UNDERSTANDING MODERN MACROECONOMIC SCHOOLS: A Comparative Analysis


Creative Commons License

Hiç F. Ö.

Kriter Yayınevi, İstanbul, 2020

  • Publication Type: Book / Research Book
  • Publication Date: 2020
  • Publisher: Kriter Yayınevi
  • City: İstanbul

Abstract

In this book an attempt will be made to compare and evaluate the modern macroeconomic schools with respect to their methodology, major assumptions, the conclusions they reach concerning automatic full employment versus unemploy-ment equilibrium, their consequent policy recom-mendations and, finally, with respect to their va-lidity and relevance.

The comparative analysis of modern macroeconomic schools will cover Monetarism, New Classical School, New Keynesian and Post-Keynesian Economics, the former two as having stemmed from the Classical System and the latter two having stemmed from the Keynesian System. This acknowledges Blinder’s view (1988) that the dividing line between macroeconomic schools is whether they lead to automatic full-employment equilibrium (AFNE) following the Classical System, or to less-than-full employment or simply unemployment equilibrium (UNE) due to lack of aggregate demand following the Keynesian System. Since modern schools work with “natural rate of unemployment” (NRU) first introduced by M. Friedman (1977), we have replaced full-employment point with “NRU” and therefore talk about “automatic natural rate of unemployment equilibrium” (ANRUE) for Monetarism and New Classical School and, for the sake of convenience, non-automatic NRU equilibrium (NANRUE) for New Keynesian and Post-Keynesian Economics.

Evaluation of the above macroeconomic schools will be made on three planes:

- The first is “consistency” and “comprehen-siveness”. This criterion is methodological and draws on criticisms advanced by New Classicals to the Keynesian System that it lacks microeco-nomic foundations and that its macroeconomic result, less-than-full employment (unemployment) equilibrium is inconsistent with automatic full-employment equilibrium of the traditional microe-conomic theory. Traditional microeconomic theory works under the assumptions of perfectly competi-tive markets and full coordination between mar-kets (Walrasian Auctioneer) and reaches AFNE. This criticism led the New Keynesian economists as well as Post-Keynesian economists to lay prop-er microeconomic foundations for the Keynesian analysis. They worked, however, with imperfect markets leading to price and wage rigidities, thereby, still end up with Keynesian insufficient aggregate demand. They also showed that under the absence of the Walrasian Auctioneer similar Keynesian results would be obtained.

- The second is “realism and validity” of the major assumptions and relationships accepted in the respective macroeconomic schools. For instance, whether statistical investigations confirm the New Classical “Rational Expectations Hypothesis” (REH) or the Monetarist “Adjusted Expectations Hypothesis” (AEH) or else the Keynesian and Post-Keynesian “Heterogeneous Expectations Hypothesis” (HEH) is valid; whether, in actual practice, perfect competition (PC) or imperfect competition (IC) conditions prevail in markets, and whether there is coordination or lack of coordination between markets (presence or absence of the Walrasian Auctioneer).

- This would clear the way for the third and most important plane the evaluations and investi-gations, namely the “validity and relevance” of macroeconomic schools depending on their con-clusions and policy recommendations. This means, does the economy reach full employment (FN) or NRU automatically or else does it stop short due to Keynesian lack of demand. Since dif-ferent schools reach different conclusions, ANRUE or NANRUE, they recommend different economic policies. These policies, in turn, are implemented. Hence the results of these different policy imple-mentations also give us clues as to the validity and relevance of the different macroeconomic schools.

Again following Blinder (1988), we accept here that “the major test is whether a macroeconomic system or school analyses the working of the actual economy correctly, defines the reasons why, if any, an economic problem exists, and whether policies it prescribes to eradicate or alleviate the problem do bear positive results”. Thus, for instance, if according to the Keynesian System and hence to the New Keynesian and Post-Keynesian Economics, a less-than-full employment equilibrium (UNE) is explained by the lack of aggregate demand, whether we meet with UNE in case of non-intervention of the government, and whether Keynesian monetary and/or fiscal policies, if actually implemented had alleviated the unemployment problem encountered. Or else, if according to Monetarism and New Classical School, the economy reaches full employment equilibrium or NRU automatically and we must gauge our monetary and fiscal policies only to prevent inflation, then whether an existing unemployment situation disappears of its own accord within a reasonably short period of time.

It must be stressed at this point that the “va-lidity and relevance” of macroeconomic systems and schools is evaluated here exclusively for the developed countries (DCs). No attempt will be made with respect to their validity and relevance for the less developed countries (LDCs) and newly industrializing countries (NICs). Such an investi-gation could lead to another and different survey on its own.

First follows, however, some comments on why we have different macroeconomic schools with widely different conclusions and policy recommendations, taken up in the section below.