Belief: Business cycles are driven by fluctuations in investment and this comes as a result of inherent instabilities in the capitalist system.
Policy recommendation: The government must counter the business cycle by managing aggregate demand, and they must do this by, mainly, using fiscal policy.
Post-Keynesians assert that AD matters in both the short-run and long-run, that the economy is inherently unstable and the free market does not automatically adjust to full employment equilibrium.
Post-Keynesian economists are not all united on their theories and models but they do all believe that Keynes’ work is misrepresented by Neo-Keynesians and New Keynesians. Post-Keynesian economists attempt to rebuild Keynes’ economic theory within the sphere of Keynes’ original ideas and insights.
Whereas New Keynesians focus on sticky wages and prices to explain why the economy does not reach full employment on it’s own, Post-Keynesians emphasise that the economy is inherently unstable and put uncertainty at the heart of their modes. Post-Keynesians follow Keynes’ path of highlighting an unpredictable future and erratic investment decisions in driving AD and GDP fluctuations; this, arguably, is closer to Keynes’ ideas of animal spirits than the New Keynesians’ theories on price and wage rigidities.
Post-Keynesians believe that the free market does not automatically reach full employment because it depends on agents’ decision making and expectations of the future, and these involve complex inter-dependencies and unforeseen events.