It has been suggested that Neo-Keynesian economics be merged into this article. (Discuss) Proposed since September 2020.

The neoclassical synthesis (NCS), or the neoclassical–Keynesian synthesis,[1] was a post-World War II academic movement in economics that worked towards absorbing the macroeconomic thought of John Maynard Keynes into neoclassical economics.[2] Being Keynesian in the short run and neoclassical in the long run, neoclassical synthesis allowed to adjust economy via fiscal and monetary policies in the short run (especially focusing on fiscal policies that considered to be more effective than monetary ones) but considering that equilibrium in the long run will be reached without state intervention.[3] The consensus towards the Neoclassical Synthesis began to deteriorate in late 1960, following the high inflation episode in the U.S. and aggravating by mid-1970s stagflation, that proved an impossibility to maintain sustainable growth and low level of inflation via measures suggested by the school.[4] Due to the failure of the synthesis to explain and predict the events of the 1970s, as well as serious contradiction expressed in asymmetric relation to agents as highly rational with considering markets as inefficient in adjusting wages and prices to the appropriate levels, the theory has fallen into a crisis,[4] re-emerging in the mid-1990s with new neoclassical synthesis.[4] [5]

Main theoretical and empirical studies of NCS school are based on IS-LM model developed by J. Hicks and A. Hansen, and the Phillips curve.[3]

Main contributors

Much of neo-Keynesian economic theory was developed by leaders of economic profession, such as John Hicks, Maurice Allais, Franco Modigliani, Paul Samuelson, Alvin Hansen, Lawrence Klein, James Tobin and Don Patinkin.[6] The process began soon after the publication of Keynes' General Theory with the IS-LM model (investment saving–liquidity preference money supply) first presented by John Hicks in a 1937 article.[7] It continued with adaptations of the supply and demand model of markets to Keynesian theory. It represents incentives and costs as playing a pervasive role in shaping decision making. An immediate example of this is the consumer theory of individual demand, which isolates how prices (as costs) and income affect quantity demanded.

The term "neoclassical synthesis" appears to be coined by Paul Samuelson in his influential textbook "Economics".[4] According to Paul Samuelson, the neoclassical synthesis should have become a new general economic theory, that could unite positive aspects of previous economic research and become a consensus, over which all members of the economic community believed that the active fiscal and monetary interventions can be used for stabilizing economy and ensuring full employment.[5] Following him, market economy, based on the reasons described by J. Keynes, cannot provide full employment on its own. But if monetary and fiscal policy is used to tackle underemployment, it will put the economy on a trajectory that applies the principles of classical equilibrium analysis to explain relative prices and resource allocation.[8]

Paul Samuelson has started the program of neoclassical synthesis, outlining two main objects of study:

  1. Static theories: equilibrium is described as a result of actions of rational price-taking agents;
  2. Dynamic theories: price adjustments toward equilibrium after shocks realization, with prices moving in the direction of excess demand functions proportionally to the functions’ magnitudes.[5]

Main provisions

Development of neoclassical synthesis

The interpretation of J. Keynes suggested by the neoclassical synthesis economists is based on the mixture of basic features of general equilibrium theory with Keynesian concepts.[6] Thus, most models of neoclassical synthesis are tagged as «pragmatic macroeconomics».[6]

The development of neoclassical synthesis started in 1937 with J. Hicks’s publication of paper «Mr. Keynes and Classics», where he proposed the IS-LM scheme that has put the Keynesian theory into more traditional terms of a simplified general equilibrium model with three markets: goods, money, and financial assets.[14] This work marked the beginning of «pragmatic» macroeconomics.[6] Later, in the 1940s-1950s, the ideas of J. Hicks were supported by F. Modigliani and P. Samuelson.[6] F. Modigliani in 1944 has elaborated on J. Hicks publication, expanding the IS-LM scheme by adding the labor market into consideration.[14] Paul Samuelson had coined the term «neoclassical synthesis» in 1955[5] and has put much effort to build and promote the theory, in particular through his influential book «Economics», first published in 1948.[15] One of the main contributions of P. Samuelson made in the first edition of «Economics» was the 45-degree diagram (frequently known as «Keynesian cross"), that reconciled the competing economics of J.M. Keynes and neoclassical school by combining the neoclassical theory of price and income formation in the context of market competition with Keynesian macroeconomics as a theory of government intervention.[15]

Thus, many breakthroughs in the development of neoclassical synthesis happened by the 1950s, with the creation of the IS-LM model by J. Hicks (1937) and A. Hansen (1949), clarification of the role of the rigidity of nominal wages in the Keynesian model in the work of F. Modigliani (1944), the identification of the importance of the wealth effects and the role of public debt in the work of L.Metzler (1951), and D. Patinkin’s clarification of the structure of the macroeconomic model (1956).[4] 

By the beginning of 1970s, the research program formulated after WWII was generally completed, and the neoclassical synthesis proved to be very successful.[4] As the scientific success of the neoclassical synthesis was largely due to its empirical success, the U.S. inflation in the late 1960 and further stagflation of the 1970s have questioned the theory of neoclassical synthesis and it was blown for the impossibility to explain events.[4][5] Although the neoclassical synthesis models were further expanded to include shocks, the empirical reality has exposed the main flaw that lied in the core of the theory: the asymmetric relation to agents as highly rational with considering markets as inefficient in adjusting wages and prices to the appropriate level[4] that has resulted in the collapse of the theory of neoclassical synthesis. R. Lukas and T. Sargent have highly criticized the theory, claiming that «predictions [based on this theory] were widely incorrect, and the doctrine on which they were based is fundamentally flawed, are now simple matters of fact».[16]

After neoclassical synthesis

From the mid-1970s to the mid-1990s there was no consensus within the economics prevailed, with the first generation of Keynesianism and Lucasian visions fighting for the leading position.[5] Macroeconomic theories that could give a convincing explanation to the Great Depression and stagflation of the 1970s, such as monetarism and theories build around rational expectations (such as new classical macroeconomics and real business cycle models) became popular. However, in the mid-1990s, the neoclassical synthesis re-emerged with a new neoclassical synthesis. New neoclassical synthesis was not attractive for neoclassical synthesis’ economists, as it was to formalize economy as if markets were considered as competitive and clearing instantly.

The works of S.Fischer (1977) and J.Taylor (1980) have contributed to the reconstruction of the neoclassical synthesis, as they have demonstrated that the Philips curve can be replaced by a model of explicit nominal price and wage-setting with saving most of the traditional results proposed by neoclassical synthesis.[4]

See also

General

Notes

  1. ^ Mankiw, N. Gregory. "The Macroeconomist as Scientist and Engineer". The Journal of Economic Perspectives. Vol. 20, No. 4 (Fall, 2006), p. 35.
  2. ^ Fonseca, Gonçalo L. "Neo-Keynesian Synthesis". www.hetwebsite.net. The History Of Economic Thought Website. Retrieved 7 May 2017.
  3. ^ a b "Neoclassical synthesis | Policonomics". Retrieved 2021-04-02.
  4. ^ a b c d e f g h i j k l m n Blanchard, Olivier Jean (1991), Eatwell, John; Milgate, Murray; Newman, Peter (eds.), "Neoclassical Synthesis", The World of Economics, London: Palgrave Macmillan UK, pp. 504–510, doi:10.1007/978-1-349-21315-3_66, ISBN 978-0-333-55177-6, retrieved 2021-04-02
  5. ^ a b c d e f De Vroey, Michel; Duarte, Pedro Garcia (2013-01-01). "In search of lost time: the neoclassical synthesis". The B.E. Journal of Macroeconomics. 13 (1). doi:10.1515/bejm-2012-0078. ISSN 1935-1690.
  6. ^ a b c d e Togati, Dario (1998-08-20). Keynes and the Neoclassical Synthesis. Routledge. ISBN 978-0-429-22982-4.
  7. ^ Hicks, J.R. (1937). "Mr. Keynes and the 'Classics': A Suggested Interpretation," Econometrica, 5(2), pp. 147-159 (via JSTOR).
  8. ^ Kiefer, David (1997), "Short-Run Macro Models", Macroeconomic Policy and Public Choice, Berlin, Heidelberg: Springer Berlin Heidelberg, pp. 61–80, ISBN 978-3-540-64872-7, retrieved 2021-04-03
  9. ^ Flaschel, Peter; Franke, Reiner (1996-02). "WAGE FLEXIBILITY AND THE STABILITY ARGUMENTS OF THE NEOCLASSICAL SYNTHESIS". Metroeconomica. 47 (1): 1–18. doi:10.1111/j.1467-999X.1996.tb00384.x. ISSN 0026-1386. Check date values in: |date= (help)
  10. ^ Stanfield, James Ronald (1995), "The Neoclassical Synthesis in Crisis", Economics, Power and Culture, London: Palgrave Macmillan UK, pp. 30–48, ISBN 978-1-349-23714-2, retrieved 2021-04-02
  11. ^ Eatwell, John (1991). The World of Economics. Murray Milgate, Peter Newman. London: Palgrave Macmillan Limited. ISBN 978-1-349-21315-3. OCLC 1084363299.
  12. ^ Stanfield, James Ronald (1995), "The Neoclassical Synthesis in Crisis", Economics, Power and Culture, London: Palgrave Macmillan UK, pp. 30–48, ISBN 978-1-349-23714-2, retrieved 2021-04-04
  13. ^ Eichner, Alfred S. (1983), "Why Economics is not yet a Science", Why Economics is not yet a Science, London: Palgrave Macmillan UK, pp. 205–241, ISBN 978-0-333-36143-6, retrieved 2021-04-04
  14. ^ a b Roncaglia, Alessandro (2019-11-30). The Age of Fragmentation: A History of Contemporary Economic Thought (1 ed.). Cambridge University Press. doi:10.1017/9781108777766.007. ISBN 978-1-108-77776-6.
  15. ^ a b A., Pearce, Kerry. After the Revolution: Paul Samuelson and the textbook Keynesian model. [s.n.] OCLC 849114534.
  16. ^ Lucas, Robert; Sargent, Thomas (1997-08-29), "After Keynesian macroeconomics", A Macroeconomics Reader, Routledge, ISBN 978-0-415-15715-5, retrieved 2021-04-04