Essays on Microfoundations, Macroeconomic Applications and Economic History in Honor of Axel Leijonhufvud
Edited by Roger E.A. Farmer
Chapter 2: Old-Keynesian Economics
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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