by To complete the reconciliation of Keynesian economics with general equilibrium theory, Paul Samuelson introduced the neoclassical synthesis in 1955 … In this view of the world, high unemployment is a temporary phenomenon caused by the slow adjustment of money wages and money prices. In Samuelson’s vision, the economy is Keynesian in the short run, when some wages and prices are sticky. It is classical in the long run when all wages and prices have had time to adjust…. Although Samuelson’s neoclassical synthesis was tidy, it did not have much to do with the vision of the General Theory … In Keynes’ vision, there is no tendency for the economy to self-correct. Left to itself, a market economy may never recover from a depression and the unemployment rate may remain too high forever. In contrast, in Samuelson’s neoclassical synthesis, unemployment causes money wages and prices to fall. As the money wage and the money price fall, aggregate demand rises and full employment is restored, even if government takes no corrective action. By slipping wage and price adjustment into his theory, Samuelson reintroduced classical ideas by the back door—a sleight of hand that did not go unnoticed by Keynes’ contemporaries in Cambridge, England. Famously, Joan Robinson referred to Samuelson’s approach as ‘bastard Keynesianism.
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To complete the reconciliation of Keynesian economics with general equilibrium theory, Paul Samuelson introduced the neoclassical synthesis in 1955 …
In this view of the world, high unemployment is a temporary phenomenon caused by the slow adjustment of money wages and money prices. In Samuelson’s vision, the economy is Keynesian in the short run, when some wages and prices are sticky. It is classical in the long run when all wages and prices have had time to adjust….
Although Samuelson’s neoclassical synthesis was tidy, it did not have much to do with the vision of the General Theory …
In Keynes’ vision, there is no tendency for the economy to self-correct. Left to itself, a market economy may never recover from a depression and the unemployment rate may remain too high forever. In contrast, in Samuelson’s neoclassical synthesis, unemployment causes money wages and prices to fall. As the money wage and the money price fall, aggregate demand rises and full employment is restored, even if government takes no corrective action. By slipping wage and price adjustment into his theory, Samuelson reintroduced classical ideas by the back door—a sleight of hand that did not go unnoticed by Keynes’ contemporaries in Cambridge, England. Famously, Joan Robinson referred to Samuelson’s approach as ‘bastard Keynesianism.’
The New Keynesian agenda is the child of the neoclassical synthesis and, like the IS-LM model before it, New Keynesian economics inherits the mistakes of the bastard Keynesians. It misses two key Keynesian concepts: (1) there are multiple equilibrium unemployment rates and (2) beliefs are fundamental.
Not that long ago Paul Krugman had a post up on his blog telling us that what he and many others do is “sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point” and that “New Keynesian models are intertemporal maximization modified with sticky prices and a few other deviations.”
Being myself sorta-kinda Keynesian, I side with Farmer and remain a skeptic of the pretences and aspirations of ‘New Keynesian’ macroeconomics.
Where ‘New Keynesian’ economists think that they can rigorously deduce the aggregate effects of (representative) actors with their reductionist microfoundational methodology, they have to put a blind eye on the emergent properties that characterize all open social systems. The interaction between animal spirits, trust, confidence, institutions etc., cannot be deduced or reduced to a question answerable on the individual level.
So, I cannot concur with Krugman – and other sorta-kinda ‘New Keynesians’ – when they try to reduce Keynesian economics to “intertemporal maximization modified with sticky prices and a few other deviations.”
The purported strength of New Classical and ‘New Keynesian’ macroeconomics is that they have firm anchorage in preference-based microeconomics, and especially the decisions taken by inter-temporal utility maximizing ‘forward-looking’ individuals.
To some of us, however, this has come at too high a price. The almost quasi-religious insistence that macroeconomics has to have microfoundations – without ever presenting neither ontological nor epistemological justifications for this claim – has put a blind eye to the weakness of the whole enterprise of trying to depict a complex economy based on an all-embracing representative actor equipped with superhuman knowledge, forecasting abilities and forward-looking rational expectations. It is as if – after having swallowed the sour grapes of the Sonnenschein-Mantel-Debreu-theorem – these economists want to resurrect the omniscient Walrasian auctioneer in the form of all-knowing representative actors equipped with rational expectations and assumed to somehow know the true structure of our model of the world.
And then there is also the fact that ‘New Keynesians’ share the New Classical economists extraterrestial view of unemployment as voluntary.
The ‘New Keynesian’ microfounded dynamic stochastic general equilibrium models do not incorporate such a basic fact of reality as involuntary unemployment. Of course, working with microfounded representative agent models, this should come as no surprise. If one representative agent is employed, all representative agents are. The kind of unemployment that occurs is voluntary, since it is only adjustments of the hours of work that these optimizing agents make to maximize their utility. In this model world, unemployment is always an optimal choice to changes in the labour market conditions. Hence, unemployment is totally voluntary. To be unemployed is something one optimally chooses to be.
To Keynes it was an obvious and sad fact of the world that not all unemployment is voluntary. But obviously not so to New Classical and ‘New Keynesian’ economists.