April 3, 2013 at 11:40 am #17750samghebParticipant
I have read several times that keynesianism died intellectually in the 70’s because of stagflation. Rothbard said it was “dead from the neck up”.
But what is meant by that because governments still followed keynesian policies after the 70’s didn’t they?
And economists kept proscribing keynesian policies did they not?April 3, 2013 at 3:00 pm #17751
Rothbard was referring to old Keynesianism that ruled the intellectual roost in the 1950s and 1960s. Stagflation made that version of Keynesianism unpalatable to intellectuals. So they invented sophisticated versions, New Keynesianism, Post-Keynesianism, and so on. The old orthodox Keynesianism still lives on in the textbooks. But until Paul Krugman appeared on the scene, intellectuals considered old Keynesianism fit only for undergraduates as a gateway to their more sophisticated versions. And even in the era of Krugman, the sophisticated Keynesians tend to cringe at his old Keynesianism.
Whatever the debates on arcane points of contention between them, all Keynesians agree that aggregate demand is the key to economic prosperity. Thus, their policy prescriptions are much more uniform than their explanations of why the market system fails to sustain prosperity. Politicians are never loath to accept the advice that the government must spend more to keep the economy prosperous.April 4, 2013 at 7:45 am #17752samghebParticipant
So what are the differences between the so called crude keynesianism of pre-70’s and what ruled until 2008?April 4, 2013 at 10:54 am #17753
The old Keynesians left out micro-economics altogether. By doing so they implicitly assumed that prices and wages were sticky, i.e., did not adjust rapidly. They were criticized by the New Classical economists who asserted that if prices and wages adjust rapidly, then changes in aggregate demand with not adversely affect production in the economy. The New Keynesians came up with micro-economic arguments for sticky prices and wages.
Here is Greg Mankiw, a leading New Keynesian, on New Keynesianism:April 8, 2013 at 5:49 pm #17754c.h.emel910Member
About the sticky wages, wages are considered as a ‘price’ as well since there needs to be a market for that wage right? Wouldn’t this mean it will clear eventually? And even if wages are sticky, it could be a result of desiring predictability i.e. they won’t arbitrarily adjust every second. It doesn’t necessarily weaken the case for markets right?
I apologize if this is sort of off-topic!April 9, 2013 at 11:14 am #17755
Your points are well taken, but they require thinking about the problem of wage setting in the markets of the real economy. New Keynesians think about the problem within their models. The models are specified to generate sub-optimal equilibria under sticky-wage assumptions. The justification they give for this method is that the phenomenon of an “under performing” economy is experienced in the real world. If their explanation seems fishy to you, then go to the head of the class.
On the reasons for sticky wages in the real world, take a look at Joe Salerno’s blog post:
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