Explaining Historical Business Cycles Using Keynes and Kalecki

Keynes’ almost century-old explanation of the determinants of aggregate investment remains vastly superior to anything mainstream economics has developed in the interim. However, while his work has spawned many theoretical representations and models over the years, empirical tests and narrative adaptations have been far fewer. The presentation will focus on attempts at these last two, reviewing first a number of recent empirical papers offering direct tests of Keynes’ contention that in an environment of uncertainty surprises–particularly negative ones–lead to strong reactions on the part of entrepreneurs. Investment spending is driven not only by agents’ expectations of the future profitability of capital formation but also--and perhaps especially--by the degree to which those expectations differ from realized outcomes. There exists strong statistical evidence in support of this heretofore untested hypothesis. Both the manner in which forecasts and surprises were proxied (the key contribution of the literature) and the results of the studies will be explained.

Even less pursued has been the path of using Keynes’ approach in narrative descriptions of fluctuations in aggregate investment spending and the business cycles they create. This is accomplished in a recent volume–US Business Cycles 1954-2020: Sources, Symptoms, and Solutions (Cambridge University Press, 2025)–where a Keynes-inspired macro model is introduced and then used as a frame in a detailed history of US business cycles from 1954 through 2020. The implicit assumption underlying this analysis is that at some level, we must submit our models to the test of history and not just statistical significance or internal consistency: do we see elements of Keynes’ 1936 explanation of fluctuations in investment spending during the Kennedy administration or not? A summary of the results will be offered wherein it will be shown that it is impossible to explain US economic downturns without resort to Keynes’ theory of aggregate investment, even within the context of a more complete explanation where every effort is made to consider all relevant factors including policy, labor disputes, international conflicts, agents’ expectations, inflation, and more.

This is a hybrid lecture. Those attending in person should head to Bush House south east building, room 1.05. Those attending online will receive the link to join via MS Teams in the run-up to the lecture.

SPEAKER

John T. Harvey earned his PhD from the University of Tennessee in 1987, which at the time was a center for Institutionalist and Post Keynesian thought. He has been at Texas Christian University (TCU) ever since and currently serves as the Hal Wright Professor of Economics. His areas of specialty are international economics, macroeconomics, and contemporary schools of thought. John’s main contribution to the scholarly literature has been in exchange rate determination, where he published a volume in 2009: Currencies, Capital Flows, and Crises: A Post Keynesian Analysis of Exchange Rate Determination (Routledge). His most recent research examines the causes of the business cycle using a hybrid Keynes/Kalecki/Minsky model. A monograph based on this work–US Business Cycles 1954-2020–was published by Cambridge University Press in 2025. It applies the theory to the post-World War Two U.S. economy and offers policy solutions along with an extensive historical narrative.

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Host or Publisher Department of European and International Studies