Out with the new, in with the old...

Who needs new (or neo) Keynesian economics when you can have the old? UCLA's Roger Farmer is writing a book on Old-Keynesian Economics, and you can read the draft chapters online. The book - still a work in progress - junks the 'natural rate' and sticky price assumptions in favour of Keynes' "animal spirits". Here is his explanation:

This book is concerned with the question: Why do capitalist economies sometimes go very badly wrong? For several decades after the publication of Keynes' General Theory economists thought that they had an answer. But with the resurgence of classical ideas in the 1970's, the key premise of the General Theory, that market economies are not inherently self-stabilizing, has been called into question. Although there has been a recent resurgence of Keynesian ideas under the rubric of "new-Keynesian economics", the models studied by the new-Keynesians are hybrids that incorporate a classical core. New-Keynesian models allow for temporary deviations of unemployment from its "natural rate" as a consequence of sticky prices but they contain a stabilizing mechanism that causes a return to the natural rate over time.

In his 1966 book, Axel Leijonhufvud made the distinction between Keynesian economics and the economics of Keynes. By Keynesian economics, he meant the interpretations of Keynes that became incorporated into the IS/LM model and ultimately, into the new-Keynesian paradigm. Leijonhufvud pointed out that the assumption that the General Theory is about sticky prices is central to Keynesian economics but it is not a central argument of the text of the General Theory.

This book provides an alternative microfoundation to Keynesian economics that does not rely on sticky-prices. In successive chapters I construct a series of models that build on a single idea. Each of them is constructed around a conventional dynamic general equilibrium model in which real resources must be used to move unemployed workers into jobs using a "search technology". Although this technology is convex, I assume that the planning optimum cannot be decentralized as a competitive equilibrium because moral hazard prevents the creation of markets for the search inputs.

As an alternative, I introduce an equilibrium concept called demand constrained equilibrium, in which the level of economic activity is determined by investor confidence or "animal spirits". I refer to the resulting model as "old-Keynesian" to differentiate it from new-Keynesian economics that incorporates the natural rate hypothesis of Edmund Phelps and Milton Friedman. In contrast to new-Keynesian models, those described in this book display multiple stationary perfect foresight equilibria, and there is a different stationary unemployment rate, for each possible level of beliefs.

Comments

[Gabriel M.]

*Very* nice work! For graduates and undergraduates.
Unfortunatelly, after a few hours, it seems to be returning an error because of "too many users".

[GVV]

Most new-Keynesians are Friedmanians too.
This"New-Old-Keynesianism"of Prof.Farmer brings a different sort of "perfect foresight" equilibria! I suspect it as old wine in new bottle or "KLASSICAL"
in nature.

[marxbites]

Just bring back gold and silver and get politicians and crooked bankers OUT OF THE MONEY BUSINESS and restore it the people and free markets.

1) Why do we WANT to pay interest on the use of our OWN money?

2) Why do we want to suffer ANY inflation whatsoever, when specie increases buying power with savings from innovation and prices FALL, as in the almost full last qtr of the 1800's. Yup that competititon squeezing the big's profit, ergo the call for the ICC, Fed & Inc Taxes.

YOU FRAUDS only seek to muddy economics with equations to justify statism, your bosses.

[Homeowner Loans]

Last post a bit harsh. Interest is important for many industries.

[picture framer glasgow]

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