Beyond Keynes, Volume One
Edited by Shelia C. Dow and John Hillard
Chapter 1: The microeconomic foundations of Keynesian economics
Athol Fitzgibbons The adjustment process has not been successfully described as optimising behaviour, [so that it] carries conviction in our profession. This failure, neither surprising nor discreditable in view of the intrinsic diﬃculties of the task, is the root cause of the chronic crisis in macroeconomics. (Tobin, 1981, 36–7). I PARADIGMS IN ECONOMICS Despite the great signiﬁcance of macroeconomics for employment, inﬂation, economic growth and other major social objectives, there is no longer a widely accepted theory of the subject. The Keynesian system that regulated Western economies for more than two decades has been discredited, the New Classical economics that destroyed the old Keynesianism is widely believed to be contrary to all experience, and the New Keynesian economics that has risen from the ashes of the old is a thin and meagre doctrine that casts no light on money, capital, trade cycles or deﬁcient demand. Of course, pragmatism rules and macroeconomic policies are often implemented even in the absence of a theory. However, pragmatism without principles means policy without consistency or direction, and it leaves policy makers with no systematic way to evaluate their failures or develop an improved approach. This intellectual crisis has arisen out of the conﬂicting demands of theory and the facts. Some form of Keynesian theory is the only way to explain aggregate demand phenomena; but economists have come to realize that Keynesian theory is inconsistent with the fundamental principles of mainstream microeconomics. There has been a strong desire to...
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