MacroeconomicsI_working_version (1)

Brief Inquiry into History of Economic Thought 15
Economic welfare (normative part of the neo-classical economics)
• Does the market equilibrium situation lead to the maximising of satisfaction of the
needs and wants from the limited resources? Is the economic system effective in that
way? A. Pigou stated that economic system allocates limited resources effectively, but
it does not always lead to the maximisation of the welfare. To prove it he applied the
principle of diminishing marginal utility.
2.3. Keynesian Economics
• Till 20’s of the last century neoclassical economics was the most influential economic
school. The neo-classics presented their school as a homogenous theoretical system
capable to cope with all basic economic questions and problems. However the Great
World-wide Depression put the neo-classical economics into a crises. Economic
depression was not in line with their thought.
• John Maynard Keynes (1883 – 1946): The General theory of Employment, Interest and
Money (published in 1936);
• R. Kahn, J. Robinson, R. Harrod, A. Hansen;
• object of interest: Macroeconomics, approach: Interventionism;
• refused the main neoclassical ideas (self-regulating system, Say’s law, liberalism).
• National economy is not a stable system.
• Keynes explained (clarify) the existence of a long-term depression. He theoretically
doubted the Say’s law by reformulating a the savings function. There is no automatic
mechanism that would transform savings into investments (classics: interest rate).
Savings depend on income.
• Unemployment is a result of a deficient aggregate demand. Thus the government
interventions supporting aggregate demand (consumption, investment) are necessary.
The effective aggregate demand theory. He justified theoretically the need of the
state (external) interventions into the economy. (Expansive fiscal policy,
accommodating monetary policy, fiscal deficits, fiscal multiplier).
• Keynes considered his theory as a general economics and the neoclassical economics as
a special case of his general economics. (A special case describing economy at the full
employment level).
• Preference of liquidity, interest as a reward for abandoning (surrendering) of liquidity;
• neo-classical synthesis in 60’s (neo-keynesian economics) – synthesis of keynesian
and neo-classical economics. Keynesianism became a special case of a general neoclassical
economics (the special case for the economy with rigid wages). Keynesian
theory – valid in a short run, neo-classical theory valid in a long run.
• AS – AD model, IS – LM model, the Phillips curve;
• 60/70’s (oil shocks) - crises of (neo) keynesian economics (Hicks, Samuelsson) loosing
the influence;
• 80’s New Keynesians – closer to liberal approach, focused on explanation of wage
rigidities (microeconomic view) – Mankiw, Fischer.
• Post-keynesian theory returns to the original (orthodox) Keynesian theory (Robinson,
Kaldor, Weintraub).