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Uncertainty and Rationality: Keynes and Modern Economics

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Abstract

The intellectual revolution triggered by Keynes’s General Theory of Employment, Interest and Money (1973c [1936]; hereafter GT) is often described as a shift in emphasis from microeconomics to macroeconomics, and as a shift from study of optimal behaviour of the individual consumer or the individual firm to study of broad statistical aggregates, such as income and employment, or consumption and investment. For a long time macroeconomists thought it unnecessary to provide a special explanation of individual behaviour, but eventually traditional microeconomics was introduced into the Keynesian model to provide ‘micro foundations’ to explain individual decision making. However, Keynes never used the term ‘macroeconomics’, and it soon became obvious that there was an inherent tension between the traditional approach to optimal individual behaviour and the Keynesian explanation of the movements of income and employment.

Keywords

  • Subjective Probability
  • Rational Expectation
  • Traditional Theory
  • Rational Belief
  • Neoclassical Theory

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© 2011 John Allen Kregel and Eric Nasica

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Kregel, J.A., Nasica, E. (2011). Uncertainty and Rationality: Keynes and Modern Economics. In: Brandolini, S.M.D., Scazzieri, R. (eds) Fundamental Uncertainty. Palgrave Macmillan, London. https://doi.org/10.1057/9780230305687_11

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