ARGUM ENTA OECO NO M ICA No 1-2(14) 2003 PL ISSN 1233-5835
Izabela Bludnik*
HOW DEAD IS KEYNES FOR NEW KEYNESIANS?
D u rin g the 1970s the early K eynesian system was buried as a result o f m icrofoundations. S om e o f these, however, turned o u t to be overidealistic (e.g. m arket-clearing price). T h e new id eas develo p ed during the 1980s and 1990s, inaugurated th e “ K eynes after L ucas” age. N ev erth eless, it must be adm itted that New K eynesians are a very heterogeneous g ro u p d iffic u lt to describe by the m eans o f unique definition. F u rth erm o re, m odem K eynesian e co n o m ics differs significantly fro m both Keynes’ ap p ro ach and the old orthodox P o st K ey n esian school. The purpose o f th is paper is to investigate w h ere the sim ilarity b etw een K ey n es and his followers starts an d ends. The follow ing q u e stio n s are considered: m ic ro fo u n d a tio n s, rigidities, unem p lo y m en t, expectations, m o n ey a n d m onetary policy, fiscal p o licy a n d budget deficit. T he a n aly sis show s that a very gen eral view o f K eynes’ w ritings is still relev an t. But at the sam e tim e N ew Keynesians d e c id e d ly reject many typical old K ey n esian opinions, approving several New Classical and M o n etarist suggestions. M ost c e rtain ly the spirit o f Keynes has b een rediscovered and N ew K ey n esian s are inheritors o f the c o n sid e ra b le part o f his proposals. H ow ever, Keynes m ost p ro b ab ly would not be a N ew K ey n esian .
K e y w o rd s : Keynes, N ew K eynesians, micro fo u n d atio n s, rigidities, unem ploym ent, ex p ec ta tio n s, econom ic policy
INTRODUCTION
During recent years the Keynesian paradigm has lost its homogenous structure. Although Post and New Keynesians unanimously emphasize the impact of market failures in an economy, a unique Keynesian model does not exist. On the contrary to the 1950s and 60s when the IS-LM model was a cornerstone of most Keynesian constructions, New Keynesians commonly use only one assumption, namely rigidity. However, New Keynesians propose so many explanations of the stickiness phenomena that it is impossible to formulate a unique peculiarity of modern Keynesians. Mankiw (1997, p. 450) concluded that:
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N e w K e y n e s ia n e c o n o m ic s is f a r d iffe re n t from o ld K e y n e s i a n e c o n o m ic s - so d if f e r e n t, in fa c t, th at to d ay th e la b e l ‘K e y n e s ia n ’ m ay g e n e r a te m o r e c o n fu s io n th a n u n d e r s ta n d in g .
M oreover, New K eynesians’ achievements are also far different from K eynes’ economics. It is worth citing Mankiw (1997, p. 446) once again:
N e w K e y n e s ia n s v iew th e ir w o r k a s fo llo w in g in th e b r o a d tr a d itio n th at e v o lv e d fro m K e y n e s , b u t th eir go al is to e x p la i n to the w o rld , n o t to c la r if y th e v ie w s o f o n e p a r ti c u l a r m a n . I f n ew K e y n e s ia n e c o n o m ic s is no t a tru e r e p r e s e n ta tio n o f K e y n e s ’s v ie w s , th e n s o m u ch the w o rs e f o r K e y n e s . T h e re a s o n f o r th is a ttitu d e is c le a r . D e s p ite its re m a rk a b le c o n tr ib u tio n , th e G e n e r a l T h e o r y is a n o b s c u r e b o o k : I a m n o t s u r e th a t e v e n K e y n es h i m s e l f k n e w c o m p le te ly w h a t h e r e a l ly m e a n t. M o re o v e r, a f te r f if ty y e a r s o f a d d itio n al p r o g r e s s in e c o n o m ic s c ie n c e , th e G e n e r a l T h e o r y is an o u td a te d b o o k .
T he purpose of this paper is to focus and com pare the most distinctive features of Keynes’ and New Keynesians’ approach. Consequently, the follow ing questions that seem to be primary for each econom ic school will be scrutinized: microfoundations, rigidities, unem ploym ent, expectations, money and monetary policy, fiscal policy and budget deficit. There is no intention to survey every rem arkable paper connected to the discussed topic but rath er to highlight the m ost important and often considered issues. The paper ends with some concluding remarks.
1. MICROFOUNDATIONS
O ne o f the most im portant objections raised to K eynes’ theoretical system is the lack of a m icrobasis. The critics concentrated on the assum ption of rigid wages arguing that Keynes had not derived it from pure m icroeconom ic behavior. His scant explanation of sticky wages concerning money illusion, the behavior o f trade unions and m inim um wage legislation (K eynes 1960, p. 14-15) was not accepted as satisfactory. Moreover, the adversaries emphasized that Keynes had not applied the theory of m onopolistic competition, w ell-know n in the 1930s.
H ow ever, it must be pointed out that the assumption o f rigid wages in the
G eneral Theory had been only an analytical sim plification, not the necessary
condition for the final results. Such an attitude could probably excuse the absence o f an adequate m icro-interest in question. It is also maintained (D avidson 1992, p. 452, 458, 461) that Keynes, by omitting the m onopolization of economy, had showed that the equilibrium with
unem ploym ent could occur even without such a m arket failure. Davidson (1999, p. 575) stressed that the existence of excessive dem and for liquidity is the only condition for equilibrium with involuntary unem ployment in K eynes’ analysis. The effective dem and principle show s that the presence of underem ploym ent does not depend on any degree o f com petition. Keynes had asserted very clearly that his theory is applicable to every level of com petition. For this purpose he had also incorporated perfectly competitive m arket w ith flexible prices and wages.
F urtherm ore, Howitt (1986, p. 628) maintained that Keynes had provided a sufficient microbasis, which is exhibited in his theory o f effective demand. Keynes in pointing out the role o f effective demand, had presented in detail how the entrepreneurs’ decisions based on their expectations can influence econom ic activity. M icroeconom ic decisions directly affect the m acroeconom ic variables, since employment, output and national income all depend upon effective demand.
N evertheless, the opinion that the General Theory completely omits m icrofeatures became a w idespread belief. It was substantially reinforced by the neoclassical synthesis’ analysis. Hence, New K eynesians intend to provide an accurate m icroeconom ic defense o f th eir macroeconomic conclusions. They are not convinced by the ad hoc assum ptions and try to investigate the reasons for the downward wage and price rigidity, which is regarded as one of the most im portant market failures. As Greenwald and Stiglitz (1993, p. 25) stated:
I n c o r p o r a t in g the n e w e r m ic r o - f o u n d a tio n s is th e p r i n c i p a l ta s k a h e a d o f n e w K e y n e s ia n s . T h e c h a lle n g e is to c h o o s e b e tw ee n th e m y r ia d o f w a y s in w h ic h th e m a r k e t c a n b e im p e rfe c t, a n d to d e c i d e o n the c e n tra l q u e s t io n s a n d p u z z le s to b e e x p la in e d .
T he em phasis on m icrofoundations by New K eynesians is due to New C lassicists’ and M onetarists’ critique of Keynes and Post Keynesians. E specially influential is the New Classical analysis based on the representative agent’s behaviour. This agent uses all available information in order to m aximize his utility, w hich leads to continuous equilibrium in all m arkets questioning the P ost Keynesian explanation of economic phenom ena. Its lack of sufficient microjustification o f macro effects was obvious. Ironically, the stage o f challenging the K eynesian viewpoints was the beginning of their reincarnation. The attempt to refute the neoclassical charge gave an incentive to initiate the “New Keynesian era ” .
2. RIGIDITIES
In the first eighteen parts o f the General Theory, K eynes had analyzed m acroeconom ic phenomena assum ing explicitly rigid w ages. This reasoning is treated as a crux of his theoretical system to the present day. Moreover, it is often argued that Keynes’ conclusions depend strictly on this postulate. Such a view is very surprising, since Keynes had adm itted that it was only a tem porary simplification, dropped in the nineteenth part. He had also stressed very clearly that the elasticity of wages and prices could not be a solution for macroeconomic coordination failures. K eynes was convinced that to augm ent the level o f employment one m ust raise the level of aggregate demand, keeping the rate of nominal wages unchanged (Keynes
1960, p. 2 6 0 - 2 6 1 ,2 6 7 ).
The b elief that Keynes’ outcom es are relative to sticky wages was propagated by the neoclassical synthesis, especially John R. Hicks (1937) and Franco Modigliani (1944). However, they im posed this presumption without any theoretical rationalization. It was a typical a d hoc assumption.
New Keynesians continue the tradition initiated by H icks and Modigliani, considering rigidities concerning both wages and prices as the heart of K eynesian economics. N onetheless, they try to explain it on the ground of m icroeconom ics. The search for microfoundations is the common com ponent bringing together alm ost all New Keynesians. It is often claimed that insistence on microbasis is what distinguishes N ew Keynesians from Keynes and Post Keynesians. Evidently, a contem porary complication of both the economic situation and microapparatus advanced the analysis. The fundam ental issue for New K eynesians is to make a distinction between nominal and real rigidities. Such a division indicates that nominal rigidities are the m ain source of economic fluctuations. Although real rigidities alone could not produce large disturbances, together with nom inal frictions they have a large effect on economic activity. The most pop u lar New Keynesian papers exam ining the nominal rigidity of wages and prices were presented by M ankiw (1991), and A kerlof and Yellen (1991). Both concepts of menu costs developed by Mankiw and near-rational behaviour originated by A kerlof and Yellen, showed how small nominal frictions on a microlevel can result in a large macroeconomic nom inal rigidity. H ow ever, Ball and Romer (1991) for example showed that sm all nominal frictions produce only small rigidities.
M ost New Keynesians m aintain that economic fluctuations arise from the problem o f rigid (nominal or real) prices and wages. Consequently, they
continue the belief that the K eynesian models must em body the phenomena o f stickiness, which disturb the correct economic m echanism s. In their opinion rigidities are the main reason why a market econom y differs from the W alrasian model. W ithout such stickinesses flexible prices and wages would allow the economy to adjust quickly to disturbances. This attitude is strongly criticized by many P ost Keynesians arguing that the rigidity of w ages, m uch less of prices, is not a theoretical basis o f Keynes’ reasoning. Tobin (1975, p. 201-202) affirm ed that rigid nom inal wages ensure the stability o f aggregate dem and, while the elasticity o f wages produces a coordination problem in the labour market b ecause of insufficient inform ation. Hence, even if w ages and prices w ere perfectly elastic, the output and employment would be highly volatile. A lso P ost Keynesians such as D avidson and Kregel (1980, p. 144) shared this attitude:
S in c e a ll e x c h a n g e v a lu e s a r e re la tiv e and s in c e th e c u r r e n t v a lu e s o f all r e s a l e a b l e d u r a b le s u ltim a te ly d e p e n d o n th e ir e x p e c te d f u t u r e s p o t p ro c e ss , the o n ly th in g w h i c h w ill p ro v id e an a n c h o r fo r th e m o n ey p ric e le v e l o v e r tim e is the b e lie f in th e s t a b ility o r s tic k in e s s o f m o n e y c o s ts o f p ro d u c tio n o v e r tim e . H e n c e as lo n g as f o r w a r d la b o r c o n tra c ts a rc s e t in m o n e ta ry te rm s fo r a p e r io d o f c a le n d a r tim e w h ic h e x c e e d s th e g e s ta tio n p e r io d o f p ro d u c tio n , e c o n o m i c a g e n ts c an e x p e c t s ti c k i n e s s in th e p ric e lev el o f n e w g o o d s an d s e rv ic e s. It is t h e m o n e y w a g e c o n tr a c t a n d th e r e s u ltin g s tic k in e s s o f m o n e y w a g e s w h ic h p e r m i t te d K e y n e s to p r o d u c e a s ta b le b u t p o te n tia lly s h iftin g e q u il i b r iu m m o d el.
A restis and Sawyer (1998, p. 183) underlined as well that many factors term ed ‘im perfections’ may play a positive role in econom y. For example long-run labor contracts contribute to workers’ training and education, w o rkers’ greater com m itm ent to the enterprise and they prevent disadvantageous relations betw een employees and employers. Sim ilar argum ents refer to the trade unions, minimal wages etc. All these factors should positively affect productivity.
M ost New Keynesians im pairing the first-order role o f rigidities point to financial, especially credit, m arket failures and im perfect indexing. Their m odels usually contain the follow ing components (G reenw ald and Stiglitz 1993, p. 26): risk averse firm s (Greenwald and S tiglitz 1990), credit rationing (Stiglitz and W eiss 1991), theories of labour market em bodying efficiency wages (Yellen 1991) and insider-outsider hypothesis (Lindbeck and S no w er 1986). These com ponents help to explain how price elasticity causes m acroeconom ic fluctuations and unem ployment. Particularly, m odels with risk averse firms and credit rationing dem onstrate why small economic
disturbances can create large changes in output, while the theories of labor market show why these output changes generate unem ploym ent.
3. UNEMPLOYMENT
K eynes had rejected the opinion that equilibrium is alw ays attained at full utilization o f production sources (Keynes 1960, p. 2 5 -2 6 ). In his system such a situation could be only an exception to the rule (K eynes 1960, p. 28, 249-250). In this way he had questioned the classical econom ists’ attitude of treating unemployment as voluntary. Keynes had pointed out that usually aggregate demand equals aggregate supply at the partial utilization of production sources and the resulting unemployment is always of an involuntary character (Keynes 1960, p. 15). In K e y n es’ opinion, this phenom enon arises from the insufficient effective dem and. All the actions undertaken in order to cope with unemployment should concentrate on ensuring the adequate level o f aggregate demand (K eynes 1960, p. 30-31). The fundam ental cause of unem ploym ent had been deduced not from im perfect competition but from the problems connected to the usage of money. T hat is why Keynes had demonstrated that even under lack of any m arket im perfection an underem ploym ent equilibrium is possible.
N ew Keynesians agree with Keynes on the character o f unemployment. Since m arkets clear only gradually, New Keynesians usually view the level of unem ploym ent as too high and too volatile. They oppose M onetarists and New C lassicists, who conclude that the labour m arket is always in equilibrium and the actual unem ploym ent is entirely voluntary and peculiar to real circumstances. Many N ew Keynesians underline the imperfect com petition in the labour m arket and provide the m icrofoundations of wage setting based on the negotiations (Layard et al. 1991). T h e other stress is the predom inant role of real wage rigidity. This is rationalized in three ways: implicit contracts (Azariadis 1975, Azariadis and S tiglitz 1991); insider- outsider m odels; theories of efficiency wages. Some N ew Keynesians insist that the m ain cause of non-cleared labour market is nom inal wage rigidity and others emphasize imperfect information. All these various reasons induce the phenomenon of involuntary unemployment, w hich requires some actions on the authorities’ side.
N ew Keynesians clearly underline the supply-side problem s, not the dem and-side, as the predom inant cause of equilibrium with involuntary unem ploym ent. In Davidson’s (1992) opinion the foundations of New
K eynesians’ research are conceptually useless for an explanation of Keynes’ unem ploym ent analysis. N ew K eynesians omit K eynes’ considerations about necessary and sufficient conditions for underem ploym ent equilibrium in both the short- and long-run and political decisions required to restore and m aintain full employment. D avidson (1992, p. 452) w rote:
I f N e w - K e y n e s ia n s re a d K e y n e s ’s a n a ly sis o f a g g r e g a te s u p p ly an d d e m a n d , h o w e v e r , th e n th ey w o u ld r e a l iz e th e y can no t c la im K e y n e s a s a n in te lle c tu a l f o r e f a th e r .
4. EXPECTATIONS
In the General Theory expectations play a crucial role. Every agent is influenced by both short- and long-run anticipations and his decisions determ ine the level of investm ent which are fundam ental for the state of the econom y (Keynes 1960, p. 46-47). Every m icroeconom ic action is underpinned by expectations. In spite of that K eynes had not specified rigorously such an essential fo r his system element. He had treated all sorts o f expectations in the sam e m anner. In fact he had agreed that the kind, intensity and tendency of expectations are independent of the type of undertaken investment. B esides, the entrepreneurs’ expectations had been show n as unpredictable, hence it is impossible to form ulate them in rational term s. Keynes had written openly about the ag e n ts’ “animal instincts” (K eynes 1960, p. 161). H ow ever, Meltzer (1996) suggested that the expectations in the General Theory are for various reasons, similar to the rational expectations.
N um erous Post Keynesians, among other Joan R obinson and George L. S. S hackle, pointed out that the instability of expectations should be treated as a principal feature of K ey n es’ model. New K eynesians also accept anticipation as a very im portant element, but their attitu d e was forced rather by the manifestation o f new classical rational expectations hypothesis (henceforth REH). This theoretical achievement questioned the Keynesian explanation of the econom ic phenomena. H ow ever, New Keynesians succeeded to incorporate R EH in order to m aintain their traditional conclusions concerning non-cleared markets and the role of stabilizing policy. New Keynesians started to construct m odels including REH and nom inal (price and/or wage) rigidities showing that activist monetary policy with that well-known money supply rule can affect output and em ployment after all (Fischer 1977, P helps and Taylor 1977). N ow adays, many N ew
K eynesians introduce the assum ption of rational expectations into their traditional models. However, it m ust be pointed out that for example Tobin (1980, 1981) and Davidson (1982/83, 1987) have n ev e r accepted REH, criticizing its theoretical and methodological assumptions and questioning its general character.
5. MONEY AND MONETARY POLICY
K eynes had been interested above all in short-run occurrences. Hence, his study concerning the role of m oney and monetary policy had referred to the short-run. In the General Theory, money has a m ajor role in increasing em ploym ent through affecting the interest rate and the level of investment. Hence, the monetary authority can heighten em ploym ent by the means of money supply growth. It does this by lowering the interest rate, which increases the level of investm ent and the level o f incom e (due to the m ultiplier). The effect of the m onetary policy depends upon (Dillard 1960, p. 178): the decline of interest rate in response to the m oney supply growth; the sensitivity o f investment to the interest rate decline (the elasticity of the m arginal capital efficiency function); how much the given increase of investm ent raises the income (the investment m ultiplier). However, Keynes had also show n the situation w hen even a very large m oney supply growth only low ers the interest rate a little. This occurs when this increase induces such an uncertainty that the liquidity preference is dom inated by the precautionary motive and the w hole money is thesaurized. Therefore, the increase o f money supply w ould not lead to the low ered interest rate, if the liquidity preference rose more than the amount of m oney (Keynes 1960, p. 172). A lso the lowered interest rate, ceteris paribus, w ould not have to result in favourable effects, if the m arginal efficiency of capital fell more than the interest rate (Keynes 1960, p. 173). Keynes had been conscious of the inefficiency of monetary policy under depression w hen the liquidity preference is high and the entrepreneurs’ expectations o f profits are low. It is very sym ptom atic that K eynes’ opinion about m onetary policy had been rather critical and expressed a lot o f doubts concerning its efficiency. He had not believed in the success o f m onetary policy used alone. It is also worth m entioning that Keynes is usually regarded as an advocate o f discretional m onetary policy. However, one o f his statements clearly denies such a view (1960, p. 203):
. . . M o n e ta r y p o lic y w h ic h s t r i k e s p u b lic o p in io n a s b e in g e x p e rim e n ta l in c h a r a c t e r o r e a s ily lia b le to c h a n g e m a y fail in its o b je c tiv e o f g r e a tly re d u c in g th e l o n g - te r m r a le o f in te re s t ... T h e s a m e p o lic y , on th e o t h e r h a n d , m a y p ro v e e a s ily s u c c e s s f u l if it a p p e a ls to p u b lic o p i n io n a s b e in g r e a s o n a b le a n d p ra c tic a b le an d in th e p u b l ic in te re s t, ro o te d in s t r o n g c o n v ic tio n , a n d p r o m o te d b y an a u th o rity u n lik e ly t o b e su p e rs e d e d .
T he role of money and m onetary policy in K e y n es’ theory was depreciated by the neoclassical synthesis. Its considerations made very fam ous a conclusion that “m oney does not matter” . N ew Keynesians on the one hand go back to the roots o f General Theory by announcing the short- run non-neutrality of money. O n the other hand, how ever, they are very close to Monetarists, since they believe that the m oney supply curve is vertical fo r a long time. For that reason Mankiw and R om er (1991, p. 3) stated that much of New K eynesian economics could be called new m onetarist economics. G oodfriend and King (1997) w rote about the new neoclassical synthesis, since the long-run neutrality o f m oney incorporates new classical assumptions o f inter-temporal optim ization and rational expectations into New Keynesian models based on the im perfect competition and costly price adjustments.
The m ost famous papers com bining Walrasian features with a typical K eynesian approach in the context of monetary policy em erged in the mid 1970s as a response to the N ew C lassicists’ and M o n etarists’ critique. Two classical studies, mentioned previously, by Fischer (1977) and Phelps and T aylor (1977) showed how m onetary policy under rational expectations and long-term nominal wage contracts can stabilize production and employment in the short term. In the long term, however, m onetary policy loses its stabilizing power. Almost all N ew Keynesians agree to the short-term non neutrality and long-term neutrality of money supply. O w ing to such an attitude the potential role o f stabilizing monetary policy is restored (at least in a short run). New K eynesians also share a com m on view that under flexible prices and wages, m oney should be neutral, except the mentioned above group of New Keynesians who reject the first-order role of rigidities. G reenw ald and Stiglitz (1993, p. 26) asserted that even under a greater elasticity o f wages and prices m onetary policy m aintains its properties, since flexibility increases the problem of economic fluctuations. However, D avidson (1999, p. 576-578) asserted that New K eynesian assumption of long-term neutrality of m oney is inconsistent with K eynes’ theory of effective demand. Since money affects strongly the actual short periods, it is im possible to form long-term predictions without know ledge about money
behaviour between the first and last stage. Davidson argued also that Keynes had clearly rejected the classical proposal of short- and long-term neutrality of m oney, even under perfectly flexible wages and prices. Even if prices and wages w ere elastic in the long term , the existence of m oney would generate booms and depressions. In the General Theory there is no self-adjusting m echanism which would assure cleared markets, even if wages and prices were perfectly elastic.
U nlike Monetarists, most N ew Keynesians doubt the power of fixed policy rules. Underlying both the impact of uncertainty and instability of econom ic life, and the lags in effects of monetary policy, New Keynesians question the potency of m onetary principles established in advance. They prom ote the necessity o f intervention in the face o f large, persistent disturbances, since the adjustm ent processes in the economy are too sluggish. Hence, the changing economic environment requires changes of m onetary policy.
6. FISCAL POLICY AND BUDGET DEFICIT
K eynes had propagated the progressive taxation of high incomes sim ultaneously with increased social services intended for the poorest. Since the propensity to consume is low at high levels o f incom e, this taxation would only slightly diminish the amount of consum ption, while reducing the am ount o f savings significantly. On the other hand, low incomes augmented by the transfers would increase their consumption expenditures (Keynes 1960, p. 372-373). However, K eynes had pointed out that highly progressive taxes could restrain the am ount of investments undertaken, even if the interest rate is low. To maintain the optimal level of investm ent, taxes should rise m oderately (Hansen 1953, p. 220). Keynes had also proposed managing public investments to offset the lowered level of private investments, though only in a situation of unem ploym ent growing dangerously (Keynes 1960, p. 126-127). Together with increased social services and only moderately progressive taxes, it must have spelt a budget deficit. Although he had w arned against the crowding-out effect connected to the financing of public investm ents (Keynes 1960, p. 119), he had treated the rising budget deficit as a m eans o f necessary stim ulation. In Keynes’ opinion, government could be indebted to commercial banks or directly to society by selling bonds. In the first case, there would be an increased credit money supply. In the second, the governm ent would use a part of society’s deposits. T his way of covering
the augm ented expenditures and budget deficit leads to increased public debt. K eynes had believed that this is one of the form s of redistribution, w hich w ould not diminish the social wealth, since only foreign indebtness is a serious problem (Sołdaczuk 1959, p. 199-202; G órski and Sierpiński 1987, p. 3 4 9 -3 5 1 ).
T he role of active fiscal policy was emphasized by P ost Keynesians, who preferred such actions to the effects of monetary policy. They also did not exaggerate the problem of budget deficit relying on the favorable effect o f m ultiplier. New Keynesians, sim ilar to Post K eynesians, are convinced that a m arket governed by the “invisible hand” cannot automatically attain equilibrium , and that m arkets (above all the labor m arket) respond very sluggishly to the shocks, i.e. prices and wages do not m ove quickly enough to clear the markets. Hence, government intervention is necessary. But a trust in the reliability of governm ent activity is not as unquestionable as before. Just as in the case o f m onetary policy, they po in t out that it is very difficult for government to choose an appropriate m om ent for intervention due to tim e lags in its effects. Hence, most New K eynesians prefer rather
‘coarse tuning' than ‘fine tu n in g ’. The latter could fail because of lack of
adequate information and forecasting potentiality. T he form er concentrates on assuring a sufficient level o f aggregate demand in the medium period by m eans o f balancing taxes and government expenditure on one hand and savings and investments on the other (Arestis and S aw yer 1998, p. 187).
N ew Keynesians underline institutional reform s in the labour market, especially changes in acts o f jo b protection (m inim izing turnover costs) and the actions undertaken in order to restrict the possibility of strikes. Furtherm ore, they propose to create the possibilities o f increased workers’ m obility, training prospects and workers’ share in profits. They also recom m end improvement in unem ploym ent benefits and insurance system which should induce workers to take up a not quite suitable job. Some of them propose income policy reform to modify the unfavorable effect of uncoordinated wage bargaining. New Keynesians also differ from K eynes’ and P ost Keynesians’ opinion concerning high deficit and public debt. They are not treated as economically and socially beneficial anym ore. It is noticed that a high budget deficit leads to decreased savings w hich in turn generates a reduction in the rate of grow th.
CONCLUDING REMARKS
N ew Keynesian theoretical assumptions are very m anifold. Sometimes they are even mutually inconsistent. Distinguishable incoherence of New K eynesians’ conclusions produces certain problems in separating them as an independent school. After all this great number and heterogeneity of New K eynesian views play an im portant and favorable role. Owing to this situation it is possible to highlight very com plicated interdependences existing in every economy. Thereby they also avoid narrow -m inded analysis and opinions.
All the aspects touched above show that a very general view of K eynes’ w ritings still comes into consideration. But at the same time, New K eynesians decidedly reject m any typical old Keynesian opinions, approving several New Classical and M onetarist suggestions. New Keynesians, agreeing with Keynes, underline that the real w orld does not reflect W alrasian principles, hence one should undertake som e actions to support econom ic mechanisms. W hile Keynes had insisted on the lack of sufficient dem and resulting from the working of a m onetary economy, New K eynesians concentrate on various sources of m arket failures, above all, nom inal and real rigidities, relevant to the supply-side o f economy. Clearly, m odern Keynesians admit that the disturbances can arise from both demand
(e.g. the changes in monetary or fiscal policy cause stochastic changes in the
private sector) and supply (e.g. productivity shocks or shifts in supply functions of production factors) side of the economy (F ischer 1988, p. 306). H ow ever, the coordination failures stemming first o f all from rigidities are still the core of the New K eynesian approach. M ost o f their attention is directed towards providing the solid microfoundations o f sticky prices and wages behavior. Such an attitude preserves the im pression that both Keynes’ and N ew Keynesians’ m odels cannot dispense with the assumption of rigidity. It also sheds light on the way of explaining the unemployment phenom ena. Keynes had deduced it explicitly from insufficient effective dem and showing that the issue o f rigid wages or any other market im perfection is irrelevant. N ew Keynesians share K eynes’ opinion that unem ploym ent is usually of an involuntary character and claims for com ing through this socially im portant problem. However, they emphasize the supply-side puzzles, omitting the crux of Keynes’ interest.
The theoretical divergences between Keynes’ and New Keynesians’ approach reflect in policy proposals. Keynes suggested the monetary and fiscal instruments in order to enlarge the insufficient demand and to
overcom e the problem o f persistent involuntary unemployment. His propositions of active m onetary (money supply grow th by lowering the interest rate) and fiscal (progressive taxation of high incomes, increased social services and public investm ent causing a higher budget deficit) policy had been, however, rather cautious. He had stressed many constraints o f governm ent and m onetary authority’s intervention, exhibiting many exam ples of its inefficiency. T he uselessness of such proceedings had been connected to the uncertainty and agents’ unpredictable behaviour. New K eynesians also underline m any problems relevant to the proper policy decisions. It arises, however, rather from the m ultiplicity of proposed market failures. Their different sources claim for equally different cures which appear to be often m utually contradictory. The lack of a unique New K eynesian model causes inconsistency in policy proposals. Furthermore, New Keynesians often share M onetarists’ opinions o f guiding the policy.
T he short sketch of chosen theoretical and practical questions reveals that most certainly the spirit of K eynes is recovered and N ew Keynesians are the inheritors of a considerable part o f his proposals. T h eir way of thinking and perceiving of the real world, however, differs significantly in many aspects from that associated with K eynes. Those discrepancies are critical, hence one could state that most probably Keynes would not be a New Keynesian.
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