The second half of the 20th century was an exciting time for Economics, with developments rapidly succeeding each other as a reaction to the very different economic scenarios the world faced. This development did nothing if not speed up towards the end of the century, when different theories not only succeeded each other, but often coexisted, feeding off the breakthroughs that were being made by the different schools. In this way, the end of the century was curiously reminiscent of the first half, with a return to the two main schools and a whole new focus on mathematics.
Fitting into this retro revival period, Keynesians were also kept busy countering the neo-classicists and monetarists who were intruding onto their sacred ground: macroeconomics and the Phillips curve. This current in economic thought is often overshadowed because of the keen political interest that New Classical Macroeconomics was able to garner, but warrants a much closer look than it is sometimes afforded. Were they able to preserve the monetary illusion? Perhaps not, but they were consistent in their approach: exploring market failure one breakdown at a time.
Main definitions and economists:
–New Keynesian Economics, as a counterattack to New Classical Economics’ theories;
–George Akerlof, the mind behind asymmetric information;
–Gregory Mankiw, whose works marked the beginning of menu costs analysis;
Employment and inflation:
–Menu costs as a way of explaining price stickiness;
–Mankiw’s menu cost model demonstrated how price stickiness originated in menu costs reduces social welfare;
–Layard-Nickell NAIRU model, helps understand how the labour market works from the NKE’s point of view.
–NAIRU, a concept related to the natural rate of unemployment, although with a few subtle differences.