A Macroeconomics Reader

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

6

Price flexibility and output stability

An old Keynesian view

James Tobin

Journal of Economic Perspectives (1993) 7, Winter, pp. 45-65

In this symposium I shall play the role in which I was cast, the unreconstructed old Keynesian. Time was when I resisted labels and schools, naively hoping that our fledgling science was outgrowing them. I had, to be sure, been drawn into economics when the General Theory was an exciting revelation for students hungry for explanation and remedy of the Great Depression. At the same time, I was uncomfortable with several aspects of Keynes’ theory, and I sought to improve what would now be called the microfoundations of his macroeconomic relations.

The synthesis of neoclassical and Keynesian analysis achieved in the 1950s and 1960s promised a reconciliation of the two traditions, or at least an understanding of the different contexts to which each applies. The hope and the promise were premature, to say the least. Since 1973 the dominant trend in macroeconomics has dismissed Keynesian theory. Nevertheless, Keynesian models continue to prove useful in empirical applications, forecasting and policy analysis. Macro-econometric models are mostly built on Keynesian frameworks. The gulfs between doctrine and observation, between theory and practice, are chronic sources of malaise in our discipline.

I have benefitted from Gregory Mankiw’s ‘refresher course’ in modern macroeconomics (1990). He writes that recent developments—methodological, new classical, and new Keynesian—are to old macroeconomics as Copernicus was to Ptolemy. It just takes time before Copernican truths can outdo Ptolemaic approximations in practical applications.

Considering the alternatives, I do not mind being billed as a Keynesian, an old Keynesian at that. But old Keynesians come in several varieties, and I speak for no one but myself. Nor do I defend the literal text of the General Theory. Several generations of economists have criticized, amended, and elaborated that seminal work. I shall argue for the validity of the major propositions that distinguish Keynesian macroeconomics from old or new classical macroeconomics.


SUMMARY OF THE KEYNESIAN CASE

The central proposition of Keynesian economics is commonly described as follows: ‘According to the Keynesian view, fluctuations in output arise

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