The Neo-Keynesian World
- Introduction-

John Maynard Keynes


"Those, who are strongly wedded to what I shall call "the classical theory", will fluctuate, I expect, between a belief that I am quite wrong and a belief that I am saying nothing new. It is for others to determine if either of these or the third alternative is right."

(John Maynard Keynes, The General Theory, 1936: p.v)

"The impression of Keynes that one gains [from Neo-Keynesians] is that of a Delphic oracle, half-hidden in billowing fumes, mouthing earth-shattering profundities whilst in a senseless trance -- an oracle revered for his powers, to be sure, but not worthy of the same respect as that accorded to the High Priests whose function it is to interpret the revelations."

(Axel Leijonhufvud, On Keynesian Economics and the Economics of Keynes, 1968: p.35)

"After the war, Keynes's theory was accepted as a new orthodoxy without the old one being rethought. In modern text-books, the pendulum still swings, tending toward its equilibrium point. Market forces allocate given factors of production between different uses, investment is a sacrifice of present consumption, and the rate of interest measures society's discount of the future. All the slogans are repeated unchanged. How has this trick been worked?"

(Joan Robinson, 1979, Collected Economic Papers, Vol. V, p.172).

"The "Keynesian revolution" went off at half-cock...The equilibrists, therefore, did not know they were beaten; or rather...they did not know that they had been challenged. They thought that what Keynes had said could be absorbed into their equilibrium systems; all that was needed was that the scope of their equilibrium systems should be extended. As we know, there has been a lot of extension, a vast amount of extension; what I am saying is that it has never quite got to the point....I must say that that diagram [IS-LM] is now much less popular with me than I think it still is with many other people. It reduces the General Theory to equilibrium economics; it is not really in time. That, of course, is why it has done so well."

(John Hicks, "Time in Economics", in Evolution, Welfare and Time in Economics, 1976: p,289-90)



"The old century ends in a storm, the new one begins with a murder..." wrote Friedrich Schiller at the end of the 18th Century. Had he written those words in 1936, they could not have been more appropriate: the old Neoclassical orthodoxy had wallowed clueless in the storm of the Great Depression and with one swift blow, the publication of John Maynard Keynes's General Theory of Employment, Interest and Money in 1936, their theory was murdered and the "New Economics" began.

Within the next few years, there were several important developments. The most crucial was the introduction of the IS-LM representation of Keynes's theory by John Hicks (1937). This was to have a very deep impact in both economic theory and the conduct of economic policy. Hicks's representation provided a useful and efficient pedagogic device to popularize the Keynesian Revolution. However, by treating a subset of Keynes's theory as a system of simultaneous equations, Hicks's IS-LM was also the beginning of what has been called a "Neoclassical-Keynesian Synthesis", or "Neo-Keynesianism", the dominant form of Keynesianism which took hold in America and, for the most part, the rest of the world.

Hicks's system of simultaneous equations was completed by Franco Modigliani (1944) who subsequently set the dominant "Synthesis" view that Keynes was merely doing Neoclassical economics with "sticky wages". The race was then on to formalize the major Keynesian relationships in a manner compatible with Neoclassical theory. In this endeavor, the now-converted Alvin H. Hansen, the idiosyncratic Abba Lerner and a brilliant parade of (mostly) American youngsters - Franco Modigliani, Seymour Harris, Lawrence Klein, James Tobin, Paul Samuelson, James Duesenberry, Robert Mundell, Robert Eisner, Robert Solow and numerous others - took instrumental roles.

In Britain, in the meantime, Roy Harrod, John Hicks, Joan Robinson, Nicholas Kaldor and the "Cambridge Keynesians" continued on what they perceived to be the next logical step: namely, the extension of the General Theory into the longer run, the "dynamic" economy. By the time they looked up from their work sometime in the 1960s, the American "Neoclassical-Keynesian Synthesis" was already firmly in place and virtually immovable. Much to their chagrin, it seemed as if the "Keynesian Revolution" had now become synonymous with the Neo-Keynesian synthesis. Some, such as Joan Robinson, went on the attack - taking hold of Neoclassical capital theory and methodology as the corner of a rug by which she hoped to shake the whole edifice down. Others, such as Robert Clower and Axel Leijonhufvud, sought to draw it onto a different "disequilibrium" track, advocating a "Walrasian-Keynesian" synthesis instead.

However, it was to be another challenge, that of Milton Friedman's "Monetarism" and, more fundamentally, its New Classical incarnation, that would finally bury the mainstream Neo-Keynesian construction - and, some could argue, all vestiges of Keynes's original influence with it.

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