Critical Assessments of The General Theory
Edited by L. Randall Wray and Matthew Forstater
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 , 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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