History of Economic Thought

Week 8

Keynes and Mainstream

Macroeconomic Thought after

Keynes

Tomáš Cahlík

Outline

John Maynard Keynes (1883 – 1946)

The Neoclassical Synthesis

New Chicago School and Monetarism

New Classical Macroeconomics

New Keynesian Macroeconomics

Theory of Growth

John Maynard Keynes (1883 – 1946) Life and Writings:

Eton and King´s College at Cambridge – graduated

in mathematics

Before 1908: India Office, 1913 published „Indian

Currency and Finance“

After 1908: at Cambridge University

1911 editorship of the „Economic Journal“

1913 secretary of the Royal Economic Society

1919 „The Economic Consequences of Peace“

1921 „Treatise on Probability“

1923 „Tract on Monetary Reform“

John Maynard Keynes (1883 – 1946) Life and Writings:

1925 married a famous Russian dance

1926 „The end of laissez-faire“

1930 „The Treatise on Money“

1936 „General Theory of Employment, Interest

and Money“

1937 a heart attack

1944 a leading role at the Bretton Woods conference

John Maynard Keynes (1883 – 1946) Probability and Uncertainty:

Problem of rational behaviour without certainty

„..the probable is that with is rational for us to

believe…“

Probability x „weight of the argument“

In general, it is not possible to attribute a numerical

value to the probability od events

Contrast with Frank Ramsey

John Maynard Keynes (1883 – 1946) 1930 „The Treatise on Money“

Monetary sector: he developed the approach based

on the „Cambridge equation“ for money demand

Real economy: a two sector model

Sequential scheme that connects production levels

and realised profits in both sectors

Investments and savings are decided on by two

different sorts of agents

Includes also an analyses of international monetary

relations, suggest an international central bank

John Maynard Keynes (1883 – 1946) 1936 „The General Theory of Employment, Interest

and Money““

The role of „Cambridge Circus“ and Richard Kahn

Equilibrium analysis

The principle of effective demand

The multiplier mechanism

The theory of interest

Reactions: London School of Economics – Hayek

and John Hicks, Swedish School – successors of

Wicksell – Lindahl, Myrdahl and Ohlin

John Maynard Keynes (1883 – 1946) After 1936

Economic policy in an open economy

International institutions

A lot of interesting policy suggestions

The Neoclassical Synthesis

Keynesian Cross, IS-LM model,

Aggregate Demand, Long Run

Aggregate Supply and Short Run

Aggregate Supply, Investment

Trap and Liquidity Trap,

Stabilization Policy

The Neoclassical Synthesis

John Hicks (1904-1989), Nobel Price in

1972 with Kenneth Arrow

London School of Economics, Oxford,

Cambridge

1937 in journal „Econometrica“ article „Mr.

Keyness and the Classics: A Suggested

Interpretation“ : IS-LM framework

The Neoclassical Synthesis Franco Modigliani (1918 – 2003)

Nobel Price in 1985

MIT

1944 in journal „Econometrica“ article

„Liquidity Preference and the Theory of

Money“ : The Complete Keynesian Model

That extends the IS-LM framework to

consider the labour market as well - role of

obstacles for free operation of the labour

market

The Neoclassical Synthesis Don Patinkin: non neutrality of money out of

equilibrium – Pigou effect

The Neoclassical Synthesis

Consumption Function:

J. M. Keynes: C=C(aut)+cY

Kuznets paradox

Simon Kuznets (1901-1985), Nobel Price in

1971

Solutions:

Franco Modigliani: The life cycle hypothesis

James Duesenberry (1918 – 2009), Harvard

1949 doctoral thesis „Income, Saving and the Theory

of Consumer Behavior“ – Psychological explanation

Milton Friedman – Permanent Income Hypothesis

The Neoclassical Synthesis

Paul Anthony Samuelson (1915 – 2009)

Nobel Price in 1970

MIT

1936 in „Journal of Political

Economy“ article „A Synthesis of the

Principles of Acceleration and the

Multiplier“ : endogenous explanation of

economic cycles

The Neoclassical Synthesis

Paul Anthony Samuelson (1915 – 2009)

1947 book „Foundations of Economic

Analysis“

1948 textbook „Economics: An

Introductory Analysis“, best-selling

economics textbook of all time, 19 editions,

Since 1985 with William D. Nordhaus (1941 - ),

Nobel Price in 2018 with Paul Romer, Yale,

economic modeling and climate change

The Neoclassical Synthesis

Paul Anthony Samuelson (1915 – 2009)

Together with R. M. Sollow constructed the

Phillips curve for the USA

Alban William Housego Phillips (1914 – 1975),

London School of Economics

1949 the MONIAC hydraulic computer

1958 in journal „Economica“ article „The

Relationship between Unemployment and the

Rate of Change of Money Wage Rates in the

UK“

The Neoclassical Synthesis

James Tobin (1918 – 2003)

Nobel Price in 1981

Harvard, Yale

Tobin´s q

Baumol-Tobin model of transactions demand for

money

Theory of portfolio

Tobit model in econometrics for censored

dependent variables

William Baumol (1922 – 2017), NYU, Berkley, Princeton

The Neoclassical Synthesis Keynes:

Before Keynes:

The Neoclassical Synthesis Keynes:

The Neoclassical Synthesis Keynes:

The Neoclassical Synthesis Keynes:

Neoclassical Synthesis Keynes:

New Chicago School and Monetarism

George Stigler (1911 – 1991)

Nobel Price in 1982

Columbia and Chicago

1961 in „Journal of Political Economy“ article „The

Economics of Information“

1962 article „Information in the Labor Market“ - search

unemployment

1975 book „Citizen and the State: Essays on

Regulation“ – regulatory capture

New Chicago School and Monetarism

Gary Stanley Becker (1930 – 2014)

Nobel Price in 1992

Columbia and Chicago

1964 book „Human Capital“

1996 book „Accounting for Tastes“

Neoclassical economics as an imperial science

New Chicago School and Monetarism

Milton Friedman (1912 – 2006)

Nobel Price in 1976

Columbia, Chicago, Stanford

1953 „Essays in Positive Economics

1957 „A Theory of Consumption Function“

1956 article „The Quantity Theory of Money: A

Restatement“

1963 book „Monetary History of the United

States, 1867-1960“ (together wuth Anna Schwartz)

New Chicago School and Monetarism

Milton Friedman (1912 – 2006)

1968 article „The Role of Monetary Policy“ in

„American Economic Review“ – natural rate of

unemployment, restatement of the Phillips curve, long-

run non-neutrality of money

Among other monetarists:

Karl Brunner, Allan H. Meltzer

Meltzer originated the aphorism "Capitalism without

failure is like religion without sin. It doesn't work."

New Classical Macroeconomics

John Fraser Muth (1930 – 2005)

Carnegie Mellon University, Michigan State University,

Indiana University

1961 article "Rational Expectations and the Theory of

Price Movements„

Father of the rational expectations revolution in

economics

New Classical Macroeconomics

Robert Emerson Lucas Jr. (1937 – )

Nobel Price in 1995

University of Chicago

1976 article „Econometric Policy Evaluation: A

Critique“

1976 article „Rational Expectations and Econometric

Practice“

1987 book „Models of Business Cycles“

Other contributions: supply curve, endogeneos growth

models

New Classical Macroeconomics

Other fathers of New Classical

Macroeconomics:

Thomas J. Sargent (1943 - ) Nobel Price in

2011 (with Christopher A. Sims (1942 - ),

who opposed the rational erxpectations

revolution)

Robert Joseph Barro (1944 - ): Barro-

Ricardian equivalence

And others

New Classical Macroeconomics

Real Business Cycle Theory:

Edward C. Prescott (1940 - ) Nobel Price in

2004 with

Finn E. Kydland (1943 - )

New Keynesian Macroeconomics

Microeconomic underpinning of nominal and real

rigidities

Non-perfect competition

Role of negociations

Price or wage rigidity

Role of information assymetry

Positive attitude to economic policy

New Keynesian Macroeconomics

Arthur Okun (1928 – 1980)

Nobel Price in 1995

Columbia University, Yale University

1981 „Prices and Quantities: A Macroeconomic

Analysis“ – real rigidities on oligopolistic markets

Okun´s law

New Keynesian Macroeconomics George Arthur Akerlof (1940 – )

Nobel Price in 2001 with Joseph Stiglitz

London School of Economics and Political Sciences,

Berkeley University

1970 „The Market for „Lemons““

His wife

Janet Luise Yellen (1964 - )

University of Califormia. Berkeley

Chair of the FED

New Keynesian Macroeconomics Joseph Eugen Stiglitz (1943 – )

Nobel Price in 2001 with Joseph Stiglitz

MIT, Yale, Stanford, Princeton, Cambridge, Oxford

1986 „Economics of Public Sector“

2002 „Globalization and Its discontents“

New Keynesian Macroeconomics Nicholas Gregory Mankiw (1958 – )

MIT, Harvard

Textbooks „Principles of Economics“ and

„Macroeconomics“

And his classmate from Princeton

David Romer (1958 - )

University of Califormia, Berkeley

Textbook „Advanced Macroeconomics“

Theory of Growth 1939 Roy Harrod

1946 Evsey Domar

1956 Robert Solow and Trevor Swan

1957 Nicolas Kaldor „A Model of Economic

Growth“

1986 Paul Romer

List of Nobel Memorial Prize laureates in

Economics