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History of economic thought 3

Divided heirs : the neoclassical synthesis, and post-keynesians (Bernard Chavance, ABIK, June 2010). History of economic thought 3. A) Neoclassical synthesis keynesianism. Influence and transformation of Keynes’ theory. Quick spread of Keynes’ ideas in the end of the 1930s and 1940s

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History of economic thought 3

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  1. Divided heirs : the neoclassical synthesis, and post-keynesians (Bernard Chavance, ABIK, June 2010) History of economicthought 3

  2. A) Neoclassicalsynthesiskeynesianism

  3. Influence and transformation of Keynes’ theory • Quick spread of Keynes’ ideas in the end of the 1930s and 1940s • But it is a selected part of his approach that is popularized and combined with the neoclassical tradition (equilibrium analysis) • Giving rise to the « neoclassical keynesian synthesis » (Samuelson) that becomes dominant in the 1950s-1960s

  4. Shifts in the mainstream • The center of gravity of neoclassical economics shifts from England to the United States (at a time of changing economic hegemony) • A process of formalization and mathematization of economic theory

  5. Paul Samuelson (1915-2009)

  6. Samuelson’sinfluential books • Foundations of economic analysis (1947): economics through mathematical analysis, economic behaviour as maximisation (or minimisation) under constraints • Economics (1st ed. 1948): a prominent textbook, translated in 41 languages, 18 editions until the last one in 2004 (with W. Nordhaus since 1985) • Linear programming and economic analysis (1958), with Dorfman and Solow: optimisation techniques to integrate price theory and growth theory

  7. The afterwarcontext in the West • A modified stance about unemployment: traditionally viewed as positive (resulting in « wages discipline »), it is now seen as a major evil to be fought • Policies oriented towards « full employment », and building a Welfare state • Consensus about the responsibility of the state in economic evolution • National accounting developed

  8. Keynesianmacroeconomicsreinterpreted in equilibriumterms • John Hicks, « Mr Keynes and the classics » 1937: Keynes model as a special case in a more general theory (a reversal of Keynes’ argument about his « general theory ») • Alvin Hansen, A guide to Keynes, 1953 • The IS-LM model (Hicks-Hansen) • … gives a basis for the analysis of economic policy, combining fiscal and monetary policy

  9. John Hicks (1904-1989)

  10. Equilibrium on two main markets • I = Investment, S = Savings • L = Liquidity preference (demand) • M = Money supply • Relation between two main variables, Y (production, income) and i (interest rate) • IS curve: all points for which I = S • LM curve: all points for which L = M • Equilibrium : simultaneous equilibrium on the goods and services market (I = S) and on the money market (L = M)

  11. IS-LM (Investment/Savings-Liquidity/Money)

  12. Discerning the propergovernment action • Fiscal policy and shifts in the IS curve • Monetary policy and shifts in the LM curve • Three different zones, where the efficiency of fiscal and monetary policy differs

  13. The Phillips curve • Phillips : declining relation between wages and unemployment • Modified Phillips curve (Samuelson, Solow, 1960): declining relation between inflation and unemployment • The policy trade-off between inflation and unemployment

  14. Phillips curve (US, 1960s)

  15. Followers of Keynes in the second half of the 20th century B) Post-keynesians

  16. Colleagues and disciples of Keynes • The influence of Piero Sraffa • The Polish marxist : Michal Kalecki • Cambridge (GB) post-keynesians: Roy Harrod, Nicholas Kaldor, Joan Robinson • American group: Sidney Weintraub, Alfred Eichner, Jan Kregel, Paul Davidson • Cambridge Journal of Economics, Journal of Post-Keynesian Economics

  17. Nicholas Kaldor (1908-1986)

  18. Joan Robinson (1903-1983)

  19. The approach of post-keynesianeconomics • A critique of « bastard keynesianism » (the neoclassical synthesis) • The « capital controversy »: a victory without effect • The role of uncertainty, time, anticipations • Capitalism as an unstable monetary economy • Economy and history: historical time vs logical time (Robinson) • Combining the classical and marxian traditions with Keynes ’ inspiration

  20. Extensions of Keynes’ approach • Endogenous money: created following the needs of economic activity, through bank credit • Criticism of Friedman’s monetarism • Growth theory • The role of increasing returns to scale • Imperfect competition • Prices: the markup

  21. Kaldor’sassessment of Keynes 50 yearsafter (1983) • A limit about unemployment: not a consequence of insufficient demand, but of increasing returns and imperfect competition • A questionable hypothesis of exogenous money supply, while the quantity of money actually depends on its demand • Keynes reflected on a closed economy, and neglected exports as an important element of demand • But Keynes work remains fundamental

  22. HymanMinsky (1919-1996) • Financial market fragility is linked with speculative investment bubbles endogenous to financial markets • Alterning speculative euphorias and contractions • Financial instability hypothesis • « A fundamental characteristic of our economy, is that the financial system swings between robustness and fragility and these swings are an integral part of the process that generates business cycles. » (1974) • A criticism of financial deregulation in the 1980s

  23. Minsky

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