Abstract
This chapter analyses the Keynesian Revolution as a reaction against the reductionism of classical economics. Keynes focused on the failure of mainstream theory, rooted in marginalist microeconomic foundations and Say’s law, to explain the Great Depression and the evolution of capitalism. Keynes argued that classical economics was based on assumptions, like the neutrality of money and full employment, preventing a thorough analysis of the complexities of a monetary economy. The General Theory aimed to provide a new framework, emphasizing the principle of effective demand as the determinant of aggregate employment. This involved developing concepts like propensity to consume, marginal efficiency of capital, and liquidity preference, integrating subjective factors in decision-making under uncertainty. Keynes’s approach was antireductionist, acknowledging the crucial role of complexity. He adopted a hierarchical analysis, starting with a basic pre-analytic model and adding layers of complex analysis, including feedbacks between real and monetary variables. Keynes justified government interventions to achieve full employment, challenging laissez-faire. The neoclassical synthesis attempted to reconcile Keynesian analysis and classical approach. Clower and Leijonhufvud criticized this approach distinguishing the ‘economics of Keynes’ from mainstream ‘Keynesian economics’. Post-Keynesian economics sought to develop Keynes’s original insights on uncertainty methodology, endogenous money, and financial instability.