Temin, P. & Vines, D. (2014) “Why Keynes is Important Today“, Institute for New Economic Thinking, 28 October.
Macroeconomists have been notably unhelpful in explaining and recommending policies since the global financial crisis of 2008.
How could this have happened?
Since John Maynard Keynes created macroeconomics in the 1930s, the field has grown to be half of all introductory courses in economics and has become well represented and respected among academic economic publications. Keynes was considered helpful in the “Golden Age of Economic Growth” after the Second World War, but he is largely ignored now that we have recreated conditions similar to the Great Depression in many countries.
Keynesian analysis was abandoned in the turbulent 1970s that signaled the end of rapid economic growth. Macroeconomics reconstituted itself as the study of economic growth. Building on pioneering work by Frank Ramsey and Robert Solow, macroeconomics became the study of long-run economic growth. It also became the complement of economic development, which focused on empirical works and policies of developing countries.
Modern macroeconomics flourished in its pursuit of the secrets of long-run economic growth, but it neglected short-run economic problems. In the long run, prices are flexible, and the growth of the economy is determined by the growth in the ability to supply goods and services. But in the short run prices are not flexible. Growth can be held back because prices are too high and, as a result, demand is too low. Keynes made his name by analyzing short-run problems caused by the stickiness or even rigidity of some important prices. But these Keynesian ideas were abandoned by modern macroeconomics.
Relevant posts:
- Whyman, P. B. (2014) “Keynes and the International Clearing Union: A Possible Model for Eurozone Reform?“, JCMS: Journal of Common Market Studies. doi: 10.1111/jcms.12180, 07 August.
- Wren-Lewis, S. (2014) “Has the Great Recession killed the traditional Phillips Curve?“, Mainly Macro Blog, 14 July.
- Rogoff, Kenneth, (2013) “Europe’s Lost Keynesians“, www.project-syndicate.org, 23 May.