The orthodox Keynesian school
Introduction
In the decade or so following the publication of the General Theory economists
engaged in the Keynes v. Classics debate sought to clarify the arguments
of Keynes and the counter-arguments of his critics. For example, a major
theme of Modigliani’s (1944) paper was to show that, except for the case of
extreme wage rigidity, Keynes’s system did allow for a restoration of full
employment equilibrium via price flexibility, aside for some special limiting
cases. However, by the mid-1950s Samuelson (1955) declared a truce. He
argued that 90 per cent of American economists had ceased to be anti- or
pro-Keynesian but were now committed to a ‘neoclassical synthesis’ where
it was generally accepted that neoclassical microeconomics and Keynesian
macroeconomics could sit alongside each other. The classical/neoclassical
model remained relevant for microeconomic issues and the long-run analysis
of growth, but orthodox Keynesian macroeconomics provided the most
useful framework for analysing short-run aggregate phenomena. This historical
compromise remained the dominant paradigm in economics until the
1970s.
The main purpose of this chapter is fourfold: first, to review one highly
influential orthodox Keynesian interpretation of Keynes’s (1936) General
Theory, namely the Hicksian IS–LM model for a closed economy, before
considering more fully the theoretical debate on underemployment equilibrium
in the context of that model (sections 3.3–3.4); second, to consider the
effectiveness of fiscal and monetary policy for stabilization purposes when
the model is extended to an open economy (section 3.5); third, to discuss the
original Phillips curve analysis and comment on the importance of the Phillips
curve to orthodox Keynesian analysis (section 3.6); and finally, in the light of
this discussion, to summarize the central propositions of orthodox Keynesian
economics (section 3.7).
The reader should be aware that throughout this and subsequent chapters
two recurrent and interrelated issues arise, concerning (i) the controversy
over the self-equilibrating properties of the economy and (ii) the role for
interventionist government policies. We begin our discussion with the early
orthodox Keynesian approach to these central issues within macroeconomics.
Introduction
In the decade or so following the publication of the General Theory economists
engaged in the Keynes v. Classics debate sought to clarify the arguments
of Keynes and the counter-arguments of his critics. For example, a major
theme of Modigliani’s (1944) paper was to show that, except for the case of
extreme wage rigidity, Keynes’s system did allow for a restoration of full
employment equilibrium via price flexibility, aside for some special limiting
cases. However, by the mid-1950s Samuelson (1955) declared a truce. He
argued that 90 per cent of American economists had ceased to be anti- or
pro-Keynesian but were now committed to a ‘neoclassical synthesis’ where
it was generally accepted that neoclassical microeconomics and Keynesian
macroeconomics could sit alongside each other. The classical/neoclassical
model remained relevant for microeconomic issues and the long-run analysis
of growth, but orthodox Keynesian macroeconomics provided the most
useful framework for analysing short-run aggregate phenomena. This historical
compromise remained the dominant paradigm in economics until the
1970s.
The main purpose of this chapter is fourfold: first, to review one highly
influential orthodox Keynesian interpretation of Keynes’s (1936) General
Theory, namely the Hicksian IS–LM model for a closed economy, before
considering more fully the theoretical debate on underemployment equilibrium
in the context of that model (sections 3.3–3.4); second, to consider the
effectiveness of fiscal and monetary policy for stabilization purposes when
the model is extended to an open economy (section 3.5); third, to discuss the
original Phillips curve analysis and comment on the importance of the Phillips
curve to orthodox Keynesian analysis (section 3.6); and finally, in the light of
this discussion, to summarize the central propositions of orthodox Keynesian
economics (section 3.7).
The reader should be aware that throughout this and subsequent chapters
two recurrent and interrelated issues arise, concerning (i) the controversy
over the self-equilibrating properties of the economy and (ii) the role for
interventionist government policies. We begin our discussion with the early
orthodox Keynesian approach to these central issues within macroeconomics.
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