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'Right Back Where We Started From': From 'The Classics' To Keynes, And Back Again

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  • Grieve, Roy H
Abstract
The purpose of this paper is to highlight the curiously circular course followed by mainstream macroeconomic thinking in recent times. Having broken from classical orthodoxy in the late 1930s via Keynes’s General Theory, over the last three or four decades the mainstream conventional wisdom, regressing rather than progressing, has now come to embrace a conception of the working of the macroeconomy which is again of a classical, essentially pre-Keynesian, character. At the core of the analysis presented in the typical contemporary macro textbook is the (neo)classical model of the labour market, which represents employment as determined (given conditions of productivity) by the terms of labour supply. While it is allowed that changes in aggregate demand may temporarily affect output and employment, the contention is that in due course employment will automatically return to its ‘natural’ (full employment) level. Unemployment is therefore identified as a merely frictional or voluntary phenomenon: involuntary unemployment - in other words persisting demand-deficient unemployment - is entirely absent from the picture. Variations in aggregate demand are understood to have a lasting impact only on the price level, not on output and employment. This in effect amounts to a return to a Pigouvian conception such as targeted by Keynes in the General Theory. We take the view that this reversion to ideas which should by now be obsolete reflects not the discovery of logical or empirical deficiencies in the Keynes analysis, but results rather from doctrinaire blindness and failure of scholarship on account of which essential features of the Keynes theory have been overlooked or misrepresented. There is an urgent need for a critical appraisal of the current conventional macroeconomic wisdom.

Suggested Citation

  • Grieve, Roy H, 2014. "'Right Back Where We Started From': From 'The Classics' To Keynes, And Back Again," SIRE Discussion Papers 2014-001, Scottish Institute for Research in Economics (SIRE).
    • Handle: RePEc:edn:sirdps:546
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    File URL: http://hdl.handle.net/10943/546
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    References listed on IDEAS

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    1. Nevile, J W & Rao, B Bhaskara, 1996. "The Use and Abuse of Aggregate Demand and Supply Functions," The Manchester School of Economic & Social Studies, University of Manchester, vol. 64(2), pages 189-207, June.
    2. William Scarth, 2010. "Aggregate Demand-Supply Analysis and Its Critics: An Evaluation of the Controversy," Review of Radical Political Economics, Union for Radical Political Economics, vol. 42(3), pages 321-326, September.
    3. Fred Moseley & Roy Grieve, 2010. "Reply to Scarth," Review of Radical Political Economics, Union for Radical Political Economics, vol. 42(3), pages 327-329, September.
    4. Roy H. Grieve, 2010. "Time to Ditch AD-AS?," Review of Radical Political Economics, Union for Radical Political Economics, vol. 42(3), pages 315-320, September.
    5. Rao, B Bhaskara, 1991. "What Is the Matter with Aggregate Demand and Aggregate Supply?," Australian Economic Papers, Wiley Blackwell, vol. 30(57), pages 264-277, December.
    6. David Colander, 1995. "The Stories We Tell: A Reconsideration of AS/AD Analysis," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 169-188, Summer.
    7. Fred Moseley, 2010. "Criticisms of Aggregate Demand and Aggregate Supply and Mankiw’s Presentation," Review of Radical Political Economics, Union for Radical Political Economics, vol. 42(3), pages 308-314, September.
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    Cited by:

    1. Lima, Gerson P., 2015. "Supply and Demand Is Not a Neoclassical Concern," MPRA Paper 63135, University Library of Munich, Germany.

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    Keywords

    Keynes’s General Theory; ‘classical’ macroeconomics; involuntary unemployment; the AD/AS model;
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