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History of Economic Thought
Week 8
Keynes and Mainstream
Macroeconomic Thought after
Keynes
Tomáš Cahlík
Outline
John Maynard Keynes (1883 – 1946)
The Neoclassical Synthesis
New Chicago School and Monetarism
New Classical Macroeconomics
New Keynesian Macroeconomics
Theory of Growth
John Maynard Keynes (1883 – 1946) Life and Writings:
Eton and King´s College at Cambridge – graduated
in mathematics
Before 1908: India Office, 1913 published „Indian
Currency and Finance“
After 1908: at Cambridge University
1911 editorship of the „Economic Journal“
1913 secretary of the Royal Economic Society
1919 „The Economic Consequences of Peace“
1921 „Treatise on Probability“
1923 „Tract on Monetary Reform“
John Maynard Keynes (1883 – 1946) Life and Writings:
1925 married a famous Russian dance
1926 „The end of laissez-faire“
1930 „The Treatise on Money“
1936 „General Theory of Employment, Interest
and Money“
1937 a heart attack
1944 a leading role at the Bretton Woods conference
John Maynard Keynes (1883 – 1946) Probability and Uncertainty:
Problem of rational behaviour without certainty
„..the probable is that with is rational for us to
believe…“
Probability x „weight of the argument“
In general, it is not possible to attribute a numerical
value to the probability od events
Contrast with Frank Ramsey
John Maynard Keynes (1883 – 1946) 1930 „The Treatise on Money“
Monetary sector: he developed the approach based
on the „Cambridge equation“ for money demand
Real economy: a two sector model
Sequential scheme that connects production levels
and realised profits in both sectors
Investments and savings are decided on by two
different sorts of agents
Includes also an analyses of international monetary
relations, suggest an international central bank
John Maynard Keynes (1883 – 1946) 1936 „The General Theory of Employment, Interest
and Money““
The role of „Cambridge Circus“ and Richard Kahn
Equilibrium analysis
The principle of effective demand
The multiplier mechanism
The theory of interest
Reactions: London School of Economics – Hayek
and John Hicks, Swedish School – successors of
Wicksell – Lindahl, Myrdahl and Ohlin
John Maynard Keynes (1883 – 1946) After 1936
Economic policy in an open economy
International institutions
A lot of interesting policy suggestions
The Neoclassical Synthesis
Keynesian Cross, IS-LM model,
Aggregate Demand, Long Run
Aggregate Supply and Short Run
Aggregate Supply, Investment
Trap and Liquidity Trap,
Stabilization Policy
The Neoclassical Synthesis
John Hicks (1904-1989), Nobel Price in
1972 with Kenneth Arrow
London School of Economics, Oxford,
Cambridge
1937 in journal „Econometrica“ article „Mr.
Keyness and the Classics: A Suggested
Interpretation“ : IS-LM framework
The Neoclassical Synthesis Franco Modigliani (1918 – 2003)
Nobel Price in 1985
MIT
1944 in journal „Econometrica“ article
„Liquidity Preference and the Theory of
Money“ : The Complete Keynesian Model
That extends the IS-LM framework to
consider the labour market as well - role of
obstacles for free operation of the labour
market
The Neoclassical Synthesis
Consumption Function:
J. M. Keynes: C=C(aut)+cY
Kuznets paradox
Simon Kuznets (1901-1985), Nobel Price in
1971
Solutions:
Franco Modigliani: The life cycle hypothesis
James Duesenberry (1918 – 2009), Harvard
1949 doctoral thesis „Income, Saving and the Theory
of Consumer Behavior“ – Psychological explanation
Milton Friedman – Permanent Income Hypothesis
The Neoclassical Synthesis
Paul Anthony Samuelson (1915 – 2009)
Nobel Price in 1970
MIT
1936 in „Journal of Political
Economy“ article „A Synthesis of the
Principles of Acceleration and the
Multiplier“ : endogenous explanation of
economic cycles
The Neoclassical Synthesis
Paul Anthony Samuelson (1915 – 2009)
1947 book „Foundations of Economic
Analysis“
1948 textbook „Economics: An
Introductory Analysis“, best-selling
economics textbook of all time, 19 editions,
Since 1985 with William D. Nordhaus (1941 - ),
Nobel Price in 2018 with Paul Romer, Yale,
economic modeling and climate change
The Neoclassical Synthesis
Paul Anthony Samuelson (1915 – 2009)
Together with R. M. Sollow constructed the
Phillips curve for the USA
Alban William Housego Phillips (1914 – 1975),
London School of Economics
1949 the MONIAC hydraulic computer
1958 in journal „Economica“ article „The
Relationship between Unemployment and the
Rate of Change of Money Wage Rates in the
UK“
The Neoclassical Synthesis
James Tobin (1918 – 2003)
Nobel Price in 1981
Harvard, Yale
Tobin´s q
Baumol-Tobin model of transactions demand for
money
Theory of portfolio
Tobit model in econometrics for censored
dependent variables
William Baumol (1922 – 2017), NYU, Berkley, Princeton
New Chicago School and Monetarism
George Stigler (1911 – 1991)
Nobel Price in 1982
Columbia and Chicago
1961 in „Journal of Political Economy“ article „The
Economics of Information“
1962 article „Information in the Labor Market“ - search
unemployment
1975 book „Citizen and the State: Essays on
Regulation“ – regulatory capture
New Chicago School and Monetarism
Gary Stanley Becker (1930 – 2014)
Nobel Price in 1992
Columbia and Chicago
1964 book „Human Capital“
1996 book „Accounting for Tastes“
Neoclassical economics as an imperial science
New Chicago School and Monetarism
Milton Friedman (1912 – 2006)
Nobel Price in 1976
Columbia, Chicago, Stanford
1953 „Essays in Positive Economics
1957 „A Theory of Consumption Function“
1956 article „The Quantity Theory of Money: A
Restatement“
1963 book „Monetary History of the United
States, 1867-1960“ (together wuth Anna Schwartz)
New Chicago School and Monetarism
Milton Friedman (1912 – 2006)
1968 article „The Role of Monetary Policy“ in
„American Economic Review“ – natural rate of
unemployment, restatement of the Phillips curve, long-
run non-neutrality of money
Among other monetarists:
Karl Brunner, Allan H. Meltzer
Meltzer originated the aphorism "Capitalism without
failure is like religion without sin. It doesn't work."
New Classical Macroeconomics
John Fraser Muth (1930 – 2005)
Carnegie Mellon University, Michigan State University,
Indiana University
1961 article "Rational Expectations and the Theory of
Price Movements„
Father of the rational expectations revolution in
economics
New Classical Macroeconomics
Robert Emerson Lucas Jr. (1937 – )
Nobel Price in 1995
University of Chicago
1976 article „Econometric Policy Evaluation: A
Critique“
1976 article „Rational Expectations and Econometric
Practice“
1987 book „Models of Business Cycles“
Other contributions: supply curve, endogeneos growth
models
New Classical Macroeconomics
Other fathers of New Classical
Macroeconomics:
Thomas J. Sargent (1943 - ) Nobel Price in
2011 (with Christopher A. Sims (1942 - ),
who opposed the rational erxpectations
revolution)
Robert Joseph Barro (1944 - ): Barro-
Ricardian equivalence
And others
New Classical Macroeconomics
Real Business Cycle Theory:
Edward C. Prescott (1940 - ) Nobel Price in
2004 with
Finn E. Kydland (1943 - )
New Keynesian Macroeconomics
Microeconomic underpinning of nominal and real
rigidities
Non-perfect competition
Role of negociations
Price or wage rigidity
Role of information assymetry
Positive attitude to economic policy
New Keynesian Macroeconomics
Arthur Okun (1928 – 1980)
Nobel Price in 1995
Columbia University, Yale University
1981 „Prices and Quantities: A Macroeconomic
Analysis“ – real rigidities on oligopolistic markets
Okun´s law
New Keynesian Macroeconomics George Arthur Akerlof (1940 – )
Nobel Price in 2001 with Joseph Stiglitz
London School of Economics and Political Sciences,
Berkeley University
1970 „The Market for „Lemons““
His wife
Janet Luise Yellen (1964 - )
University of Califormia. Berkeley
Chair of the FED
New Keynesian Macroeconomics Joseph Eugen Stiglitz (1943 – )
Nobel Price in 2001 with Joseph Stiglitz
MIT, Yale, Stanford, Princeton, Cambridge, Oxford
1986 „Economics of Public Sector“
2002 „Globalization and Its discontents“
New Keynesian Macroeconomics Nicholas Gregory Mankiw (1958 – )
MIT, Harvard
Textbooks „Principles of Economics“ and
„Macroeconomics“
And his classmate from Princeton
David Romer (1958 - )
University of Califormia, Berkeley
Textbook „Advanced Macroeconomics“
Theory of Growth 1939 Roy Harrod
1946 Evsey Domar
1956 Robert Solow and Trevor Swan
1957 Nicolas Kaldor „A Model of Economic
Growth“
1986 Paul Romer
List of Nobel Memorial Prize laureates in
Economics