Neo-Keynesian economics

school of economic thought

Neo-Keynesian economics is a school of macroeconomic thought that was developed in the post-war period from the writings of John Maynard Keynes. A group of economists (notably John Hicks, Franco Modigliani, and Paul Samuelson), attempted to interpret and formalize Keynes' writings, and to synthesize it with the neo-classical models of economics.

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  • Today orthodox economics accepts Keynes's critique of the self-regulating market mainly by acknowledging that the market economy may deviate from its normal equilibrium in the short run, and so display Keynesian characteristics, while in the long run, normal, full-employment equilibrium will be restored as the prices eventually adjust to equilibrium levels.
    This orthodox rendition of Keynes seems to accept his insights, while neatly preserving the basic elements of supply-and-demand theory. A centerpiece of this revisionism was the work of J.S. Hicks, familiar to students of macro-economics as the "IS-LM" model. Hicks's gloss on Keynes, first published in 1937, holds that the market economy fails to attain full employment mainly because money wages are "sticky." That is, they fail to adjust immediately to real changes in economic conditions. Since labor costs are a principal ingredient of product costs, sticky money wages keep up prices too, and so ensure a high demand for money for transactions purposes, in turn keeping interest rates high. If only money wages would fall, the demand for money would fall too, interest rates would come down, and the decline in interest rates would stimulate an increase in investment, raising output and moving the economy toward full employment.
  • The West has unfortunately already started to go along this path. I know, to many it may sound ridiculous to suggest that the West has turned to socialism, but it's only ridiculous if you only limit yourself to the traditional economic definition of socialism, which says that it's an economic system where the state owns the means of production. This definition in my view, should be updated in the light of current circumstances. Today, states don't need to directly control the means of production to control every aspect of the lives of individuals. With tools such as printing money, debt, subsidies, controlling the interest rate, price controls, and regulations to correct so-called market failures, they can control the lives and fates of millions of individuals. This is how we come to the point where, by using different names or guises, a good deal of the generally accepted ideologies in most Western countries are collectivist variants, whether they proclaim to be openly communist, fascist, socialist, social democrats, national socialists, Christian democrats, neo-Keynesians, progressives, populists, nationalists or globalists. Ultimately, there are no major differences. They all say that the state should steer all aspects of the lives of individuals. They all defend a model contrary to the one that led humanity to the most spectacular progress in its history.
  • I think the basic issue there is the question of whether there are any dead weight losses or market filures of a macroeconomic nature in a market economy. Neo-Keynesians think there are and that the government can do something about them. They think that demand management policy can assist the economy to stay close to its equilibrium track.

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