Abstract
The period from the mid-1960s to the mid-1980s is characterised by a slowdown in the level of economic activity; however, government’s stabilisation and welfare functions restrained the outbreak of a major depression and converted it to a long-lasting stagflation. This is the reason why this time period has been christened the “Silent Depression” and, as in the 1930s, it formed the fertile ground for the flourishing of new economic theories and for the withering away of the old ones. Dissatisfaction with the neoclassical synthesis as well as the dead end road of disequilibrium macroeconomics paved the way for the rise of Monetarism, which, however, soon lost its popularity, and already from the mid-1970s, the researches of New Classical economists with the works of Lucas and Sargent were leading the way. Many among the New Classical economists kept a critical stance towards basic propositions of their theory, and in the early 1980s, it led to the development of the real business cycles (RBC) approach. Meanwhile, Keynesian economists of the neoclassical synthesis (Tobin, Modigliani and Gordon) continued their critique which was initially levelled against Monetarism and subsequently against the New Classical economics and the RBC. The basic plea of New Keynesians is about the fundamental common hypothesis of all these approaches which is continuous market clearing. These new, so to speak, Keynesian economists argued that in actual economies there are many “obstacles” that hinder markets from complete clearing.
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Notes
- 1.
The characterisation “New” indicates recent advances in the Keynesian theory of the Neoclassical Synthesis. Among the New Keynesian are included (in parenthesis the University where they teach) Gregory Mankiw and Laurence Summers (Harvard), Olivier Blanchard and Stanley Fischer (MIT), Bruce Greenwald, Edmund Phelps, Joseph Stiglitz and Michael Woodford (Columbia).
- 2.
Blinder (1987) and Phelps (1992) are among the New Keynesians who question the hypothesis of rational expectations.
- 3.
The data are from the US economy ( www.bea.gov ) and refer to the growth rate of real weekly wages and the growth rate of the real GDP during the period 1948–2001. We also experimented with real hourly wages instead of weekly with no qualitative difference in the results. In a similar graph, Mankiw (1994) presents the rate of change of the real wage and the rate of change of GDP in the USA and he finds that the two variables are subjected to the same kind of fluctuations. Nevertheless, Gordon (1993) argues that the procyclical character of the real wage appears only sporadically as it happened during the decade of 1970s, while in the general case the real wage does not display significant cyclical fluctuations.
- 4.
Keynes distanced himself from these two polar conceptions of competition and, like his teacher Marshall, had a rather realistic view of competition akin to that of the classical economists (Shapiro 1997; Hayes 2008).
- 5.
On further consideration, however, one concludes that the profit maximisation (or cost minimisation) is the decisive determining factor in business behaviour!
- 6.
It is interesting to note that there are many New Keynesians placing emphasis on the importance of money supply, something that differentiates them from the real business cycles approach. This emphasis in monetary variables has made Mankiw and Romer (1993, p. 3) to regard the New Keynesian economics as a kind of New Monetarism. The difference often is restricted to various kinds of rigidities and so the monetary policy may have real results in the economy, as monetarists would argue.
- 7.
See Arestis (2009) for a fuller description of the model with a foreign sector.
- 8.
The recent housing bubble in the US and other economies might be interpreted along a Wicksellian cumulative process, where the whole process begins with central banks trying to keep the interest rate as low as possible.
- 9.
The issue of the estimation of capacity utilisation is certainly a controversial one with various methods being suggested which vary from questionnaires to econometrics (see Dergiades and Tsoulfidis 2007).
- 10.
This statement is attributed to Friedman by the Time magazine (December, 1965) although in the next issue of the magazine Friedman complained that he was misquoted and that what he really said was that “in one sense, we are all Keynesians now; in another, nobody is any longer a Keynesian”. From this Delphic statement one thing is certain: the characterisation “Keynesian” was received favourably by the majority of economists at the time. The same characterisation would have not been so favourably received in the early 1980s.
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Tsoulfidis, L. (2009). The Return of (New) Keynesian Economics. In: Competing Schools of Economic Thought. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-540-92693-1_16
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