Post-Keynesian Economics

Authors: Adam Aboobaker, Karsten Köhler, Franz Prante und Ruben Tarne | 18th of December 2016
Patron and academic review: Prof. Dr. Eckhard Hein

1. Core Elements

Post-Keynesian economics (PKE) is an economic paradigm that stems from the work of economists such as John Maynard Keynes (1883-1946), Michal Kalecki (1899-1970), Roy Harrod (1900-1978), Joan Robinson (1903-1983), Nicholas Kaldor (1908-1986), and many others. It is defined by the view that the principle of effective demand as developed by J. M. Keynes in the General Theory (1936) and M. Kalecki (1933) holds in the short, as well as in the long run. That is, that economic activity in a capitalist monetary economy is demand-driven and that there are no built-in mechanisms that guarantee full employment and full utilisation of capacities.

Post-Keynesians are united in their rejection of the different versions of neoclassical economics as inappropriate for the analysis of a monetary, capitalist economy. They are also unanimous in their joint endeavour of building an alternative economic theory that is more suitable for analysing the inherent features of modern capitalist economies, such as unemployment, (financial) crises, business cycles, depressions, technological change, and uneven development.

They have an understanding of the economy as being structured by institutions such as firms, labour unions, wage and credit contracts, government regulation and so forth. These institutions determine economic behaviour to a large extent, which is why PKE gives a certain priority to macro- and mesoeconomic analyses.

On the microeconomic level, PKE stresses that the future is fundamentally uncertain. It follows that individuals cannot act perfectly rationally as understood by mainstream economists. They rather make decisions based on rules of thumb, as they can deal better with incomplete and complex information. Rules of thumb are also very much influenced by social conventions and norms, which can lead to stability (e.g. nominal wage contracts stabilising the price level), as well as to instability (e.g. due to herd behaviour in financial markets). Fundamental uncertainty also shapes behaviour of firms, which operate in imperfectly competitive markets rendering them price makers and quantity takers.

PKE studies a wide array of economic fields ranging from short-run macroeconomics (unemployment, economic output and inflation), long-run macroeconomics (growth and distribution), monetary economics, finance and the international monetary system to microeconomic approaches to the theory of the firm, theory of consumption, exchange rate theory, financialisation, and much more. Correspondingly, PKE provides a rich set of policy proposals which often differ considerably from standard recipes offered by mainstream economics. Two examples are the emphasis on fiscal policy as the main tool to fight economic recessions in the short-run and the view that central banks should maintain low interest rates and regulate the banking system rather than narrowly focusing on fighting inflation. Another case in point would be the endorsement of labour market institutions that foster collective wage bargaining and establish a nominal wage anchor that no one can undercut. This compels firms to compete by quality and productivity without causing deflation by lowering wages.

Although by name they are very similar, post-Keynesianism is quite different from Old Keynesianism as well as New Keynesian economics. Post-Keynesians regard the New Keynesian approach as mainly neoclassical with some alterations that lead to market imperfections, but which do not improve their analysis of the real world. Nevertheless, New Keynesian economics not post-Keynesian economics, is usually what students learn to be modern Keynesianism.

2. Terms, Analysis, Conception of Economy

PKE seeks to analyse capitalist economies that are characterised by certain distinctive features. Capitalist economies are monetary production economies in which money (credit) is advanced by banks or other financial institutions to firms to invest in physical capital and labour to produce goods and services. Those are sold to obtain a profit and to repay the debt plus interest that has been incurred to finance investment. This monetary circuit establishes not only a circular flow of income between the main sectors of the economy, but also links economic units like households, firms or governments, to each other over time through their asset and liability structure. The capitalist macro-economy thus forms a system that has to be analysed in a systemic way — what happens in one sector of the economy has effects on other sectors, too.

Post-Keynesians conceive capitalist economies as highly productive, but unstable and conflictive systems. Economic activity is determined by effective demand, which is typically insufficient to generate full employment and full utilisation of capacity. Fluctuations in effective demand are mostly due to changes in investment expenditures, which are in turn strongly affected by expectations. Expectations of economic agents are influenced by social conventions and rules of thumb due to fundamental uncertainty about the future. In times of generally optimistic expectations, investment demand may be buoyant and set in motion a phase of strong credit growth, capital accumulation and income generation.

New credit money is created to finance investment expenditures. Then, economic output and employment is determined in the goods market according to the level of investment demand. The money spent on investment appears as income in the deposit accounts of other entrepreneurs or households. A credit-investment-income mechanism is thereby established and investment demand creates corresponding saving. The income generated through the production of new investment goods stimulates consumption demand. If everything runs well, expectations of agents become validated as payment obligations are met and the economy prospers. PKE thus assumes that there is a potential economic equilibrium that is determined by monetary and real factors. However, sudden changes in expectations may bring the economy out of equilibrium. Strong boom phases due to optimistic expectations can then be followed by drastic downturns, which are often induced by pessimistic expectations, distributional conflict or financial fragility. This depresses investment and consumption expenditures, invalidates income expectations and induces a period of debt defaults and economic crisis. These boom and bust phases are regarded as systemic features of monetary production economies that can only be mitigated by certain economic institutions and policies that help sustain economic expectations and activity and thereby reduce uncertainty about the future.

In PKE, employment is not determined in the labour market but rather labour demand is determined by aggregate demand in the goods market and not by the real wage rate. However, the labour market determines nominal wages and therefore nominal unit labour costs. These have a strong influence on the general price level and hence inflation, as well as on income distribution. In contrast to orthodox economics, the level of prices is not determined by the level of the money supply in PKE and neither is the rate of inflation determined by the growth rate of money supply. Therefore, post-Keynesians do not regard inflation as being a monetary phenomenon. Instead, inflation is regarded as the outcome of unresolved distributional conflict. This conflict is caused by conflicting claims over the distribution of income between the main social classes, wage-earners in different industries or sectors, entrepreneurs and rentiers (i.e. people who earn capital income from property or financial assets), and the foreign sector in an open economy. For example, if the real wage target of workers or unions is in conflict with the profit target of firms, firms will partly pass through increases in nominal wages to prices, which will lead to inflation if the firms have price setting power. While inflation therefore is a usual outcome of the wage bargaining process even in “normal” times, it may be accelerated by sudden increases in the costs of inputs, e.g. because of currency depreciations or commodity price shocks.

The pursuit of profit makes capitalism a dynamic system that is usually growing over time due to investment and technical change. However, growth dynamics are regarded as strongly influenced by short-run economic performance which is mainly driven by aggregate demand. The economy is developing in historical time, which means that the past has a persistent effect on the future through path dependency. Temporary adverse shocks may therefore reduce potential output permanently, just as well as a high unemployment rate might push up the non-accelerating inflation rate of unemployment (NAIRU), and the actual growth rate influences the natural rate of growth. Short-run effects, therefore, heavily influence long-run economic development.

3. Ontology

Although PKE, like most other scientific disciplines, does not provide an elaborated philosophical ontology, its theories do imply presuppositions about the existence and nature of certain entities that make up economic reality. On the most abstract level, PKE presupposes that capitalist economies are composed of certain social structures that exist independently of scientific observation (in philosophy of science, this view is called ‘realism’). More concretely, important social structures are social classes (e.g. workers, capitalists, rentiers), that determine to a large extent the economic behaviour of economic agents, social institutions (e.g. values, money, consumption norms, labour market regulations) and social organisations (e.g. firms, central banks, governments). These social structures form the nature of the capitalist monetary production economy that is the subject matter of post-Keynesian economic analysis. While post-Keynesians do believe that capitalist economies exhibit certain regularities that are generated by causal mechanisms and that can be captured by economic theories, they conceive of the economy as a dynamic system that is subject to a permanent change in historical time. Therefore, empirical regularities can change as well, so that economic theories cannot be regarded as universal laws.

While post-Keynesians certainly agree that social structures are ultimately based on human action, they reject the idea that social structures or macroeconomic phenomena can be reduced to the behaviour of individuals. On the contrary, individuals always act in a certain institutional context which shapes their beliefs and actions, and connects different classes of agents or types of economic units with each other. Social structures and macroeconomic phenomena may exert causal powers that affect human behaviour, which then in turn determines macro-phenomena. Macro-phenomena and institutions might even exhibit emergent properties that cannot be fully explained by aggregating individual actions. PKE thereby makes stronger ontological commitments than the classical rational choice model, which adheres to a strong ontological individualism that states that the social world is ultimately only composed of individuals and aggregates of individuals, and that nothing other than individual action can exert causal powers.

A very simple analogy to macro properties can be given by the following situation: If everyone in a cinema stands up, nobody improves his or her view of the film, even though if only one person would stand up, this would improve her view. This way of thinking led to the discovery of several macroeconomic paradoxes. The term paradox in this context means that what might seem reasonable for one single person, firm or state can lead to unintended, adverse or even irrational collective behaviour and outcomes when all individuals, firms or states act in a similar way. It is thus important to study macro-phenomena and their properties in their own right, and to look at how they in turn affect individual behaviour. This approach has been described as “holism”. All of these macroeconomic paradoxes are, for instance, important building blocks of a thorough explanation of the recent financial crisis. The most important of these paradoxes are summarized in the following table.

Macroeconomic Paradoxes

What is it?


Paradox of thrift

Higher saving rates lead to a reduction in total saving

When people save, they spend less, therefore businesses realise less revenue and reduce investment. Thereby, aggregate income declines and so does total saving.

Paradox of debt

Efforts to de-leverage might lead to higher leverage ratios

When everybody saves more out of their income to repay debt, aggregate income declines and leverage ratios rise.

Paradox of tranquility

Stability is destabilizing

A stable economy makes people more optimistic, leading to higher risk taking and higher gross debt-income ratios, which creates instability.

Source: Based on Lavoie 2014, p. 18.

4. Epistemology

Again it must first be noted that PKE does not provide a coherent epistemology, and that individual post-Keynesians probably hold very different views about truth, knowledge and the degree to which we can obtain knowledge of economic reality. However, there are some implicit assumptions about the relationship between reality and scientific knowledge that are typical for PKE.

First, post-Keynesians share the view that it is the task of empirical science to collect and systematise statements about the world that should reflect reality as adequately as possible. Although economic models are always a highly simplified representation of actual causal mechanisms, they should ideally capture key aspects of reality as they exist. Models that succeed in describing and explaining empirical phenomena and whose assumptions do not contradict basic observations about actual regular economic events may not be regarded as strictly true, but certainly ‘truer’ than models that do not correctly explain actual causal mechanisms or that are based on assumptions that do not adequately reflect our experience of everyday economic activity and events.

Second, PKE seems to presuppose that it requires both logical reasoning and empirical observation to construct good economic theories. Rather than following a pure deductive method starting from, for instance, axioms about supposedly universal rules of human choice and then logically deriving more concrete propositions about empirical phenomena, PKE bases all theoretical assumptions on empirical evidence. However, that does not mean that in PKE all theoretical assumptions are sought to be strictly proven by inductive reasoning, i.e. statistical evidence. Theoretical assumptions should be in line with basic empirical knowledge of actual economic behaviour and phenomena. On top of that, logical reasoning plays an important role. On a very basic level, this implies a desire for internal consistency of the individual statements of a theory, but also overall coherence.

An example may be the link between microeconomic assumptions (like competition, pricing and firm behaviour) and macroeconomic theory (like the determination of functional income distribution, which is the distribution of the GDP to wages and profits). More specifically, logical reasoning plays an important role in creating economic theories that are consistent with the practice and implications of double-entry bookkeeping and national accounting. Theories that fail to take into account basic accounting identities and their substantive economic consequences are certainly regarded as flawed by post-Keynesians.

Third, post-Keynesians seem to share a certain awareness of the limits to economic knowledge. This is reflected in a certain caution and modesty with respect to the reliability of economic predictions about quantitative variables (e.g. GDP growth or inflation) of a dynamic economy that is subject to structural change. In such an economy particular empirical regularities only persist temporarily. Moreover, post-Keynesians do not seek to necessarily cast every relevant assumption or hypothesis into a formal framework, which would claim the possession of a degree of precision that may simply be not attainable due to the qualitative complexity of the respective phenomenon, e.g. herd behaviour in financial markets. This view can be summarised by the rule of thumb that it is better to be roughly right than precisely wrong. Predictive success and the highest possible degree of quantitative precision are not regarded as the main objectives of economic theories, as these may not be reconcilable with the qualitatively complex and changing nature of the capitalist economies. Economists should be aware of the limits to economic knowledge and rather work to develop realistic theories that provide an adequate description of actual causal mechanisms and plausible explanations.

The general objective of economics in such a view is to tell plausible stories about the functioning of the economic system in the real world starting from stylised facts. This approach is strongly opposed to the epistemological viewpoint of instrumentalism, which does not care about the degree of reality reflected in core assumptions and only seeks to achieve correct predictions.

5. Methodology

As mentioned above, the post-Keynesian paradigm’s most basic ontological principle, as is the case for the wider heterodox branch of economics, can be described as a holistic or organicistic approach. Accordingly, post-Keynesians advocate for methodological holism. A good example of this organicistic approach is the PK theory of choice, in which consumption or other expenditure decisions (i.e. residential investment, education), as well as financial decisions (i.e. portfolio decisions and credit taking) are strongly interdependent among individuals. Individuals, due to psychological reasons and fundamental uncertainty, compare themselves to others and built their decisions partly on rules of thumb and habits. These forms of group behaviour lie at the heart of post-Keynesian explanations of the recent financial crisis. On the grounds of this social determination of behaviour, post-Keynesian theory emphasizes the role of different classes (the main classes being workers, capitalists and rentiers) and institutions in society. This stands in strong objection to the still dominant neoclassical approach of methodological individualism, which requires that every explanation of economic phenomena has to start from individual behaviour.

PKE employs research methods that correspond to the principle of holism. Among others, the most important methods are formal macro modelling and econometric estimation, stock-flow consistent and agent-based modelling employing computer simulations, as well as institutional analyses and case studies.

PKs often cast their macroeconomic theories in simple formal models, which describe the causal linkages between macroeconomic variables through structural parameters. The underlying behavioural assumptions, for instance about consumer or firm behaviour, are typically not strictly modelled but justified by stylized facts and knowledge of empirical regularities. Income inequality, for instance, may enter a PK aggregate consumption function based on empirical studies about consumption behaviour showing that rich households have a lower propensity to consume or that poorer households try to adjust their consumption behaviour to the next higher social income class. These models thus do have microfoundations, but they are not cast in a formal constrained-optimisation-framework. However, unlike neoclassical theory, assumptions about individual behaviour typically involve norm-oriented behaviour that is shaped by social institutions and social contexts.

Simple PK macro models can be static and focus on the marginal effects of changes in exogenous variables on economic outcomes in a goods market equilibrium. Dynamic models look at the change of economic variables over time and investigate the stability or instability of certain variables in the steady state, e.g. private debt. These models thus capture the aforementioned systemic nature of capitalism and allow for a depiction of dynamic and unstable processes.

The structural parameters of these models are often empirically estimated through standard econometric techniques. Likewise, theoretical hypotheses that are derived from PK theories may be empirically tested through econometrics. While some PK economists dislike the econometric approach because of their scepticism towards universal regularities, it seems that the majority of researchers embraces econometric work. Another popular way of assessing macroeconomic theories is the use of comparative case studies of different countries based on descriptive statics.

Stock-flow consistent (SFC) models represent another strand of post-Keynesian formal macro modeling that has become increasingly popular in recent years. Its most important analytical feature is the integration of behavioural equations derived from PK theory into a framework of rigorous accounting rules (note, however, that the SFC framework is not bound to one specific school of thought). The intuition behind the accounting framework is build on the principle that every asset is someone else’s liability and every monetary inflow is some else’s outflow. Therefore, the SFC framework ensures that all real and financial flows and stocks of the respective model are comprehensively integrated and can be traced back to their origin. Accordingly, SFC modeling fits very well within the holistic methodological approach of PKE and the comprehensive accounting allows to derive some relationships from pure accounting, meaning that these models rely less on behavioural equations. For instance, some variables function as adjustment variables which guarantee that the budget constraints of all agents or sectors are simultaneously met. This is important from a post-Keynesian perspective, since the object of analysis in PKE is a monetary production economy, as mentioned above. By now there is a variety of SFC models ranging from relatively small analytical models to very large and complex models that are solved numerically.

A relatively new development is the combination of SFC models with agent-based models (ABMs) in order to incorporate more diverse economic agents into post-Keynesian models. An ABM is a computer simulation of many interacting heterogeneous agents, which can be used to study the emerging aggregate outcomes from individual interactions and their feedback on the individual level. The ABM methodology differs greatly from the representative agent approach, since the state of any single agent over the course of the simulation does not necessarily provide any information about the aggregate state or behaviour of the model, and time plays an important role. Therefore, agent-based modeling is a promising endeavour to provide an explicit microstructure for the emergent macro properties of PK models.

On the meso-economic level, PKE makes use of institutional analyses, which involve the storytelling method. Institutional analyses describe the structure, operation and connections of economic institutions and organisations, and what kind of regularities or tendencies arise from their interactions. An institutional analysis of the practice of banking and central banking, for instance, might elucidate how credit money is created, how interest rates are determined and how the central bank can affect the short-term interbank rate (e.g. LIBOR, Federal Funds Rate) through monetary policy. This allows for an explanation of the effects of monetary policy, its capacities and limits (e.g. why the central bank cannot control the money supply, but why it succeeds in targeting the short-term interbank rate), and a comparison of different monetary systems. This approach can also be employed to tell stories about the occurrence of certain economic phenomena, e.g. the financial crisis 2007-08, as a result of more long-term structural institutional changes in the financial sector. Although such institutional analyses are based on specific empirical cases and typically do not involve formalisation, they often do provide more general conclusions about economic behaviour and events. Moreover, they may underpin formal macroeconomic models that in themselves are unable to provide rich descriptions of the underlying economic institutions and behaviour that generate certain macroeconomic outcomes.

6. Ideology and Political Goals

PK theory itself is in principle compatible with a wide range of ideologies or goals. To exaggerate a bit, on the one hand, PKE can be an analytical framework of a socialist politician who wants to overcome capitalism or, on the other hand, it can be a tool for a pro-capitalist investment banker to analyse the economic environment that she finds herself in. The point is that PKE lends itself to different ideologies, since its main aim is to understand the dynamics of capitalist systems from a macroeconomic point of view, regardless of whether one wants to maintain or overcome capitalism. Nevertheless, every academic has a specific ideology that he or she employs in the assessment of a theory.

Post-Keynesianism has not been strongly or uniquely associated with any major political movement. However, it is safe to say that post-Keynesians in general do not wish to eliminate capitalism, they wish to tame it and envisage an economic system which would constitute some middle way between liberalism and socialism. Therefore, some central ideological foundations and political goals of many post-Keynesian economists can also be found in the historical development of social democratic thought and corresponding emphasis on the prospects for non-zero sum game, class-cooperative capitalism. However, many post-Keynesians strongly disagree with the political programs that were put forward by social democratic parties of Western capitalist countries after the neoliberal turn to the “third way” in the 1990s.

In justifying the pursuit for socially progressive capitalism, many post-Keynesian economists claim to find historical precedence for these prospects in the Golden Age or Fordist regime of capitalism, from the 1950s to the 1970s. This period notably featured, in advanced capitalist countries, steady economic growth, a more egalitarian distribution of income, full (or close to full) employment, a stronger social security net, greater regulation of the financial sector and a more actively interventionist state engaged in aggregate demand management than that seen during the subsequent ‘neoliberal era’. The features of this era can be seen as some kind of blueprint for the kind of economic system post-Keynesians advocate for. In order to get there, the overarching political objective is to change the effectiveness of the state and the political-economic system. The question of how this can be achieved in the social and political domain is not often directly answered in PK literature. While there are some attempts in PKE which investigate the question of the socio-economic and socio-political factors that can lead to certain shifts of overall economic or capitalist regimes, it can be argued that these questions are not the major concern of PK academic literature. Rather, PKE states what needs to be achieved at the macroeconomic level in order to avoid the instabilities and/or persistent structural weaknesses related to capitalism. These include stagnation, excessive inflation or deflation, recessions, financial and economic crises, among others. For example, many post-Keynesians argue that a more even distribution of income between capitalists and workers will boost aggregate demand and growth and can therefore result in increasing the gross profits of the capitalist class. This emphasises the fact that for PKE, there is no fundamental trade-off between social cohesion as a political target and growth as the economic means to maintain high levels of employment and to improve living conditions. However, as the analysis of social developments leading to political change are of minor concern relative to specific economic policy recommendations in PKE, one can easily get the impression that the PK approach to politics has a certain affinity to technocracy. This is despite many post-Keynesians being well aware of the socio-political challenges hindering their “technical” recommendations from being implemented.

Most post-Keynesian economists would subscribe to the idea of achieving a more socially just system, with full employment, low levels of income inequality and high levels of individual freedom. While today many post-Keynesian economists do recognise that infinite growth is problematic from an environmental perspective, it remains the central instrument to achieve full employment and therefore can be seen as a key goal of PKE.

PKE favours a macroeconomic policy mix with an active role for fiscal policy to stabilise the economy in the short and the long run. Monetary policy should target low interest rates to provide stability in the monetary, financial and real sector. Other policies to stabilise the economy could be achieved with strict financial market regulation via credit controls, asset-based reserve requirements, among others. Also, it is considered important that central banks act as lenders of last resort. Wage and incomes policies should lead to steady nominal unit labour cost growth in line with the desired inflation rate. PK economists are generally supportive of trade unions as they have an important influence on wage bargaining coordination and therefore price stability. Regarding international economic policies, PKE does not regard free trade as beneficial for poorer countries as long as it does not help them to build their own competitive manufacturing sectors. To achieve that post-Keynesians favour capital controls, managed exchange rates and infant industry protection.

7. Current Debates and Analyses

There are different areas of debates and analyses that PK research has concentrated on. The focus that is placed on different problems and research areas is strongly influenced by the developments of economies and societies, by fads and fashions, by the advancement of computer technology and, of course, by historical events.

One area where many contributions have recently been made is in the use of econometric studies trying to determine if a country is wage-led or profit-led. While in wage-led countries an increase in the wage share leads to higher aggregate demand, it reduces aggregate demand in a profit-led country. In extensions to this approach, the effects of personal income inequality, financialisation, open economy issues, fiscal policy and other factors on growth are being researched. Furthermore, the notion of financialisation has recently given rise to a rich literature that describes and analyses structural changes in many economies towards a greater importance and dominance of the financial sector. The contributions in this field range from institutional and descriptive analyses on the micro- and meso-level to econometric studies and formal macroeconomic models. PK contributions to the financialisation debate highlight its negative effects on investment, income distribution and financial stability. However, there are still puzzles to be solved such as how financialisation relates to neoliberalism.

With the historical event of the Global Financial Crisis (GFC), the interest in Hyman Minsky’s financial instability hypothesis was renewed, in an attempt to better understand the complex connection of the real and the financial sector and the tendency for crises. This is being done especially with the help of dynamic models that seek to cast Minsky’s ideas in a more rigorous formal framework.

The overall awareness about ecological problems and, in particular, climate change have also had an influence on PKE. However, it has to be said that traditionally, post-Keynesians did not spend a lot of time thinking about environmental issues but have focussed rather on achieving full employment by economic growth. However, the focus on environmental constraints has received a lot more attention in recent years. PK economists see ecological economics as having strong microeconomic foundations but relying too much on neoclassical macroeconomics, and so they attempt to introduce PK macroeconomics to the analysis.

Finally, there has been a strong increase in the diversity of modelling methods used by PK economists. For example, the GFC has generally reaffirmed the post-Keynesian insistence on the important role of money and finance for economic activity. This has given another boost to stock-flow consistent modelling. Large scale SFC models are being developed that describe an entire national economy, while multi-country open economy models look at international trade and finance. Another field of advancement is agent-based modelling to understand how the complex interactions on the microeconomic level can affect macroeconomic outcomes. This is still in early stages as post-Keynesians have only recently started to work with these models. Other authors focus on issues like disequilibria, instability, and how the economy moves from one equilibrium to another through time. This research area employs increasingly complex models with non-linear dynamics that often require computer techniques to numerically simulate different possible solutions to the model. These models give an insight into the sometimes chaotic adjustment processes that happen in the real world and thus have a very different flavour than the tranquil and harmonious mainstream general equilibrium models. 

8. Delineation: Subschools, other Economic Theories, and other Disciplines



Major themes



Fundamental uncertainty

Monetized production economy

Financial instability


J.M. Keynes

Hyman Minsky

older Joan Robinson

Sidney Weintraub


Income and distribution models

The traverse

Effective demand

Class conflict


Donald Harris

Michal Kalecki

younger Joan Robinson

Joseph Steindl


Relative prices

Technical choice

Multisectoral production systems

Capital theory

Joint production

Long-run positions

Krishna Bharadwaj

Pierangelo Garegnani

Luigi Pasinetti

Pierro Sraffa



Theory of the firm

Monetary institutions

Behavioural economics

Labour economics

Alfred Eichner

John Kenneth Galbraith

N. Georgescu-Roegen

Abba Lerner

Thorstein Veblen


Economic growth

Productivity regimes

Open economy constraints

Real–financial nexus

Wynne Godley

Richard Goodwin

Roy Harrod

Nicholas Kaldor

Source: Lavoie 2014, 43.

The post-Keynesian school is comprised of several subschools, each with emphasis on different phenomena, while agreeing at the same time on important key notions. First, that monetary variables are essential to the understanding of the economy. Second, effective demand drives the economy in the short as well as in the long-run. Third, the future is fundamentally uncertain, and so it is impossible to apply probabilities to different possible futures. Fourth, the economy is path-dependent which is why there is no predetermined equilibrium in the future to which the economy can adjust. And finally fifth, they all regard distributional conflicts as very influential on the overall macroeconomic development in the short as well as in the long run.

Relying too heavily on Keynes as the intellectual founding father also has its disadvantages as it can lead to sterile discussions about what Keynes truly said, or what Keynes truly, truly said. Keynes’ contributions were in part themselves based on neoclassical foundations, as he was a student of Alfred Marshall. Therefore, some economists claim that Kalecki - who published even before Keynes, but only in Polish at first - was in a way the true founder of PKE, as his analysis was less inspired by neoclassical theory.

The name of post-Keynesian economics itself obscures the contributions of several different and influential authors. The so-called Fundamentalists base their theory mainly on Keynes himself and focus on the topics of the monetised production economy and financial fragility. Their analysis made great contributions to the understanding of the Global Financial Crisis.

Kaleckians are mainly interested with output and employment, business cycles, growth theory and pricing issues. The Sraffians focused more on relative prices and choices of techniques, among others. The Institutionalists encompass authors that look at the institutional setting of the economy. These include Minsky (at least in parts), behavioural economists of post-Keynesian tradition as well as the Modern Money Theorists who focus very intensely on the institutional framework of government, banks and central banks. Kaldorians mainly focus on long-run growth, and highlight the constraints that open economies have to face regarding growth and how economic structure matters for development.

PKE has links to several other heterodox schools of thought, most importantly with Marxism and institutional economics, which also reject mainstream economics. The object of analysis of both Marxism and PKE is the capitalist economy where the relationship between employers and employees as well as the pursuit of profit are of fundamental importance. For Marxists and PKE, money is a central element for the analysis of inherently unstable capitalist economies. Furthermore, both schools of thought reject Say’s law, though some Marxists only do so for the short run. Nevertheless, there are also important points of disagreement between the two paradigms. Importantly, most PK economists reject the Marxian labour theory of value or at least regard it as a rather useless concept. The Marxian idea of a tendency of the rate of profit to fall is another weakness. Both of these examples relate to differences in the methodological, ontological and epistemological views and beliefs in both schools. The links between PKE and institutional economics are also very strong and maybe even stronger than the links to Marxism. PKE and institutional economics both emphasise the importance of social norms, conventions and habit formation to individual behaviour. In fact, PKE makes great use of the analysis of microeconomic and socio-political issues that can be found in institutional economics. However, there are again some important differences between both schools, especially regarding methodology. For example, many institutional economists reject the formal and econometric modeling approaches that can be found in PKE.

9. Delineation from the Mainstream

Summarising what has been mentioned above, PKE and mainstream economics differ regarding their epistemology and ontology, their understanding of rationality, their methods, and their economic and political core.

First, while PKE stresses the importance of realism - trying to tell relevant stories about the economy, based on real facts - mainstream economics follows the view of instrumentalism - which does not care about the degree of reality reflected in their assumptions, as long as they will allow precise predictions. Mainstream economists therefore use the concept of a perfect optimising agent. Also known as homo economicus, this concept allows them to make seemingly accurate predictions about the future economy, while not taking into account that humans do not behave like this agent in reality. In contrast, PKE uses the concept of satisficing agents. Like real humans, these follow rules of thumb and make decisions that suit an environment with fundamental uncertainty. The method of PKE follows holism, acknowledging that humans are social beings living in a complex system of institutions, gender, culture etc. In this view sensible behaviour by individuals on the micro level can lead to unintended consequences on the macro level (see the paradoxes above for examples). Mainstream economics follows the idea of individualism where individual behaviour is simply aggregated to form a measure of macroeconomic level, ruling out any micro-macro paradoxes beforehand.

The economic core of mainstream economics is scarcity of resources, namely capital and labour. Therefore, mainstream economists focus on the allocation of these resources and hence view prices as an indicator of scarcity. In contrast, PKE considers empirical evidence and regards the economy to be generally running below full capacity. This shapes their view of the economy being in abundance. Their main concern is rather how to employ all the idle labour and capital. They understand prices as indicators of the unit production costs.


Finally, the political core of mainstream economics is based on the belief that unregulated markets lead to an optimal allocation of scarce resources. PKE, although acknowledging the positive entrepreneurial effects, is highly suspicious of unfettered markets and tend way more toward tight regulation.

10. Institutions


  • Cambridge Journal of Economics
  • Journal of Post Keynesian Economics
  • Metroeconomica
  • Review of Political Economy
  • Journal of Economic Issues
  • International Review of Applied Economics
  • European Journal of Economics and Economic Policies: Intervention
  • Review of Keynesian Economics
  • Review of Radical Political Economics
  • International Journal of Political Economy
  • PSL Quarterly Review
  • Bulletin of Political Economy
  • Brazilian Journal of Political Economy
  • Contributions to Political Economy
  • Panoeconomicus

Networks/ associations/conferences/ summer schools

  • North America: Levy Economics Institute, annual Hyman P. Minsky conferences in New York, international Post Keynesian conferences in Kansas City, and Minsky summer seminars in Annandale-on-Hudson, NY
  • South America: Associação Keynesiana Brasileiro (AKB), annual conferences
  • Australia: PKs as main organisers of and contributors to the Australian 
Society of Heterodox Economics (ASHE) conferences.
  • Asia: Japanese Society for Post Keynesian Economics, seminars, 
conferences, Keynes Society Japan, annual conferences
  • UK: Post-Keynesian Economics Study Group (PKSG), annual workshops, seminar series at the University of Cambridge, Kingston University London, Leeds University Business School and SOAS, London.
  • Denmark: Nordic post-Keynesian network (conferences)
  • France: PK conferences at the University of Dijon, partly co-organised by the French Association pour le Developpement des Etudes Keynesiennes (ADEK), French PKs heavily involved in the newly founded Association Francaise d’Economie Politique (AFEP), conferences and other activities
  • Spain: University of the Basque Country in cooperation with the Cambridge Centre for Economic and Public Policy, annual conferences
  • Germany: German Keynes Society, small annual conferences for German speaking participants, Research Network Macroeconomics and 
Macroeconomic Policies (FMM), annual international conferences, biennial summer schools

Graduate programmes:

  • Brazil: several universities (Campinas, Rio de Janeiro, ...)
  • US: University of Massachusetts Amherst, the New School for Social Research, New York, the University of Missouri, Kansas City, and at the University of Utah, Salt Lake City.
  • UK: Leeds University Business School, Kingston University London, SOAS London, Greenwich University, Open University, UWE Bristol
  • France: University of Paris 13
  • Spain: University of the Basque Country, Bilbao.
  • Germany: Berlin School of Economics and Law and the HTW University of Applied Sciences Berlin, without PhD
  • Erasmus Mundus Master Programme on Economic Policies in the Age of Globalisation (EPOG): University Paris 13, the University Torino, the Berlin School of Economics and Law, Kingston University London, and the University of Witwatersrand as major partners, Seoul National University, the Federal University of Rio de Janeiro and the University of Massachusetts Amherst associated.


  • Fontana, G.; Sawyer, M. (2015): Towards post-Keynesian ecological macroeconomics. Ecological Economics (121), pp. 186-195.
  • Godley, W., Lavoie, M. (2007): Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth. New York: Palgrave Macmillan.
  • Hein, E. (2016): Post-Keynesian macroeconomics since the mid-1990s – main developments. IPE Working Paper No. 75/2016.
  • Hein, E., Stockhammer, E. (eds.) (2011): A Modern Guide to Keynesian Macroeconomics and Economic Policies, Cheltenham: Edward Elgar.
  • King, J.E. (ed.) (2012), The Elgar Companion to Post Keynesian Economics, 2nd Edition, Cheltenham: Edward Elgar.
  • Lavoie, M. (2014): Post-Keynesian Economics: New Foundations, Cheltenham: Edward Elgar.

Further readings:

Textbooks, handbooks, further reading:

  • Davidson, P. (2011): Post Keynesian Macroeconomic Theory, Cheltenham: Edward Elgar.
  • Fontana, G., Setterfield, M. (eds.) (2009): Macroeconomics and Macroeconomic Pedagogy, Basingstoke: Palgrave Macmillan.
  • Godley, W., Lavoie, M. (2007): Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth. New York: Palgrave Macmillan.
  • Harcourt, G.C., Kriesler, P. (2013) (eds): The Oxford Handbook of Post- Keynesian Economics, 2 Volumes, Oxford: Oxford University Press.
  • Hein, E. (2014): Distribution and Growth after Keynes: A Post-Keynesian Guide, Cheltenham: Edward Elgar.
  • Hein, E., Stockhammer, E. (eds.) (2011): A Modern Guide to Keynesian Macroeconomics and Economic Policies, Cheltenham: Edward Elgar.
  • Heine, M, Herr. H. (2013): Volkswirtschaftslehre: Paradigmenorientierte Einführung in die Mikro- und Makroökonomie, 4th edition, München: Oldenbourg.
  • King, J.E. (2015): Advanced Introduction to Post Keynesian Economics, Cheltenham: Edward Elgar.
  • King, J.E. (ed.) (2012), The Elgar Companion to Post Keynesian Economics, 2nd Edition, Cheltenham: Edward Elgar.
  • King, J.E. (2002): A History of Post Keynesian Economics Since 1936, Cheltenham: Edward Elgar.
  • Lavoie, M. (2014): Post-Keynesian Economics: New Foundations, Cheltenham: Edward Elgar.
  • Lavoie, M. (2006): Introduction to Post-Keynesian Economics, Basingstoke: Palgrave Macmillan.
  • Rochon, L.-P., Rossi, S. (eds.) (2016): An Introduction to Macroeconomics: A Heterodox Approach to Economic Analysis, Cheltenham: Edward Elgar.

Assigned course modules

Title Provider Start Level
Economics of Money and Banking Columbia University 2017-07-17 beginner
Advanced Political Economy Lectures University of Western Sydney self paced advanced
Behavioural Finance Lectures University of Western Sydney self paced advanced
Economics from a pluralist perspective Erasmus University Rotterdam 2017-10-09 beginner


Introduction to Post-Keynesian Economics
Lavoie, Marc
Year of publication: 2009
Palgrave Macmillan

The Elgar Companion to Post Keynesian Economics
King, John Edward (Ed.)
Year of publication: 2012
Edward Elgar Publishing

The Oxford Handbook of Post-Keynesian Economic
Harcourt, G.C.; Kriesler, P.
Year of publication: 2013
Oxford University Press