Macroeconomic Theory, New Keynesian and Post Keynesian economics, Methodology, Critical realism and path-dependency
Abstract
Macroeconomic theory is concerned with the interrelationships between aggregate variables such as growth of GDP, employment, unemployment, inflation, rate of interest, balance of payments and the public sector budget. Until the publication of Keynes's General Theory of Employment, Interest and Money there was - except for the Quantity Theory of Money and Prices - no explicit macroeconomic theory. Employment was analysed by the use a conventional microeconomic 'Labour market diagram' under the condition of ceteris paribus. Keynes imposed into the macroeconomic ontology new aspects like uncertainty, the economy as a whole and (most important) effective demand (for goods and services). Ever since, macroeconomic theory has influenced by the debate on the macroeconomic methodology. Neoclassical economists, although with inspiration from Keynes's ontology, made a persistent attempt to integrate the new aspects into a general equilibrium framework by developing concepts like the real balance effect, vertical Phillips Curve and rational expectations. Within this methodological approach New Keynesian economists explain (temporary) divergences from general equilibrium by rational individual behaviour in an imperfect market structure. Economic policies should concentrate on structural reforms to improve market mechanisms. Demand management is strictly reserved to special occasions, should always be used with great caution and redressed when market imperfections have been overcome. Post Keynesian economists use a very different methodology. Due to the ever-prevailing uncertainty they have to dismiss the epistemology of general equilibrium. The unknowable structures of the macro-economy leave the analytical system open. In addition the future is characterised by irreducible uncertainty - 'we simply don't know'. Macroeconomic behaviour is influenced by rational beliefs, conventions and state of confidence adding up to effective demand which is the main causal mechanism explaining the path-dependent trends of major macroeconomic variables. Hence, policy recommendations are less explicit although related to demand management as well as malfunctioning institutions and market structures.
