Selected Essays of Axel Leijonhufvud
Economists of the Twentieth Century series
Chapter 1: What would Keynes have thought of rational expectations?
The Keynes centenary celebrations would be more festive if the Keynesian tradition were in intellectual good health and vigor for the occasion. Unfortunately, it is not. Unsuccessful policies and confused debates have left Keynesian economics in disarray. In recent years, the intellectual excitement in macroeconomic theory has centered around the development of the rational expectations approach. Many economists have concluded that rational expectations spells the end of Keynesian economics – and many more seem to fear that this is so, even while they dispute it. What has caused the most commotion, however, is not so much rational expectations per se but rather the so-called New Classical economics. Rational expectations is but one of the characteristic components of New Classical economics. The other two are Monetarism and market clearing. It does not seem particularly fruitful to speculate on how Keynes might have reacted to theoretical developments taking place thirty years or so after his death.1 Economists who still regard themselves as ‘Keynesians’ (in some sense) will, however, have to deﬁne their positions vis-à-vis these new developments. What should we learn from this recent work? What criticisms of Keynesian economics have to be accepted? What lessons of Keynesian economics must not be abandoned? How can they most persuasively be reasserted? The relevance of Keynes’s contributions to current concerns is best reafﬁrmed by providing good, clear answers to these questions. Many retorts to the New Classical economics have been impatient outbursts, tinged with moral indignation. They have gotten us precisely nowhere....
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