Modern Macroeconomics.pdf

698 Modern macroeconomicstraces the development of macroeconomics in historical perspective. Startingfrom Keynes’s (1936) General Theory he tracks progress in macroeconomicsfrom the Keynesian revolution, the neoclassical synthesis, the Great Inflationand the crisis in Keynesian economics, monetarism, rational expectations andthe new classical economics, real business cycle theory to a new neoclassicalsynthesis. From Woodford’s historical perspective the evolution of economists’thinking on macroeconomics has been far from smooth.It should be immediately apparent that the approach we have taken in thisbook more closely parallels that taken by Woodford. There is no dissent thatthe birth of modern macroeconomics can be traced back to the publication ofKeynes’s (1936) General Theory or that macroeconomics is a ‘quintessentiallytwentieth-century development’ (Woodford, 2000). Indeed, Blanchard(2000) notes that the term ‘macroeconomic’ does not appear in the economicsliterature until it formed part of the title of an article by De Wolff which waspublished in 1941, while the term ‘macroeconomics’ first appeared in the titleof an article by Klein published in 1946. The central belief which underpinnedthe ensuing Keynesian revolution in macroeconomic thought is theneed for stabilization, the view that the authorities can, and therefore shoulduse discretionary fiscal and monetary policy to stabilize output and employmentat their full employment levels (see Modigliani, 1977). According toGerrard (1996), a unifying theme in the evolution of modern macroeconomicsthereafter has been an ‘ever-evolving classical-Keynesian debate’ involvingcontributions from various schools of thought that can be differentiated andclassified as being orthodox (the orthodox Keynesian and orthodox monetaristschools), new (the new classical, real business cycle and new Keynesianschools) or radical (the Austrian and Post Keynesian schools).The rise and fall of orthodox Keynesian economics owed a great deal to itsproblem-solving effectiveness. It appeared to provide a robust explanation ofa severe empirical problem, namely mass unemployment, which had persistedlong enough not to be easily explained away as a minor anomaly. Inaddition it offered an attractive political action programme for the resolutionof the diagnosed problem. Whilst it contained a number of serious conceptualproblems, for example inconsistencies and ambiguities of presentation alongsidemore radical elements, these were effectively submerged by theneoclassical synthesis process. This synthesis of classical and Keynesianideas, captured by the IS–LM AD–AS framework, represented the consensusview before the 1970s and was the standard approach to macroeconomicanalysis both in textbooks and in professional discussion.The demise of orthodox Keynesianism was in large part the result of itsfailure to deal adequately with the major new empirical problem posed bystagflation in the 1970s. Conceptually much of its ‘heuristic power’ had‘petered out’ and ‘run dry’ (Leijonhufvud, 1968). As Klamer (1984) con-