Neo-Keynesian economics

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Neo-Keynesian economics is a school of macroeconomic thought that was developed in the post-war period from the writings of John Maynard Keynes. A group of economists (notably John Hicks, Franco Modigliani, and Paul Samuelson), attempted to interpret and formalize Keynes' writings, and to synthesize it with the neo-classical models of economics.


  • Today orthodox economics accepts Keynes's critique of the self-regulating market mainly by acknowledging that the market economy may deviate from its normal equilibrium in the short run, and so display Keynesian characteristics, while in the long run, normal, full-employment equilibrium will be restored as the prices eventually adjust to equilibrium levels.
    This orthodox rendition of Keynes seems to accept his insights, while neatly preserving the basic elements of supply-and-demand theory. A centerpiece of this revisionism was the work of J.S. Hicks, familiar to students of macro-economics as the "IS-LM" model. Hicks's gloss on Keynes, first published in 1937, holds that the market economy fails to attain full employment mainly because money wages are "sticky." That is, they fail to adjust immediately to real changes in economic conditions. Since labor costs are a principal ingredient of product costs, sticky money wages keep up prices too, and so ensure a high demand for money for transactions purposes, in turn keeping interest rates high. If only money wages would fall, the demand for money would fall too, interest rates would come down, and the decline in interest rates would stimulate an increase in investment, raising output and moving the economy toward full employment.
  • I think the basic issue there is the question of whether there are any dead weight losses or market filures of a macroeconomic nature in a market economy. Neo-Keynesians think there are and that the government can do something about them. They think that demand management policy can assist the economy to stay close to its equilibrium track.

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