An Historical Perspective
Chapter 4: Managing Aggregate Economic Instability: From Keynes to Lucas
Those who are strongly wedded to what I shall call Ôthe classical theoryÕ, will fluctuate, I expect, between a belief that I am quite wrong and a belief that I am saying nothing new. It is for others to determine if either of these or the third alternative is right . . . The matters at issue are of an importance which cannot be exaggerated. But, if my explanations are right, it is my fellow economists, not the general public, whom I must first convince . . . (John Maynard Keynes, 1936) Of course Keynes is an extremely important figure in twentieth century history, but I think his major influence was ideological . . . The message of the General Theory, in which he emphasised the seriousness of depressions is that they can be solved within the context of a liberal democracy without having to resort to centralised planning . . . But I think the influence of KeynesÕs theoretical ideas on the way that we practise economics is now very slightÕ. (Robert E. Lucas Jr., 1999) Greenspan says US is pulling out of recession. (Headline, Financial Times, 28 February 2002) 4.1 THE UPS AND DOWNS OF CAPITALISM Macroeconomics is traditionally divided into short-run and long-run analysis. Short-run analysis focuses on issues relating to aggregate instability that is inflation, unemployment and the business cycle. Long-run analysis concentrates on the evolution of potential or equilibrium output over time, that is economic growth. The knowledge that macroeconomists have today about the way that economies function, both in the long run and short run,...
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