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The new macroeconomics has no clothes

Colin Rogers

Keywords: time-0 auction; perfect barter; Walrasian; Arrow–Debreu; new macroeconomics

The new macroeconomics emerged from the new classical counter-revolution against Keynesian economics in the 1970s. Today it is regarded as the dominant form of macroeconomic analysis despite the fact that it proved incapable of anticipating or understanding the global financial crisis (GFC) of 2007–2009 and that it was based on well-known conceptual errors. The new macroeconomics is based on Walrasian/Arrow–Debreu general equilibrium microeconomic foundations that preclude any role for money, banks, finance or governments. Attempts to integrate these institutions into microfounded general equilibrium models where no such functions are required represents a misapplication of the Walrasian/Arrow–Debreu model and leads only to confusion. The conceptual errors that existed before the GFC continue to go unrecognised or unacknowledged and undermine the post-GFC attempts to correct what were perceived to be limitations of the theory. Today the new macroeconomics has no sound economic foundations, microeconomic or macroeconomic; it has no clothes.

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