Modern Macroeconomics Is Built around the “Level” of Demand, But Before Keynes the “Structure” of Demand Mattered Most

Recessions occur because goods and services are produced that cannot be sold for prices that cover their costs. There are countless possible reasons why and how such mistaken production decisions occur. But when all is said and done, the causes of recessions are structural. They are the consequence of structural imbalances that result from errors in production decisions, not the fall in output and demand that necessarily follows.

This cannot be emphasized enough. Modern macroeconomics is built around the notion of the level of demand, while before Keynes recessions were understood in terms of the structure of demand. The difference could not be more profound. To policy-makers today, the basic issue in analysing recessions is whether there is enough demand in total. To economists before Keynes, the central issue was to explain why markets had become unbalanced.

In modern economic theory, rising and falling levels of spending are for all practical purposes what matters. That is why increasing public spending and adding to deficits are seen as an intrinsic part of the solution, not as the additional problem such spending actually is.

Missing in modern economic debates is an understanding of the importance of structure: the parts of the economy must fit together. What’s missing is an understanding that if the entire economic apparatus goes out of sync, recession is the result and recession will persist until all the parts once again begin to mesh.

—Steven Kates, “The Crisis in Economic Theory: The Dead End of Keynesian Economics,” in Macroeconomic Theory and its Failings: Alternative Perspectives on the Global Financial Crisis, ed. Steven Kates (Cheltenham, UK: Edward Elgar Publishing, 2010), 119-120.