise an interesting hybrid of Keynesian and liberal, market-oriented theories and language that often shifts in interesting ways between historical moments and political factions, as well as from nation-state to nationstate. If, as Doherty (2007, p. 203) writes, “We are all neoliberals now,” many of us are neoliberals with Keynesian stripes, in different configurations and quantities.

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