Macroeconomics in the Small and the Large

Macroeconomics in the Small and the Large

Essays on Microfoundations, Macroeconomic Applications and Economic History in Honor of Axel Leijonhufvud

Edited by Roger E.A. Farmer

This book honors the work of Axel Leijonhufvud. The topics range from Keynesian economics and the economics of high inflation to the micro-foundations of macroeconomics and economic history. The authors comprise some of the very best economists active today.

Chapter 2:  Old-Keynesian Economics

Roger E.A. Farmer

Subjects: economics and finance, economic psychology, financial economics and regulation, money and banking

Extract

2. 2.1 Old-Keynesian economics Roger E.A. Farmer* KEYNES AND THE KEYNESIANS In his (1966) book, On Keynesian Economics and the Economics of Keynes, Axel Leijonhufvud made the distinction between the economics of the General Theory (Keynes, 1936) and the interpretation of Keynesian economics by Hicks and Hansen that was incorporated into the IS–LM model and that forms the basis for new-Keynesian economics. In that book, he pointed out that although the new-Keynesians give a central role to the assumption of sticky prices, the sticky-price assumption is a part of the mythology of Keynesian economics that is inessential to the main themes of the General Theory. In this chapter I will sketch an alternative microfoundation to Keynesian economics that formalizes this argument by providing a microfoundation that does not rely on sticky prices. I call this alternative microfoundation, old-Keynesian economics. It is fitting that this chapter should appear in a volume in honor of Axel Leijonhufvud since the ideas I will describe owe much to his influence. Although Axel’s thesis was written at Northwestern University, his work on Keynes came to fruition at the University of California, Los Angeles UCLA, the location of his first academic appointment. In the 1960s, UCLA had developed a healthy tradition of tolerance for non-mainstream ideas and, as the beneficiary of that same atmosphere of tolerance, it is a privilege to be able to use this occasion to acknowledge the debt that I owe to Axel as both a mentor and a friend....

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