A Macroeconomics Reader

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

5

The fall and rise of Keynesian economics

Alan S. Blinder

Economic Record (1988) December, pp. 278-94

Keynesian economics came under much criticism in the 1970s. This chapter argues that the decline in Keynesian economics and the rise in, notably, new classical economics in this period related to their respective theoretical appeal rather than their ability to explain developments in the macroeconomy. As this has become increasingly recognized, and with the development of sound microeconomic foundations, Keynesian economics has again been on the rise.


1 INTRODUCTION

According to T. S. Kuhn’s The Structure of Scientific Revolutions (1962), progress in ‘normal science’ requires an agreed-upon theoretical framework or ‘paradigm’ within which researchers work to solve puzzles. The stage is set for a paradigm change when anomalies are discovered and documented. After a period of turmoil and extensive questioning of old assumptions, a new theory may emerge which explains not only the anomalies but also the phenomena encompassed by the old theory. If so, the scientific revolution succeeds; although the new theory may itself be subsequently supplanted by a still newer one. Implicitly, a progressive science rarely, if ever, goes back to a previously discarded theory, for that theory was rejected for good reasons.

For a period of roughly 35 years, Keynesian theory provided a central paradigm for macroeconomists, and considerable progress was made on several empirical fronts. It was widely recognized that some of the ingredients of Keynesian economics (e.g. money illusion and/or nominal wage rigidity) rested on slender to non-existent microtheoretic foundations; and there were always dissenters. But, thought of as a collection of empirical regularities that fit together into a coherent whole, the theory worked tolerably well.

In the 1970s, however, the Keynesian paradigm was rejected by a great many academic economists, especially in the United States, in favour of what we now call new classical economics. By about 1980, it was hard to find an American academic macroeconomist under the age of 40 who

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