Download Modern neoclassical economics

Neokeynesian economics (neoclassical
synthesis, orthodox keynesianism)
Synthesis of neoclassical economics and
keynesian macroeconomics
- neoclassical interpretation of The
General Theory by J. M. Keynes
1. World View
Individual, atomistic society with
rational economic agents
Due to price and wage stickiness
markets cannot clear
Decisions taken by different groups of
agents may not be compatible
Full employment equilibrium may not
be attainable
Macroeconomic stabilization policy
needed to restore full employment
equilibrium
2. Values
Individual is best judge of own welfare
Consumer sovereignty
Neoliberal / reformist
Role of government economic policy to
achieve full employment
3. Goals
To show that complete market system
of utility-maximizing agents given their
resource constraints will not necessarily
achieve full employment equlibrium
To escape from traditional neoclassical
economics
4. Methodological practice
Combination of abstract deductive
and empirical inductive approaches
(price and wage rigidities
understood as empirical fact
 Two different approaches to
equilibrium
- Walrasian general equilibrium
theory as general methodological
and unifying approach
- Partial equilibrium
- Comparative statics
 Empasis on psychology and
rejection of mathematical
formalism in the initial stage of its
development
Later role of mathematic
formalism increases (Don Patinkin,
keynesian econometrics)
 Econometric predictions (L.
Klein)
5. Hard Core and Protective Belt
Assumptions
Typical assumptions of neoclassical
economics with some amendments
Distribution of tastes and
endowments determined exogenously
 Expectations, animal spirits
Uncertainty and risk
Prices and wages are sticky and
price adjustment processes may not
lead to market clearing
Diminishing marginal products
Mobility of factors of production
6. Concepts
- Aggregate demand and aggregate
supply
- Marginal propensity to consume/save
- Marginal efficiency of capital
- Multipliers
- Speculative demand for money
- Liquidity trap
- Phillips curve
7. Positive heuristic
- Explore macroeconomic consequences
of consumption, savings and
investment decisions of different
categories of economic agents.
- Analyse the determinants of aggregate
demand and aggregate supply
- Explore the effects of fiscal policy on
macroeconomic performance
8. Themes
- Full employment
- Involuntary unemployment
- Aggregate demand management
9. Economic policy advice
- macroeconomic stabilization policy
demand management
- role of fiscal and monetary policy to
attain full employment (FERU)
- keynesian fiscalism
Disequilibrium Keynesianism
Non-walrasian general equilibrium
theory – imperfect information (E.
Phelps)
Basic question? – what will happen
when economic agents are not able to
distinguish equilibrium and
disequilibrium prices =>
disequlibrium (or equilibrium with
excess quantities supplied and
demanded
Dual decision-making hypothesis
R. Clower
 Keynes’s General Theory is truly
general theory
- Coordination failure
A. Leijonhufvud
Quantity adjustment processes vs.
price adjustment processes
E. Malinvaud
 two general models of modern
economic theory
NEW KEYNESIAN ECONOMICS
 Heterogenous response to criticism of
neokeynesian macroeconomics
 Debate about macroeconomic
foundations of keynesian
macroeconomics
 Two major streams
1. An offspring of new classical
macroeconomics models
- neokeynesian-Friedman-Phelps-Lucas
synthesis
- no relation to Keynes’ effective
demand theory
- “keynesian” features provided by
price/wage stickiness (inflexibilities)
- “ad hoc” models combining rational
expectations hypothesis with wage or
price stickiness / eclectic model
building
Stanley Fisher 1977
2. New imperfect competition
foundations for keynesian
macroeconomics
- A new, sophisticated version of
neokeynesian macroeconomics
- A common basic feature with
neokeynesian macroeconomics =
Keynesian macroeconomic problems
seen as a result of microeconomic
functioning of contemporary market
economies
- Stickiness of prices and wages
theoretically explained
- Methodological eclecticism
- Models subject to econometric testing
- Several approaches
1) Explicit and implicit contracts
Arthur Okun - invisible shakehand
(Prices and Quantities. A
Macroeconomic Analysis 1981)
Costas Azariadis (Implicit Contracts
and Underemployment Equilibria.
Journal of Political Economy 83(6),
1975
2. Thumb rules in managerial decisions
firms (fixed prices and wages)
- N. G. Mankiw - menu costs
Arthur Akerlof, Janett Yellen – nearrational behavior
(A Near-Rational Model of the Business
Cycle with Wage and Price Inertia. The
Qurterly Journal of Economics, vol. C –
Supplement, 1985)
3. Efficiency wages
- high skills gained by learning by doing
and assymetric information
- Fordist (industrial] vs. Post-Fordist
(post-industrial) model of a firm
- negative selection and moral hazard
Arthur Akerlof, Josef Stiglitz
(J. Yellen: Efficiency Wage Models of
Unemployment. American Economic
Review. Proceedings, LXXIV, May 1984)
4. Negotiated economy – European
version
- wage bargaining
- tripartite or bipartite negotiation
institutions
“The cheapest way how to curb
inflation”
(W. Carlin, D. Soskice: Macroeconomics
and the Wage Bargain. 1990)
5. Hysteresis hypothesis
- persistent unemployment explained by
past high rate of unemployment
(Blanchard O., Summers L.:
Hysteresis and the European
Unemployment Problem. 1986
Lindbeck A., Snower D. L.:
Wage Setting, Unemployment and
Insider-Outsider Relations. American
Economic Review. 1986
Layard R., Nickell S.: Unemployment in
the U.K., Economica 1986
Soskice D., Carlin W.: Medium-run
Keynesianism: hysteresis and capital
scrapping, In: Davidson P., Kregel J.
(eds.): Macroeconomic Problems and
Policies on Income Distribution. 1989)