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Keynes & Neoclassical Synthesis: Keynesianism

Summary

John Maynard Keynes marked a hugely important turning point in the history of Economics. For the first time, Economics had become positive, allowing for differences of opinion. This brought about a chasm in economic thinking: differences of opinion could bring about real differences in the lives of many.

Keynesianism:

J. M. Keynes
Cambridge school
Keynesianism

Neoclassical Synthesis:

This school of economic thought, which focuses on macroeconomics, is mainly based on interpretations of John Maynard Keynes’ most important book, the “General Theory of Employment, Interest and Money”, 1936.

Keynes’ main thesis was that unemployment during the Great Depressionwas the result of a decreasing demand, and that the solution was to revive the economic system through public investment. A Keynesian policy would be one that promotes, for example, public works such as building dams or highways.

Supporters of Keynesianism, or Keynesian economics, believe that although businesses and private sector entities working on a liberal environment function in an efficient way, sometimes market failures may appear. For this, they support a certain degree of implication by the public sector in order to prevent these failures and restore the economy if they appear, through fiscal and monetary policies. However, they will give more credit to the former, the latter being more supported by Monetarists.

Keynesianism was the main economic doctrine from 1936 until the advent of Monetarism, with which it coexisted until the stagflation of the seventies.

Joan Robinson, Nicholas Kaldor and John R. Hicks, are just some of the great disciples of Keynes, and therefore Keynesian economists, mainly from the Cambridge School in its not neoclassical meaning, to name a few.

So much discord left economists stranded as to how two solid schools with such solid foundations could be so at odds with each other, ushering in a new, more conciliatory way of thinking which sought to reunite the neoclassical school with Keynes’ groundbreaking ideas. This way of saving the status quo whilst acknowledging basic tenements of Keynesianism led to the Neoclassical Synthesis, hugely important from the 1940s right up to the onset of monetarism. Let’s look first at how two such apparently conflicting theories could be made to coexist through a clever solution: using time frames. It turns out both were right, it all depends how long for.

Keynes & Neoclassical Synthesis: Cambridge school Keynes & Neoclassical Synthesis: the Neoclassical Synthesis