Academic Studies in Social, Human and Administrive Sciences

Abstract

In this Chapter, we will first review the historical developments leading to the birth of Post-Keynesian Economics and then give the developments of Post-Keynesian Economics in terms of their assumptions and methodology, later on we will discuss the current state of Post-Keynesian Economics.Post-Keynesian school of macroeconomics was developed in the mid ‘80s as a reaction not only against New Classicals but also against New Keynesian economists because the assumptions and hence conclusions of the latter were not deemed Keynesian enough. Keynesian Economics was mainstream both in the USA and Europe, both in academic circles and in the field of implementation by governments and Central Banks from 1936 and WW II up to the ‘70s. The debate that took place during this period between Neo-Keynesian economists in the USA and Neo-Classical economists that led to the Neo-Classical Synthesis and the reaction of Orthodox Keynesian Economists in the UK to Neo-Classical Synthesis will be referred to later. Keynesian economics here embraces both Neo-Keynesian economists and Orthodox Keynesian economists as mainstream against the Traditional Classical and the Neo-Classical system.Developments in the ‘80s were called “Counter Revolution”, reversing what Lawrence Klein in 1961 had called “Keynesian Revolution”. Though M. Friedman had laid the foundations of Monetarism during the fifties it had remained a minority voice then and had become widespread also during the ‘70s in the US academic circles; it also found adherents in the UK and Europe. This event was called the “Monetarist Counter-Revolution” by Monetarists. Thus, during the ‘70s though Keynesian macroeconomic policies were implemented low-key, Keynesian economics was on the demise and no more mainstream in the academic circles.During the decade ‘80s economic policies began to be pursued that were in line with New Classicals and particularly Monetarists both in the USA and Europe by conservative governments that had come to power, foremost Ronald Reagan during 1981-89 and Margaret Thatcher during 1979-87.Thus, government budgets began to shrink, and privatization programs were implemented in Europe. Despite the presence of high unemployment rates “tight money policy” was implemented. It assumed that the economy would automatically come to full-employment equilibrium (AFNE), or using the concept first introduced by Friedman, at the point of natural rate of unemployment (NRU), meaning automatic NRU equilibrium (ANRUE). To achieve price stability along with ANRUE, therefore, Keynesian policies of raising aggregate demand, including monetary expansion had to be discarded, and Monetarist tight money policy implemented instead. But the proposition of ANRUE claimed by both New Classicals and Monetarists did not materialize; unemployment persisted and even increased during the ‘80s. The failure of New Classical and Monetarist policies made Keynesianism mainstream once again in the academic circles and this movement was called “Counter Counter-Revolution” (Blinder 1988, Mankiw, 1990).But criticisms coming from both Monetarists and particularly New Classicals forced fundamental methodological and assumptive changes in Keynesianism since the ‘80s. The school that emerged in the USA is called “New Keynesian Economics”. A brief review of these changes is highlighted below. But we should take the criticisms coming from Monetarists first both because of historical and methodological reasons.Friedman used Keynesian concepts and basically Keynesian macroeconomic analysis but with different elasticities and assumptions leading to the Classical conclusion AFNE, or in Friedman’s terms, ANRUE.