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Keynes and Macroeconomics After 70 Years

Keynes and Macroeconomics After 70 Years

Critical Assessments of The General Theory

Edited by L. Randall Wray and Matthew Forstater

In this substantial new collection, esteemed Post-Keynesian scholars reassess the relevance of Keynes’s The General Theory to a broad array of topic areas, ranging from the environment, investment finance, exchange rates, and socialism, as well as inquiries into general Post-Keynesian theory.

Chapter 19: Expectations and Unemployment

J.W. Nevile and Peter Kriesler

Subjects: economics and finance, post-keynesian economics


J.W. Nevile and Peter Kriesler* INTRODUCTION Expectations have had a prominent role in macroeconomics ever since the publication of Keynes’s General Theory. In that book, the word ‘expectation’ appeared in the title of two chapters, and the concept was used throughout. Expectations were central to the determination of both the interest rate and the level of investment and the trade cycle in the longer run. This is most clearly illustrated in chapter 5, ‘Expectations as determining output and employment’, where Keynes identifies the importance of expectations in determining the level of employment: ‘To-day’s employment can be correctly described as being governed by to-day’s expectations taken in conjunction with to-day’s capital equipment’ (1936 [1973], p. 50). By contrast, in Milton Friedman’s version of monetarism, mistaken expectations explain the short-run trade-off between unemployment and inflation, while the correction of these mistakes leads to the long-run vertical Phillips curve. In the late 1980s and early 1990s new classical macroeconomics, with its emphasis on rational expectations, became very influential and the policy ineffectiveness theorem was widely accepted. However, neither of these two forms of monetarism lasted long as widely accepted theories useful for explaining short-run phenomena, though their conclusion that money was neutral and the Phillips curve vertical in the long run remained widely accepted. This is well documented in a symposium in the May 1997 issue of the American Economic Review, where five eminent macro economists, Robert Solow, John Taylor, Martin Eichenbaum, Alan Blinder and Oliver Blanchard, addressed the...

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