Macroeconomic Instability and Coordination
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Macroeconomic Instability and Coordination

Selected Essays of Axel Leijonhufvud

Axel Leijonhufvud

Axel Leijonhufvud has made a unique contribution to the development of macroeconomic theory. This volume draws together his insightful essays dealing with the extremes of economic instability: great depressions, high inflation and the transition from socialism to a market economy. In several of the papers, Leijonhufvud brings a neo-institutionalist perspective to the problems of coordination in economic systems.
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Chapter 2: Keynesian economics: past confusions, future prospects

Axel Leijonhufvud


The complaint has become widespread in recent years that macroeconomics is in a confused state. Theory and practice have lost virtually all connection. The approaches generating all the theoretical excitement offer almost no guidance on stabilization policy. Policy practice proceeds on the basis of theories in which we no longer have much confidence. Keynesian and Monetarist beliefs continue to contend with New Classical ideas, with no clear-cut resolution in sight. One way to find an intelligible pattern in this confusing contention among alternative approaches is to take them in historical sequence and consider, again, the grounds on which some substantial segment of the profession decided to transfer its allegiance from one camp to another. This is the tack taken here. The sketch to follow cannot be comprehensive. It is selective, which means, of course, that it is in some degree subjective. THE SWEDISH FLAG Consider first the following ‘Swedish flag’ taxonomy. It classifies business cycle theories according to the hypotheses they make about the impulses that initiate fluctuations and about the propagation mechanisms that turn the impulses into persistent movements in output and employment. A nominal impulse (N) is a disturbance to the system such that the reequilibration of the economy requires (only) a change in nominal scale, that is, an adjustment of the money price level, leaving real magnitudes unaffected. Purely nominal impulses are neutral, in other words. A helicopter drop of fiat money in a Patinkin model free of distribution effects is an example. A real...

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