Schools of Thought in Economics
Edited by Gilbert Faccarello and Heinz D. Kurz
Chapter 32: New Keynesianism
It is well known that John Maynard Keynes meant his General Theory as a piece of work “chiefly addressed to [his] fellow economists” (Keynes 1936: ii), and he was not to be disappointed: over the following 20 years the economic profession wondered about the relationship between “Keynes and the classics” – starting in 1937 with Hicks on, indeed, “Mr Keynes and the ‘classics’”, and plausibly ending, or so Axel Leijohuvfud (1981: 44) argues, in 1956 with Patinkin on Money Interest and Prices. While after the Second World War, Keynesian perspectives on policy were quickly gaining ground in the public discourse, by the early 1960s Keynesianism as a theoretical framework came to be identified with the “neoclassical synthesis” (NeoS), within which, however, the question as to whether Keynes contributed any major theoretical innovation was implicitly being answered in the negative: in most textbook versions, the “Keynesian case” came down to (nominal) wage rigidity – arguably an empirical general feature, but hardly consistent with Keynes’s own claim to theoretical generality. To this short sketch should be added that in Keynes’s work another channel could be found through which Say’s law would fail: the theory of liquidity preference, and the idea that investment is mainly expectation driven, provided a second “Keynesian case” drawn from the General Theory, which, however, was often thought to matter only in very extreme (and hence allegedly rare) situations, such as the Great Depression – a view which the NeoS interpretation of Keynes did nothing to dispel. Disagreement on this very point was arguably what set the so-called post-Keynesians apart from mainstream Keynesians. If the General Theory was to be read as the first instalment of the “Monetary theory of production” Keynes had considered in his Cambridge lectures, surely the money/output nexus should be seen as crucial: and though the interpretations of this nexus were many, all shared the idea that Keynes did contribute a novel theory of the working of market economies – a theory where aggregate demand was largely independent of the general price level, and active fiscal policy was required to steer the economy toward full employment.
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