Keynes And Modern Macroeconomics

Keynes and modern macro

The global economic crisis in recent years is a major crisis that will have implications for macroeconomic theory and teaching of macroeconomics in the years to come. During this crisis have been repeated the same debates of macroeconomics policy of the 1930s when macroeconomics was born as a discipline with the publication of Keynes’s General Theory. This presentationprecisely contrasts the two visions of macroeconomics that have faced each other since that publication and debates among its author and the Classics of those years. This comparison highlight the two main issues that separate these two visions or schools of thought: the subject of continuous equilibrium of the markets, particularly labor market, and the perfect foresight or, in modern terminology-and subject to information incomplete-, rational expectations.

In the classical view that Keynes criticized (represented today by the new classical economics) the markets are in continuous equilibrium and the economic agents, beside she optimize intertemporally, have either perfect foresight or perfect foresight subject to stochastic errors and incomplete information about some exogenousvariables (such as money supply). The underlying model is a dynamic walrasian model as it was extended by Arrow and Debreu. I begin with the issue of continuous equilibrium in markets.

The publication of the General Theory led to the Keynes´s economics and his contributions to macroeconomics in two periods: first, in the keynesian postwar consensus and second in the recent period that has been inplace the counterrevolution to Keynesian macroeconomics. In my opinion, the deepest interpretation of the General Theory, and the one that illuminates the differences between Keynes and his critics, as well as the most relevant to interpret the current macroeconomics problems, is the offered, since many years ago, by Axel Leijonhufvud in On Keynesian Economics and the Economics of Keynes, publishedin 1968, a book based on his PhD thesis and that jointly with the contributions associated with Clower and Benassy, I consider it the basis to reconstruct the macro after the debacle caused by the counterrevolution.

In Leijonhufvud´s approach, the validity of Keynes's work is due at least for two reasons. First: Keynes is a very modern author because the current economic and financial crisishas put the financial markets at the epicenter of the malfunctioning of the whole economic system, one of the central issues of the General Theory. Second, Keynes is a modern author due to the soundness of his critics to what he called the classical economics. And the former is true, as I shall argue here, because if his criticisms to the classics are valid, it applies equally to the called newclassical economics.

The rejection of the second postulate of the classical economy and the collapse of the Say´s law

Which were these critiques? Firstly, Keynes thought that classical economics rested on two postulates: 1) the equality between real wages and the marginal product of labor, and 2) the equality of the real wage and the marginal disutility of labor.

Keynes accepted the firstpostulate, derived from profit maximization by atomistic firms (which thus take as given prices and wages) that maximize, subject to technological restrictions, the production function. This story of atomistic firms that take prices as given is clearly not true. But Keynes, for reasons that I believe understand very well, decided not to mess with this postulate. I think Keynes was well aware thatperfect competition was not a good description of the situation in goods markets (with some exception). Sraffa's article of 1926 and the undergraduate thesis of Kahn in the early 1930's were both on imperfect competition. Keynes's decision to accept the first postulate was a strategic one: allowed him to focus on the second assumption, rejection, and the consequences of that rejection.

Where...