Posted on January 23rd, 2008 at 10:01 am by wswanson
In contrast to the classicals, Keynes was of the opinion that some government intervention was necessary or at least helpful in facilitating the smooth functioning of the “invisible hand.” In this article, “Keyesian economics: First Principles,” the author characterizes the Classical economimics approach as “reductionists,” or essentially linked and represented by an analysis of individual choices. In this way the classical economics missed the boat on macroeconomics. The author points out that market equilibrium and choice logic is not always consistent—however market equilibrium is not necessarily part of the reductionist approach, but rather motivated by the desire to simplify things.The author then differentiates between different modes of Kynesian economics, the first interpretation being “fundamentalist”. Those who see keynes as a complete disavowal and affront to classical economics, are referred to as fundamentalist; the rationale behind this lies in the Keynesian liquidity preference theory, by which all prices are now money prices and hence subject to “expectational and conventional elements that characterized Keynes’s theory of the rate of interest.” Coddington illuminates another criticism of reductionist theories. For example, moods and emotions are widely shared during a riot, only to revert back to normal after the people have dispersed. Choice theory in the reductionist model fails to capture this interdependence of expectations and action; elements of human behavior that have a significant impact on the market.
Following the “keynesian revolution”, the Ideas in the general theory became oversimplified and hence, publicly accessible amongst intelligent laymen and students. This brand of Kynesiansim, Coddington calls “Hydraulic.” In this approach, the government is the principle agent of action, however it relies on the assumption that all aggregate variables are stable in some way, such that the government’s influence (via the budget) is able to manipulate the market in the intended ways. Overall, this is a drastic oversimplification of Keynes theories. That is, when we say that demand determines the overall employment rather than the real wage, and the government adjusting its expenditure can control this and hence aggregate demand (given an ample amount of foreign investment to supply the cash), we are missing some crucial points of theory.
Coddington identifies a third category of keynesians; reconstituted reductionism. For him, this hybridized sterile mule of a theory lies somewhere between classical and Keynesian economics and carries with it some a few important problems, most important of which is the assumption about equilibrium.
Equilibrium is a configuration in which “the range of variability of the underlying circumstances are fairly stable relative to the speed of adjustment of the endogenous variables.” While reductionists reason within the choice logic framework, they also struggle to accommodate Keynesian ideas—therefore they accept reductionism, but also accept disequilibrium trading. Coddington points out however, that any sort of choice-theory-basis for Keynesian theory is inconsistent with Keynesian theory.
Coddington, Alan. Keynesian Economics: the search for first principles in A macroeconomics Reader. Pg 36-54.
Link Here | January 24, 2008,
Billy,
I responded to your comment on my blog. Here’s the link. http://moremacroplz.umwblogs.org/2008/01/18/neoclassical-economics/
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