A Macroeconomics Reader

By Brian Snowdon; Howard R. Vane | Go to book overview

Introduction

Keynesian economics, in all its many forms, challenges the legacy of Adam Smith’s basic theorem that competitive markets are capable of converting the self-interested behaviour of millions of individuals into a desirable macroeconomic outcome. To Keynes the ‘invisible hand’ mechanism is fundamentally flawed in that capitalist market systems seem incapable of generating the full utilization of societies scarce labour and capital resources except for limited periods of time. Given that the economic system is subject to periodic aggregate demand and supply shocks, a key question for macroeconomic theorists is: ‘Will the economy, once displaced from its full employment equilibrium, return to that desirable state in a reasonable period of time via the normal functioning of the price mechanism operating without assistance from the “visible hand” of government intervention?’ Keynesians of all persuasions share the view that some degree of selective government intervention, via fiscal and monetary policies, can improve upon the ‘invisible hand’ inspired non-interventionist stance of the classical economists and their modern day disciples (see Snowdon et al. 1994; Tobin 1996; Shaw 1997).

Although few, if any, economists have had an impact on the development of modern macroeconomics to compare with that of John Maynard Keynes, the essential message of his magnum opus, The General Theory of Employment, Interest and Money (1936), remains the subject of continuing controversy some sixty years following its publication. This is hardly surprising given the impact the General Theory has had in three important areas. First, the resultant theoretical revolution in the then newly created field of macroeconomics has inspired an ongoing theoretical debate concerning the equilibrating properties of the price mechanism. Second, in parallel to the theoretical revolution, it led to a policy revolution which represented a major shift in thinking which subsequently encountered political and intellectual resistance from those who remain wedded to the classical laissez-faire philosophy associated with the invisible hand doctrine (see Moggridge 1993; Skidelsky 1996). Third, as Colander and Landreth (1996) note, it led to a pedagogical (textbook) revolution which reflected the real need for economists to devise ways of distilling Keynes’s ideas and

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