Paul Volcker, Chairman of the Federal Reserve Board, battledinflation during the severe recession of 1980-82 through the Keynesianmethod of raising interest rates and tightening the money supply.
The success of Keynesian economicswas such that even Richard Nixon once declared, "We are all Keynesiansnow."
Keynesianism in the Postwar Era
After the war, economists found Keynesianism a useful tool in controllingunemployment and inflation.
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In fact, when he shared his theory and proposed solutionwith Franklin Roosevelt, the President is said to have dismissed them withthe words: "Too easy."
Keynes explanations of slumps ran something like this: in a normaleconomy, there is a high level of employment, and everyone is spendingtheir earnings as usual.
Roosevelt, unlike Hoover, was quick to act
But Keynesian policiesare still useful in keeping the unemployment rate as close to 6 percentas possible.
Robert Lucas' attack on Keynesianism
An even bigger attack on Keynesianism came from Robert Lucas, the founderof a theory called .
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Keynesians are therefore robbed of the argument that perhaps theFed might be useful in hastening a recovery, since Lucas showed that theFed is not much faster than anyone else in discovering the problem.
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By the mid-80s, it was already apparent that neither monetarism norrational expectations were adequate theories, and neo-Keynesianism startedmaking a comeback.
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Besides, the belief thatwe should let national disasters like the Great Depression run uncheckedfor years while waiting for the economy to correct itself borders on theimmoral.
The rise of the New Keynesians
Today, neo-Keynesianism has returned to prominence.