Economic Theory and Economic Policy Since the Seventies: Keynesians Versus New Classical Economists

This chapter begins with the analysis of causes that led to the weakening of the intellectual influence of Keynesian economic thought at the beginning of the seventies of the last century and to the strengthening of the impact of the new classical economists led by Lucas, Sargent and Wallas. The theoretical response of the new Keynesians to the criticism, was based on the introduction of sticky prices in macroeconomic models in the works of Phellps, Fischer, Taylor and Dornubsch in the late seventies. The author also presents the role of modern financial theory based on the efficient market theory, portfolio theory and the capital market theory, and the criticism of these theories presented in the works of Mandelbrot, Schiller and Kahneman. In explaining the causes of the global crisis of 2008, the author pays special attention to the post-Keynesian monetary circuit theory and the Minsky’s financial instability hypothesis and its relevance for the analysis of major factors that led to the global financial crisis. This chapter ends with the author’s comparison of the effects of macroeconomic policies in the United States under the administrations led by the last three US presidents: Clinton, Bush and Obama. By presenting the data on the trends in unemployment, interest rates, inflation and changes in the market capitalization on the major capital markets, the author shows that the economic policy measures implemented during the global economic crisis in the U.S., Europe and Japan are based on the recommendations suggested by John Maynard Keynes in the General Theory regarding the simultaneous use of expansionary monetary and fiscal policy.