Transcript www.econ.umn.edu

Neo-classical vs. Neokeynesian
By:
Jared Sommer
Natalie Merriam
Ben Duhn
Brian Matthews
Neo-Classical Economics
Assumptions
1. People have rational preferences
2. Individuals maximize utility and firms
maximize profits
3. People act independently on the basis of full
and relavant information
Chicago School
- Markets allocate resources more efficiently
than the government
- Monopolies are created by government's
attempt to regulate an economy
- Governments should avoid trying to manage
aggregate demand
- Governments shold focus on maintaining a
steady and low rate of growth of money
supply
Austrian School
- Abolishment of central banks
- Elimination of bank deposit insurance
schemes
- Institution of an information system that make
real-time prices data available
- Abandonment of mathematical models as too
rigid and limited to be of any use.
Criticisms of Neo-Classical
- Normative Bias
- Assumption that individuals act rationally
- Making the general equilibrium theory
compatible with an evolving economy
- Relies too heavily on complex mathematical
models
Milton Friedman Background
- July 21, 1912 - November 16, 2006
- American Neo-Classical Economist
- Economists ranked him the second most
popular economist of the 20th century behind
John Maynard Keynes
- Worked for the University of Chicago from
1946 to 1977.
- Won the Nobel Prize in Economics in 1976
- He was a main advocate opposing activist
Keynesian government policies
Milton Friedman's Work
- Best known for reviving interest in the quantity
theory of money
- He maintained that there is a close and stable
association between price inflation and the
money supply
- Argued for no government intervention of
currency markets
- Believed a government's role in the guidance
of the economy should be severely restricted
Robert Lucas, Jr. Background
- September 15, 1937 - Present
- American Neo-Classical Economist
- Works at the University of Chicago
- Won the Nobel Prize in Economics in 1995
Robert Lucas, Jr.'s Work
- Challenged the foundations of
macroeconomic theory
- Developed the "Lucas critique" of economic
policymaking
- Developed the Lucas aggregate supply
function, also known as the Lucas 'surprise'
supply function
Developed the Lucas paradox to consider why
more capital does not flow from developed
countries to developing countries.
Neo-Keynesian Economics
-More recently "Old-Keynesian"
-Macroeconomic school of thought
-John Hicks, James Tobin, Franco Modigliani,
and Paul Samuelson
-"Neo-Classical Synthesis"
-Formalize Keynes and synthesize it with
Neo-Classical
-"Bastard Keynesianism"
Neo-Keynesian Economics
-Dominated mainstream economics
- 1950s, 60s, 70s
-Low, stable unemployment and mild inflation
-Monetary policy which early Keynes school of
thought ignored
-Trade at non-equilibrium wage & prices
Neo-Keynesian Model
-IS/LM model failed to come to Keynesian
"unemployment equilibrium" conclusion
-Rather, came to Neo-Classical result of "full
employment"
-Applied rigid money wages, interest-elastic
investment demand, and income-elastic
money demand
-"Synthesis" conclusion that in LR, NeoClassical holds, while in short run Keynesian
thought holds
Neo-Keynesian Model
-Price expectations would prevent labor market
from rapidly adjusting to equilibrium wage
-With this rigid wage, involuntary
unemployment will exist until prices increase
enough to drive labor demand to "full
employment"
-Thus, sluggish wages and prices ensure that
at non-market-clearing wages & prices trade
must occur and therefore not adjust
simultaneously in SR
Phillips Curve
-Used to predict inflation
-Keynes had only predicted
falling unemployment would
cause higher price
-Thus could use IS/LM model
as base to predict inflation
-Ex. Increase in money
supply would increase output
and employment, therefore
increasing inflation
Criticism
-Stagflation of the 1970s
-High & rising unemployment and
inflation
-Monetarists
-Milton Friedman
-Need for microeconomic basis
-Shift to New-Keynesian
Neo-Keynesian Economists
John Hicks
&
James Tobin
Sir John R. Hicks
- Born: April 8th, 1904 , Died May 20,
1989
•Attended Oxford
•Lecturer at The London School of
Economics and Political
Science.
• Extremely proficient in almost every
European language.
• Major influences: Lionel Robbins,
Friedrich von Hayek, R.G.D. Allen,
Ursula Webb.
Sir John R. Hicks
•
Hicks's classic Value and Capital
(1939) was the spearhead of the antiMarshallian movement.
•
•
In his famous 1934 paper with
R.G.D.Allen
•
•
•
•
•
restatement of the marginal
productivity theory
Divided “Slutsky” effects into income
and substitution effects.
defined substitution clearly
reacquainted English-speaking
economists with the derivation of
demand curves with the use of
indifference curves
budget constraints and the equation
between marginal rates of substitution
and relative prices.
It was his 1937 paper, "Mr. Keynes
and the Classics”
•
•
•
Introduced his “IS-LM model”
Launching pad for the Neo-Keynesian
synthesis
Introduced the concept of the “liquidity
Value and Capital (1939)
•
1st magnum opus
•
The concept of "composite commodity"
and the conditions for stability of
general equilibrium were laid out
•
As well as a more complete reworking
of the theory of utility-based demand.
•
He also developed the concept of
"temporary equilibrium"
Capital and Growth (1965)
•
Hammered together his previous works,
into an attempt at a comprehensive reexamination of growth theory.
•
His did so by dividing models into fixprice and flex-price models
•
Led him to further concerns, particularly
the issue of the "traverse" (the
movement from one growth equilibrium
to another).
•
The first part of Capital and Growth was
reworked and republished as Methods
of Economic Dynamics in 1985.
Hicks Later Works
•
Capital and growth were always Hicks's
primary concerns
•
In the 1970’s Hicks turned to Austrian
economics and single-handedly
attempted a resurrection of Austrian
capital theory
•
It was an attempt at formalizing an
Austrian theory of capital which
included both fixed and circulating
capital.
•
Hicks denounced the pretence, method
and theory of the very NeoclassicalKeynesian Synthesis he had helped
create.
James Tobin
•
•
Born in Champagne Illinois in 1918 and Died
2002
•
Received a Masters from Harvard in 1939
•
Served in the U.S Navy during WWII
•
Went back and got his P.H. from Harvard in
1947
•
After his fellowship, he became a professor at
Yale in 1950
•
Was named has head of the Economics
Department of Yale in 1957.
James Tobin
•
Served as an editor at two prestigious
economic journals, Econometrica and
the Review of Economic Studies.
•
Recognized by the American Economic
Association's John Bates Clark Medal
as the "America’s brightest economist
under the age of forty”
•
Served on the President's Council of
Economic Advisers of John F. Kennedy
•
The Economic report that Tobin wrote
with the two other members of the
Council, Kermit Gordon and Walter
Heller, is still widely disputed.
James Tobin
•
In 1981, Professor Tobin received the highest
honor awarded in his field, the Nobel
Memorial Prize for economic science.
•
Is famous for his “profolio theory” which he
described in his nobel exceptance speech as
“don’t put all your eggs in one basket”….
•
He was author or editor of sixteen books and
more than four hundred articles.
•
Professor Tobin's ideas continue to play a
prominent role in political discourse.
•
The “Tobin Tax”