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Economic Theory and Economic Policy Since the Seventies: Keynesians Versus New Classical Economists

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The Global Crisis of 2008 and Keynes's General Theory

Part of the book series: SpringerBriefs in Economics ((BRIEFSECONOMICS))

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Abstract

This chapter begins with the analysis of causes that led to the weakening of the intellectual influence of Keynesian economic thought at the beginning of the seventies of the last century and to the strengthening of the impact of the new classical economists led by Lucas, Sargent and Wallas. The theoretical response of the new Keynesians to the criticism, was based on the introduction of sticky prices in macroeconomic models in the works of Phellps, Fischer, Taylor and Dornubsch in the late seventies. The author also presents the role of modern financial theory based on the efficient market theory, portfolio theory and the capital market theory, and the criticism of these theories presented in the works of Mandelbrot, Schiller and Kahneman. In explaining the causes of the global crisis of 2008, the author pays special attention to the post-Keynesian monetary circuit theory and the Minsky’s financial instability hypothesis and its relevance for the analysis of major factors that led to the global financial crisis. This chapter ends with the author’s comparison of the effects of macroeconomic policies in the United States under the administrations led by the last three US presidents: Clinton, Bush and Obama. By presenting the data on the trends in unemployment, interest rates, inflation and changes in the market capitalization on the major capital markets, the author shows that the economic policy measures implemented during the global economic crisis in the U.S., Europe and Japan are based on the recommendations suggested by John Maynard Keynes in the General Theory regarding the simultaneous use of expansionary monetary and fiscal policy.

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Notes

  1. 1.

    Reference [1]. http://www.marxists.org/reference/subject/economics/keynes/general-theory/.

  2. 2.

    Reference [2].

  3. 3.

    References [3, 4].

  4. 4.

    See: http://www.ontheissues.org/celeb/Richard_Nixon_Budget_+_Economy.htm.

  5. 5.

    Reference [5].

  6. 6.

    Reference [6].

  7. 7.

    Reference [7].

  8. 8.

    The condition of rational behaviour is for subjective expectations formed by market actors to be the same as the average value of the distribution of probabilities of the variable being predicted, for a given range of available information.

  9. 9.

    Reference [8].

  10. 10.

    Reference [9].

  11. 11.

    Reference [10].

  12. 12.

    Reference [11].

  13. 13.

    Data on US budget balances for 1940–2013 are available on http://www.davemanuel.com/history-of-deficits-and-surpluses-in-the-united-states.php.

  14. 14.

    Herbert Stein was Chair of the Council of Economic Advisors from 1972 to 1974.

  15. 15.

    Reference [12].

  16. 16.

    Reference [13].

  17. 17.

    References [14, 15].

  18. 18.

    Reference [14].

  19. 19.

    As an example of two major economies, we may take Europe or the Eurozone and the United States, although at the time the authors were writing the redux model paper, the Euro had still to be introduced.

  20. 20.

    Reference [16].

  21. 21.

    Reference [17].

  22. 22.

    Reference [18].

  23. 23.

    Reference [19].

  24. 24.

    Eugene F. Fama, Op. cit., see the sections under C (the Random Walk Model) and D (Market Conditions Consistent with Efficiency).

  25. 25.

    Reference [20].

  26. 26.

    Reference [21].

  27. 27.

    Reference [22].

  28. 28.

    Reference [23].

  29. 29.

    Reference [24].

  30. 30.

    Benoit B. Mandelbrot and Richard L. Hudson (2004), Op. cit., pp. 79–87.

  31. 31.

    Reference [25]. http://www.cs.princeton.edu/courses/archive/fall09/cos323/papers/black_scholes73.pdf.

  32. 32.

    Benoit B. Mandelbrot, and Richard L. Hudson (2004), Op. cit, p. 93.

  33. 33.

    Data from: http://seekingalpha.com/article/194972-world-market-cap-at-46_8-trillion.

  34. 34.

    See: http://en.wikipedia.org/wiki/Market_capitalization.

  35. 35.

    See: http://seekingalpha.com/article/194972-world-market-cap-at-46_8-trillion.

  36. 36.

    References [26, 27].

  37. 37.

    Daniel Kahneman, Op. cit., p. 345.

  38. 38.

    Daniel Kahneman, Op. cit., p. 318.

  39. 39.

    For a concise overview of the development of this theory, see Ref. [28].

  40. 40.

    For an excellent overview of Monetary Circuit Theory see Ref. [29].

  41. 41.

    Duccio Cavalieri (2004), Op. cit. http://mpra.ub.uni-muenchen.de/43769/7/MPRA_paper_43769.pdf, p. 7.

  42. 42.

    Reference [30]. http://www.levyinstitute.org/pubs/wp74.pdf.

  43. 43.

    Hyman P. Minsky (1992), Op. cit., p. 7.

  44. 44.

    Hyman P. Minsky (1992) Op. cit., p. 8.

  45. 45.

    Hyman P. Minsky (1992) Op. cit., p. 8.

  46. 46.

    Reference [31].

  47. 47.

    The Basel Committee for Banking Supervision adopted Basel II in June 2004.

  48. 48.

    Reference [32].

  49. 49.

    The Emergency Economic Stabilisation Act—which entered into force on October 4, 2008.

  50. 50.

    Data on the values of the DJIA, Nasdaq and US GDP are available on the following websites: http://www.fedprimerate.com/dow-jones-industrial-average-history-djia.htm. http://www.google.com/finance/historical?cid=13756934&startdate=Mar+10%2C+1999+&enddate=Mar+20%2C+2000&num=30&ei=N2QsU7j2CsmpwAPnSg. http://data.worldbank.org/indicator/NY.GDP.MKTP.CD?page=4.

  51. 51.

    See: Ref. [33]. Available on the following web site: http://www.federalreserve.gov/boarddocs/speeches/1996/19961205.htm.

  52. 52.

    See: http://www.fedprimerate.com/fedfundsrate/federal_funds_rate_history.htm.

  53. 53.

    Reference [34]. Available on: http://research.stlouisfed.org/conferences/workshop/gordon.pdf.

  54. 54.

    Reference [35]. http://www.bis.org/publ/work47.pdf.

  55. 55.

    Reference [36].

  56. 56.

    Signed by William Clinton in December 2000.

  57. 57.

    Data available on the web page of the Bank for International Settlements: http://www.bis.org/statistics/dt1920a.pdf.

  58. 58.

    Reference [37]. Chapter 8: Banking in the Shadows (pp. 153–164).

  59. 59.

    Reference [38].

  60. 60.

    Reference [39].

  61. 61.

    Reference [40].

  62. 62.

    Source Federal Reserve of the USA, available on the following webpages: http://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm; http://www.federalreserve.gov/monetarypolicy/bst_recenttrends_accessible.htm.

  63. 63.

    US Department of the Treasury, recovery act, http://www.treasury.gov/initiatives/recovery/Pages/recovery-act.aspx.

  64. 64.

    Data on changes to the ECB-Euro system on the ECB webpage: https://www.ecb.europa.eu/press/pr/wfs/2008/html/fs080326.en.html.

  65. 65.

    Data on changes to the ECB-Euro system monetary aggregates on the ECB webpage: http://www.ecb.europa.eu/stats/money/aggregates/aggr/html/hist.en.html.

  66. 66.

    Reference [41]. http://www.imf.org/external/np/speeches/2008/121508.htm.

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  1. School of Economics and Business, University of Sarajevo, Sarajevo, Bosnia-Herzegovina

    Fikret Čaušević

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Čaušević, F. (2015). Economic Theory and Economic Policy Since the Seventies: Keynesians Versus New Classical Economists. In: The Global Crisis of 2008 and Keynes's General Theory. SpringerBriefs in Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-11451-4_1

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