No one really seems to know what a “Keynesian” is these days. It’s one of these terms that now means “socialist”, “big government” or “proponent of fiscal policy”. Of course, it doesn’t actually mean any of those things. Keynes wasn’t a socialist. He didn’t like big government. And he liked Monetary Policy as much as he liked Fiscal Policy. So, what is the real distinction between someone who is a Keynesian and isn’t?

I like John Taylor’s simple definition:

“the Keynesian approach to macro policy is the use by government officials of discretionary countercyclical actions and interventions to prevent or mitigate recessions or to speed up recoveries.”

That’s pretty cut and dry. A Keynesian is someone who is in favor of discretionary countercyclical actions. This could be someone who favors adaptive regulations, discretionary Central Bank interest rate changes, discretionary QE, discretionary fiscal policy, etc. And you know what? Most of the major policy measures that have been enacted in the last 7 years were Keynesian. Yes, all those discretionary QE programs – Keynesian. The ARRA – Keynesian. The bank bailout packages – Keynesian. All those Central Bank loans to the banking system – Keynesian. The discretionary interest rate cuts – Keynesian. And yes, some of it worked, some of it’s been terrible. I would have done things much differently. But on the whole we skirted what could have been a much much worse situation had we sat around and just let the world burn in front of us. And we can thank the willingness of policymakers to react in a discretionary manner.

The interesting thing is that discretionary intervention and a dynamic economy are two peas in a pod. Given how dynamic and adaptive the financial system is we should expect that policies and regulations will evolve over time. Capitalists will always be trying to stay one step ahead of regulators in the search for profits. And sometimes they will mismanage risk which will result in the need for some level of discretionary response. That’s not necessarily a bad thing in the proper doses. But we should really get over the commentary aimed at trying to kill “Keynesian” economics.

Much like the inane “passive investing” debate, this discussion about eliminating discretionary intervention in the economy is inherently at odds with the dynamism of the financial system. And when you understand what Keynesian Economics really is and combine it with the reality of our dynamic system it becomes an inevitable part of our economic future. You can wish discretionary intervention away, but until our economy becomes one static unadaptive system (which it won’t) it ain’t happening.