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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)