â€˜Right Back Where We Started Fromâ€™: from â€˜the Classicsâ€™ to Keynes, and back again
The purpose of this paper is to highlight the curiously circular course followed by mainstream macroeconomic thinking in recent times. Having broken from classical orthodoxy in the late 1930s via Keynesâ€™s General Theory, over the last three or four decades the mainstream conventional wisdom, regressing rather than progressing, has now come to embrace a conception of the working of the macroeconomy which is again of a classical, essentially pre-Keynesian, character. At the core of the analysis presented in the typical contemporary macro textbook is the (neo)classical model of the labour market, which represents employment as determined (given conditions of productivity) by the terms of labour supply. While it is allowed that changes in aggregate demand may temporarily affect output and employment, the contention is that in due course employment will automatically return to its â€˜naturalâ€™ (full employment) level. Unemployment is therefore identified as a merely frictional or voluntary phenomenon: involuntary unemployment - in other words persisting demand-deficient unemployment - is entirely absent from the picture. Variations in aggregate demand are understood to have a lasting impact only on the price level, not on output and employment. This in effect amounts to a return to a Pigouvian conception such as targeted by Keynes in the General Theory. We take the view that this reversion to ideas which should by now be obsolete reflects not the discovery of logical or empirical deficiencies in the Keynes analysis, but results rather from doctrinaire blindness and failure of scholarship on account of which essential features of the Keynes theory have been overlooked or misrepresented. There is an urgent need for a critical appraisal of the current conventional macroeconomic wisdom.
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- Roy H. Grieve, 2010. "Time to Ditch AD-AS?," Review of Radical Political Economics, Union for Radical Political Economics, vol. 42(3), pages 315-320, September.
- William Scarth, 2010. "Aggregate Demand-Supply Analysis and Its Critics: An Evaluation of the Controversy," Review of Radical Political Economics, Union for Radical Political Economics, vol. 42(3), pages 321-326, September.
- David Colander, 1995. "The Stories We Tell: A Reconsideration of AS/AD Analysis," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 169-188, Summer.
- Fred Moseley & Roy Grieve, 2010. "Reply to Scarth," Review of Radical Political Economics, Union for Radical Political Economics, vol. 42(3), pages 327-329, September.
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