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Rethinking Macroeconomics in Light of the Great Crisis

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Modern Financial Crises

Part of the book series: Financial and Monetary Policy Studies ((FMPS,volume 42))

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Abstract

The recent financial crisis showed that mainstream economics was unprepared to deal with it. There was a widespread belief in the self-correcting power of markets. Most economists not only did not foresee the depth of the current crisis, they did not even consider it possible. The crisis has damaged the reputation of economics, particularly of macroeconomics. This chapter reminds readers of the origin of macroeconomics as a branch of economics. A claim is made to reevaluate Keynes’ original contribution to economic analysis and return to Keynes’ thoughts, which have been ignored or misstated during the past 40 years. The chapter concludes pointing out the need to rebuild macroeconomics as a discipline in which aggregate quantities play an essential role, while prices have only second-order effects.

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Notes

  1. 1.

    By the way, this quotation shows how wrong is Colander’s (1991, 7) interpretation of Keynes, according to which “there is not a one-to-one relationship between the number of workers used in the production process and the output of those workers”.

  2. 2.

    This is the main difference between Keynes and Patinkin’s definitions of involuntary unemployment. According to the latter, involuntary unemployment appears when producers are forced by insufficient demand to operate in a region in which the marginal product of labor exceeds the real wage rate (Grossman, 1972, 28–9). But Patinkin (1989, 323) admitted he could not find a convincing explanation why then firms did not demand more labor.

  3. 3.

    In the efficiency wage case, the demand curve for labor would move to the left, reflecting the fall in productivity caused by the decline in real wages.

  4. 4.

    See Montgomery (2006, 128) for a well-developed argument on the classics, Say’s Law, and price/wage flexibility.

  5. 5.

    Mainly, the limitations that the liquidity trap imposes on the reduction in the interest rate and, consequently, on an increase in investment. “If a tolerable level of employment requires a rate of interest much below the average rates which ruled in the nineteenth century, it is most doubtful whether it can be achieved merely by manipulating the quantity of money” (Keynes, 2006, 282).

  6. 6.

    See, for instance, Ball and Mankiw (1994, 14) for additional references to those mentioned by Dobrynskaya (2008).

  7. 7.

    See Dickens et al. (2007) and Babecký et al. (2010).

  8. 8.

    I have also extensively argued this in Beker (2010).

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Authors and Affiliations

  1. University of Belgrano and University of Buenos Aires, Buenos Aires, Argentina

    Victor A. Beker

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Beker, V.A. (2016). Rethinking Macroeconomics in Light of the Great Crisis. In: Modern Financial Crises. Financial and Monetary Policy Studies, vol 42. Springer, Cham. https://doi.org/10.1007/978-3-319-20991-3_10

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