Keynes had propounded a new vision of the economy, and Hicks had turned this vision into a tractable model and a way for economists to analyze economic problems. Indeed Keynes ’s vision resonated well with many younger economists and some decision makers. But now the real work had started. A few decades were needed to flesh out the theory, fill the gaping holes in it, and show that indeed it was a good approximation to economic reality. But if the new vision and set of policies associated with it had to have any chance, its approval had to be more widespread than in the academic circles. Decision makers and the general public had to be convinced that the Keynesian prescription was worth trying and once adopted it would bear the promised fruits. In this chapter we shall concentrate on the theoretical and empirical development of Keynesian theory and in the next chapter discuss its policy effectiveness.
I give you the toast of the Royal Economic Society, of economics and economists, who are the trustees, not of civilization, but of the possibility of civilization.
John Maynard Keynes , at the end of his speech on the occasion of his retirement from the editorship of the Economic Journal in 1945
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Notes
- 1.
This lack of microfoundations was one of the main points of controversy among economists. We shall discuss it in Chap. 7.
- 2.
For a brief pre-modern history of national income accounting the reader is referred to “The Accounts of Society” by Nobel laureate (1984) Richard Stone , who received his prize “for having made fundamental contributions to the development of systems of national accounts and hence greatly improved the basis for empirical economic analysis.”
- 3.
There are a number of books on the history of econometrics including The History of Econometric Ideas (1990) by Mary Morgan and A History of Econometrics (1987) by Roy Epstein.
- 4.
A consistent estimator converges to the true parameter with high probability as the number of observations increases.
- 5.
James Duesenberry forwarded the relative income hypothesis, but it has fallen out of favor in economics.
- 6.
Note that since the estimated equations involve first difference and its lagged value, in each case we lose two observations. Thus, our estimation periods are 1931–2006 and 1948–2006.
- 7.
We should also mention the contributions of Richard Brumberg , who was a student of both Modigliani and Friedman and whose death in 1954 cut short a promising career. His dissertation was entitled, “Utility Analysis and Aggregate Consumption Functions: An Empirical Test and its meaning” (Johns Hopkins University, 1953); and he published three papers, two of them with Modigliani , on the subject of consumption of function.
- 8.
The use of labor income—estimated as personal income less proprietor, rental, interest, and dividend income proportionately adjusted for taxes—in most models resulted in marginal propensity to consume exceeding one or very close to one and constant terms that were out of line.
- 9.
See Jorgenson and Siebert (1968), pp. 681–712.
- 10.
In Chap. 9 we take up the question of the determinants of money supply . Here we assume that the central bank can fix the amount of money supply.
- 11.
For a proof see Kamran Dadkhah (2007), pp. 271–274.
- 12.
For an account of Cowles Commission ’s role in the development of econometrics see Carl Christ (1994), pp. 30–59.
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Dadkhah, K. (2009). Laying the Foundations of Keynesian Economics. In: The Evolution of Macroeconomic Theory and Policy. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-540-77008-4_3
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