Read this article to learn about the eight salient features of Post-Keynesian economics.

1. Rejection of Walrasian General Equilibrium Theory:

Perhaps the most fundamental proposition common to all Post-Keynesian economists, irrespec­tive of the particular group or special group to which they belong is a rejection of the Walrasian theory of general equilibrium as the micro-foundation of the macroeconomic theory.

They find the Walrasian theory quite incompatible with Keynesian economics. In the Walrasian system it is crucial to understand that no trading or exchange can take place until planned demand and planned supply match in every market.

The job of the ‘auctioneer’ is to continue to call out new sets of prices for everything being traded until prices are found that will clear all markets simultaneously. This is what Walras meant by the process of tatonnement of grouping towards a general equilibrium solution for the whole economy. One of the basic weaknesses of the Walrasian general equilibrium theory is that it fails to deal with real, historic time. Models based on Walras theory are timeless and static—this is the natural corollary of equilibrium analysis. According to J.R. Hicks, “Equilibrium is by definition a state in which the relevant variables are not changing, therefore, time is not taken into consideration in equilibrium analysis”.

2. Income and Substitution Effects:


An important feature of the Post-Keynesian economics is that it explains the economic growth and income distribution—the two being viewed as directly linked with one another; but the rate of investment being the key determinant is the same for both as against the relative price variable which had been the focal point of neo-classical analysis.

This is the natural corollary of the belief that in a dynamic, expanding economy the ‘income effects’ produced by investment and other means of growth far outweigh the ‘substitution effects’ resulting from price movements—that changes in demand both aggregate and sectoral are due more to changes in income than to changes in relative prices. It does not mean that Post-Keynesian economics totally ignores substitution effects but it does not treat it as a major or significant element of the dynamic process while neo-classical theory usually ignores (by assumption) any possible income effects. The Post-Keynesian economics as such, is less arbitrary as it recognises that income effects will dominate in the short-run and will be no less important than the substitution effects over longer time periods.

3. Importance of Real, Historical Time:

The most vital fact about the Post-Keynesian economics is that historical time must be accounted for carefully. A sharp distinction must be made between historical and logical time. While logical time can move either forward or backward, historical time can only move forward. The essence of an economy that operates in historical time is that its past is given and cannot be changed, and that its future is uncertain and cannot be known. The Post-Keynesians look at the economy as an ongoing process that exists in real, historic time.

When we say that economy and economic process exist in real, historic time we are saying that they exist in a world in which past in known but the future is unknown. In other words, the economy moves continuously from a known past through the present to an unknown future.


Moreover, the process is irreversible, a view which is basically different from the one that exists under equilibrium analysis—wherein a system when disturbed returns to its original state. The only knowledge about the future can be at the most in terms of probabilities, because all that can be done is guesswork or speculation or what might happen—but one can never be sure what will happen in future. This is particularly true of investment decisions because investment decisions are entirely future oriented.

A monetary economy, Keynes argued, is not just a more complicated barter system. As such, the Post-Keynesian economists abandoned the concept, of ‘general equilibrium’—from which there is no further tendency to change; it is inappropriate to historical time. Real historical time invariably moves forward and reflects external shocks to the system. With regard to money Post-Keynesian economics rejects the neo-classical comparative static position that money is neutral in the sense that an exogenous change in the quantity of money produces proportional change in all prices, leaving real phenomena unchanged.

Post-Keynesian economics focusses on the events of the transitional period in which the world is continually involved, during which changes in the supply of money may have far- reaching consequences on output and employment. As such, the economic process is not only one- directional, but it is often cumulative in character, especially during the ups and downs of the business cycle.

In Keynesian economics, money, saving, investment, etc. play an important part in determining Y, O. Employment and once we introduce real time into the process, their role becomes even more important. This is because they provide vital links between the economy’s historic past and its uncertain future. When we say that the economy has a historic past, it means the economic process is both evolutionary and cultural, that is, we cannot detatch the economy and economic behaviour from the cultural environment in which it takes place.


To an extent, therefore, economic principles are necessarily limited by time, place and cultural effect that may disturb some because it limits the possibility of developing a general theory of economic process that could be applied to any society at any time or at all times and at all places irrespective of the prevailing technology and institutions. The essence of the argument is that evolutionary change is the normal state of affairs and not a movement towards a state of rest at some fixed level of economic activity.

4. Uncertainty and Expectations:

The real world of historic time is predominated by uncertainty. Uncertainty exists simply because we cannot know the future, howsoever, good or perfect our knowledge of the past may be. In the General Theory, the element of uncertainty is the key element and it is on account of this basic feature of uncertainty that expectations play a very vital role in the economic process. What we do and how we do it in the field of economics are strongly influenced by our expectations regarding the future.

After Keynes had finished General Theory, he realized that the main difference between his theory and the earlier one (classical) lay in the fact that he (Keynes) recognized and they ignored the fact that expectations of the future are necessarily uncertain. It is from here that Post-Keynesian theory takes off. The recognition of uncertainty and active role of expectations undermines the traditional concept of equilibrium. Expectations constitute the basis of the study of progressive and fluctuating economy— as the analysis of problems of inflation and employment at any time depends not on the existing state of expectations as existed over a past period but also on the state of expectations yet to come and how are they formulated ?

The fact that future cannot be ascertained correctly amidst varying choices in present show that the concept of microeconomic equilibrium in a competitive market is self-contradictory. Equilibrium is possible only in a ‘traditional’, ‘static’ economy— where there are no dynamic influences or variables to influence the future, where everyone knows that everyone also will do. But that is a situation where no decision-making processes are involved and no choices are to be made.

The myth that ‘invisible hand’ leads to designed and judicious allocation of scarce resources between alternative uses stands exploded. Changes in the level of output did follow variations in the state of demand without affecting composition of output. Changes in adaptation of resources to demand can come about only through the process of investment which, in turn, depend on expectations about the future which are rarely perfectly fulfilled and, therefore, have to be laid down (or anticipated) possibly with a wide margin for error. It was, therefore, left to the Post-Keynesians to tackle the neo­classical notion of the choice of technique based on rational substitution amongst resource inputs— as their relative prices change.

What distinguishes the Post-Keynesian in this respect is their belief that the foundations for expectations are highly uncertain; while the new-classical economists, no doubt, also place emphasis on the role of expectations, but they think that the foundations of expectations are built on careful analyses along with statistical certainty. According to Keynes, the classical economists assumed a kind of certainty of knowledge which, simply did not exist, and the new-classical economists held that “facts and expectations are assumed to be given in a definite and calculable form ; and risks, of which, though admitted, not much notice was taken, were supposed to be capable of an exact mathematical computation. The calculus of probability was supposed to be capable of reducing uncertainty to the same calculable status as that of certainty itself’.

Keynes went on to say, “The whole object of the accumulation of wealth is to produce results, or potential results, at a comparatively distant, and sometimes indefinitely distant data”. Unfortunately, the knowledge on which the decisions on the accumulation of wealth (investment) are or must be based is highly uncertain. By certain knowledge Keynes does not mean simply to distinguish what is known for certain from what is only probable.

The sense in which Keynes uses the term is that in which the prospect of a war is uncertain, or the price of copper and the rate of interest twenty years hence, or the position of private wealth holders in the social system is uncertain. About these matters there is no scientific basis on which to form any calculable probability. Yet decisions must be made and they must be based on the basis of expectations held about future, of which there is no scientific grounds to know.

What, then, do we do? In answer Keynes suggested that we depend upon certain conventions ; that:


(i) Assume that the present is a more dependable guide to the future that past experience;

(ii) Assume that the existing market conditions are a guide to future market conditions;

(iii) Assume that the average or majority opinion is better than our own as a guide to the future.

The element of uncertainty and expectations again based on uncertainty enter into the economic process because to the decision that household, firms and financial institutions make concerning their portfolio decisions—decisions on the kind of assets they wish to hold. Again, they enter the formation of views held by business firms and lending institutions about the prospective yield for new capital assets. Liquidity and investment decisions, on which the ups and downs of the market economy depend, rest on expectations that are closely related with uncertain and unknown future. The conclusion, therefore, is that the instability is inherent in the economic system; it is not something imposed on it by random events external to how the system functions.


In contrast to the Post-Keynesian view of uncertainty the new-classical economics deals with uncertainty as if it were the same as predictable risk. As Paul Davidson has said, these economists, “assume that the uncertainty of the future can be adequately represented by probability statements”. What this means, according to Prof. Davidson is that “the new-classical economists are simply replacing the certainty about the future which was built into traditional classical economics with the concept of—a known probability distribution”. It means that instead of perfect knowledge, economic changes now possess actuarial knowledge—which enables them to realize all expectations.

Further, Prof. G.L.S. Shackle says that in the general theory Keynes challenged the central theme of traditional economies, which is that men pursue their interests by applying reason to their circumstances. But, according to Prof. Shackle, reason cannot achieve practical results unless information is complete. We are not, says Prof. Shackle, “The assured masters of known circumstances via reason but the prisoners of time”.

However, it will not be correct to say at this stage that the Post-Keynesians arrived at a more suitable approach to human behaviour than is found in the classical thinking. This is not the case. They do take, however, a different approach, In the face of uncertainty of the kind described by Keynes, the Post-Keynesians argue that human behaviour is largely shaped or determined by the social, cultural and economic institutions through which people act. Therefore, to understand human behaviour, we must begin by understanding the dominant institutions of a society.

5. Secular Growth Path:


The Post-Keynesian economic theory is so designed that the economic system is depicted or is treated as proceeding along some secular growth path. This view of the economic system as being constantly in motion stands in sharp contrast to both the general equilibrium and partial equilibrium variations of neo-classical theory. This view of the economic system being constantly in motion is what separates the Post-Keynesian from the standard static macroeconomic models.

In treating the economic system that is expanding continuously over time, the Post-Keynesian economics recognizes the need to distinguish between the factors responsible for the cyclical movements around the trend line even though at least one of the factors, the rate of investment is the same. Once the rate and composition of investment have been determined, the economy’s dynamic growth path has been largely set.

For the long run rate of expansion and with it the growth of output per worker, depends on the rate at which supply capacity of both business plant and equipment and social infrastructure is being increased. And the short period fluctuations around that trend line depend on how steadily the growth of investment and other forms of discretionary spending are being maintained.

This methodological treatment gives rise to the distinction between the Post-Keynesian long-period and short-period analysis. The long-period analysis in isolating the determinants of secular growth, does not presume, as neo-classical growth models do, that market forces alone are sufficient eventually to bring the economy back to the warranted growth path—the one on which the economy can expand at a constant, steady rate.

6. Importance of Institutions in the Economy:

One of the features of Post-Keynesian economics is that they lay proper stress on institutions especially economic, social and political for two major reasons. Firstly, on account of their rejection of neo-classical general equilibrium theory; because institutions here do not play any significant role except the institution of market, price flexibility and competition—other institutions have no importance, but this is not a very correct description of the world where institutions do count. Another reason for giving importance by Post-Keynesians to institutions is that, in their view, human behaviour is shaped by and through institutions. They gave emphasis on the collective behaviour rather than individual behaviour. This is in sharp contrast with the neo-classical view in which human behaviour is always individualistic and free from the influence of institutions.

Therefore, it is but natural that if we really want to understand what happens in the economy, we must understand the institutions that shape and influence the collective human behaviour. The important economic institutions in which Post-Keynesians are really interested revolve round money and finance, including the institution of ‘money’ itself. Secondly, there are institutions which reflect the importance of organized groups like trade unions, business corporations, etc., in whose role the Post-Keynesians are interested.


a. The Institution of Money:

The features of Post-Keynesian economics is that it describes essentially an economic system with advanced credit and other monetary institutions—all of which play a vital role in the dynamic process which is the main study under this theory. This is in sharp contrast to the neo-classical model (including its monetary offshoots) in which money does not matter insofar as real output is concerned over time.

It is the existence of money, produced partly in response to credit needs, that makes meaningful and significant the distinction in Post-Keynesian models between savings and investment or between discretionary income and discretionary spending. It is the elasticity of the credit of the banking system (because it either activates or sterilizes idle balances depending on demand for loans) that prevents the full impact of any changes in economic activity from being felt on the real side of production.

With the increase or decrease in the government expenditures or some other form of discretionary spending—the banking system, either activates or sterilizes the idle balances or demand for cash, except when the downturn is so severe as to impair the confidence in the financial structure (due to progressive decline in asset values) leading to liquidity crisis.

Even though the modern banking and other credit institutions are designed to accommodate discretionary spending decisions; it is possible through central banking actions, to make them less so. In that case, money does matter- affecting not only the magnitude of the current business cycle but the secular growth of real output as well. Money matters because without it purchases cannot be made and if purchases cannot be made, the aggregate demand will fall—affecting the economy’s actual growth path.

Money is the central institution in the scheme of things of Post-Keynesians. One of the major criticisms of the conventional classical economics made by Keynes was that it was applicable to a real exchange economy. Keynes description of an economy in which money, while a tool of great convenience is transitory and neutral in its effect. Keynes saw a different role for money. Money, in his view is not neutral; its role is not limited to facilitate the exchange of real things.


According to Keynes his ‘General Theory’ was not only an explanation for the determination of output and employment, but it also constituted what he called, a monetary theory of production. By a monetary theory of production, “Keynes means an economy in which money plays a part of its own and affects motives and decisions and is, in short, one of the operative factors in the situation, so that the course of events cannot be predicted either in the long run or in the short run, without a knowledge of the behaviour of money”.

In short, money is not neutral, it is not a mere convenience, something that facilitates the real process of exchange. Rather, it dominates the economic process. Making money is seen as the end of economic activities, and production is a means to this end, rather than the other way round as in the classical analysis.

Important ideas flow if we adopt this perspective of money. In a monetary economy money becomes the ultimate consumer good, the thing that is valued above all else. This is so because it opens the door to power, to wealth, to attention, to status and prestige and to all things that humans value along with and often to a greater extent than consumption. Production is, of course, important, but it is seen in a different context than it is seen in classical economics. Money is crucially important, because, as we have known it provides the most essential link between the present and the future— a future, as we have known, is shrouded in uncertainty.

Money plays an important role as a source of liquidity. In the standard IS-LM model of the economy, already known the distinction is made between the real sphere—the IS curve—and the monetary sphere—the LM curve. According to Post- Keynesians, the IS-LM model while useful, fails to capture the essential properties of money that make the economic system essentially unstable. The problem lies in the institutional feature of money. It is not like other commodities. It does not obey the normal laws of the market, increasing in supply when the demand for it goes up and vice-versa.

Apart from this, another aspect of monetary economy which needs attention according to Prof. Paul Davidson is that production is carried on and organized on a ‘forward money contract basis’. This means that when production takes place future dates are given for both delivery and payment. Production takes time and during this time labour has to be paid and materials used in production have to be purchased. Both these activities require money or finance.

This is not the case in the world of Walrasian general equilibrium, for there it is assumed that all goods are traded simultaneously and all payments are made at the instant trade takes place. But in the actual world producers do incur obligations in the present to be fulfilled in the future. Unless they do this efficient production is not possible in a world of real, historic time.


The expectation is that the sale of output will supply the necessary proceeds to cover all costs incurred, in production, but meanwhile producer must have liquidity—that is, money on hand, and for this there must be money and finance creating institutions— to which the producers look forward during this period.

b. Trade Unions—Large Corporations and Other Institutions:

Of all the types of forward contracting or forward business taking place in the economy none is more important than the money wage contracts. The relationship between money wages and the productivity of labour determine the prices of newly produced goods and services.

Post-Keynesians believe that the level of money wages is strongly influenced by trade unions, collective bargaining, etc., more than the institution of the market that is mainly responsible for the level of money wages in the modern, technological advanced economy. Wages then become an exogenous variable rather than an endogenous variable. Again, according to Post-Keynesians, in the central core or the economy, where much oligopolistic firms dominate prices are administered through the technique of “mark up” over labour costs per unit produced.

According to Post-Keynesians, the distribution of income and power is the major concern of most of us—for which there is a constant struggle going on by people to gain greater control on income and power. Both inflation and economic growth are linked in the minds of Post-Keynesians to administer wage and price behaviour.

This follows because the struggle to exercise control over the money and competitive struggle among organised groups each seeking to obtain both controls and a larger share of national output for members of the group. This leads to what is now called competitive inflation, a situation in which all sorts of groups organised or otherwise compete with one another to raise the prices of goods and services they sell (including labour services), the objective being to rise their real incomes. Thus, trade unions and large business corporations are institutions crucial of the determination of both individual prices for much of nation’s output and prices in general, contend the Post-Keynesians.


c. Administered Prices and Wages:

A natural corollary of the above feature of the Post-Keynesian economics is that it accepts and recognizes the existence of multinational corporations, on the one hand, and perhaps less powerful national trade unions, on the other. Within the industrial sector of the highly sophisticated and technologically advanced and developing economies, both prices and wages are assumed to be ‘administered’, that is, they are quoted by the supplier on ‘take it’ or ‘leave it’ basis.

These prices, thus quoted become parameters determining the rate of savings or discretionary income in household and business sectors like taxes becoming parameters determining revenues or discretionary income of the public sector. Costs and other factors remaining unchanged, the higher the price in the oligopolistic island of the economy, the greater will be the rate of cash flow resulting in greater volume of internal savings.

The characteristic feature of Post-Keynesian economics is that it takes into account not only the system of administered price in the industrial sector, but also the structure of more flexible prices prevailing in world commodity markets. Indeed the interplay between the two sectors, one oligopolistic and another competitive is an important element of inflationary process in recent years in all the countries of the world.

The microeconomic base of Post-Keynesian economics stands in sharp contrast to the neo-classical models, the conclusion of which depend on critical assumption that all suppliers of goods and labour services are price takers in competitive market—whereas in Post-Keynesian economics competition implies a continual effort by business firms to exploit the most profitable investment opportunities. It is only competition in this limited sense that prevails throughout the world—a fact that the classical economists also recognised.

7. Inter-disciplinary Approach:

Another important salient feature of Post-Keynesian economics is that it is concerned with the dynamic behaviour of actual economic systems. Like the neo-classical theory, the analysis is not limited to resource allocation under highly hypothetical market conditions. Post-Keynesian economics encompasses both non-competitive market processes and non-market forms of allocation.

It has not to make any unwarranted assumptions about the nature of economic institutions—the model becomes more consistent with the knowledge derived from the other social sciences thus paving the way for inter-disciplinary approaches to economic and social problems rendering possible what may be called ‘systems approach’.

Under the systems approach, economics is no longer the study of how scarce resources are allocated. It is, on the other hand, a study of how an economic system—defined as a set and relationship of social institutions responsible for meeting the material needs of society’s members is able to expand its output over time by producing and distributing a ‘social surplus’.

It is not just that the path of expansion is cyclical or uneven; it is also that expansion has no discernible fixed limit and that the very process of expansion is likely to change the nature of the system in an unpredictable way. When the economic system is seen as just one of several major social systems, each with its own particular dynamics, the way is opened to a truly inter-disciplinary attack on social problems. From Post-Keynesian perspective, it is the behaviour of the system as a whole constituted as a set of historically specific institutions, which economic theory must be capable of explaining.

8. Incomes Policy:

Another feature of Post-Keynesian economics is that it has established beyond doubt that inflation (stagflation) cannot be brought under control unless conventional policy instruments for regulating the economy are supplemented by an incomes policy—this will definitely give Post-Keynesian slant to the existing stock of intervention devices. It is an essential element to any anti-inflationary programme without offering quick fix solutions.

Incomes policy is not just a device for building the wage gains or organized workers—it rather, represents a means of determining the annual non-inflationary rise in all the different types of income that accrue to households—dividends, rents, wages, salaries etc. Such a view reflects Post-Keynesian view of inflation being the process by which prices rise to deflate nominal incomes, bringing real incomes in line with the availability of real resources. This policy will imply facing boldly and directly the distributional issues involved.

The neo-classical synthesis by focusing attention on the ‘marginal productivity’ of un-measurable quantities like ‘capital’— misconstrued the true nature and impact of these distributional issues and as such failed to evolve effective anti-inflationary policy. An effective incomes policy needs to be preceded, at the political level, by some minimal societal agreement as to how gains from economic growth as a result of technological progress are to be distributed.

It means that a consensus must be reached, through proper representative bodies regarding the principles which will determine the apportionment of any ‘social surplus’ so generated. The fact that market mechanism alone is incapable of doing it is what makes an incomes policy essential feature of Post-Keynesian economics—though it offers no quick or easy solution—it does at least point out to the direction in which the policy must move.