Economic Events and Keynesian Ideas: The 1930s and the 1970s

Keynes' General Theory was a brilliant attempt to explain the paradox of low interest rates, ineffectual easy monetary policy, and low investment during the Great Depression. We argue that Keynes' failure to distinguish between low nominal and high real interest rates led him to misinterpret a tight and all too effective monetary policy and unnecessarily hypothesize a downward shift in investment demand. Keynesian ideas in turn profoundly influenced economic policy in the 1960s and 1970s. The resulting postwar inflation -- rather than scholarship on what actually happened in the 1930s -- appears to be the primary reason for the waning influence of the ideas derived from the General Theory.