Wednesday, July 7, 2010

Neoclassical Synthesis Keynesianism, New Keynesianism and Post Keynesianism: A Review

With the use of fiscal policy in many countries around the world during the great recession of 2008–2009, the macroeconomics of Keynesianism is now a lively topic. My blog advocates a Post Keynesian approach to economics, but Post Keynesianism is not the only Keynesian school.

In fact, there are three types of Keynesianism, and supporters and enemies of Keynesian economics should be clear about what type of Keynesianism they are talking about.

In what follows, I give a brief introduction to the three varieties of Keynesianism.

(1) The post-WWII Neoclassical Synthesis Keynesians (= Neo-Keynesians / hydraulic Keynesians / bastard Keynesians / Hicksian Keynesians).
In the aftermath of the Second World War, American economics was reformed by number of economists who were influenced by Keynes. However, partly in the environment of McCarthyism and partly through their own re-interpretation of Keynes (as well as the role of the Canadian economist Robert Bryce in spreading a flawed understanding of Keynes’ theories in the US), Paul Samuelson and Robert M. Solow diluted Keynes’s work by joining it with neoclassical economics (Davidson 2010: 247). Lorie Tarshis, the Canadian student of Keynes, had written a fairly good textbook summary of Keynes’s General Theory for American universities in the 1940s, but the book was attacked by conservatives who regarded it as inspired by communism, and in particular William F. Buckley denounced the book in his God and Man at Yale (1951). Consequently, a version of Keynesianism that used neoclassical microeconomics to justify general Keynesian macroeconomic policies was adopted as the orthodoxy in America, principally through the work of Paul Samuelson and Robert M. Solow, as well as the IS/LM model of the British neoclassical John Hicks (who worked at Oxford university). Hicks, Solow and Samuelson were influenced by neoclassical Walrasian general equilibrium theory.

Paul Samuelson coined the expression “neoclassical synthesis” to refer to the new theory that blended Keynesianism with neoclassical microeconomics. The “neoclassical synthesis Keynesians” assumed that involuntary unemployment was only due to inflexible wages and prices, and accepted the three neoclassical axioms of (1) neutral money, (2) gross substitution and (3) the ergodicity of the future, contrary to Keynes’s General Theory. Because of its departure from Keynes’s ideas, Joan Robinson labelled the neoclassical synthesis as “bastard Keynesianism” (Lodewijks 2003: 25; for the history of Keynesian policy in the US, see Turgeon 1996). This largely American version of Keynesianism was therefore open to theoretical attacks by monetarists and New Classicals in the 1970s, and today there are not many neoclassical synthesis Keynesians left.

Owing to their flawed neoclassical theory, the neoclassical synthesis Keynesians had difficulties explaining and dealing with stagflation, and were discredited in the 1970s. Many morphed into “New Keynesians,” and those who did not (e.g., James Tobin) came to be called “Old Keynesians.” Some well known neoclassical synthesis Keynesians were John R. Hicks (1904–1989), Frank Hahn, Abba P. Lerner, William J. Baumol, Franco Modigliani, Paul A. Samuelson, Robert Eisner, Walter W. Heller and Robert M. Solow. Notably, John R. Hicks actually renounced the IS-LM model (and the neoclassical synthesis) in the early 1980s and came to associate himself with the Post Keynesian school (Hicks 1980–1981).

(2) New Keynesians.
The New Keynesians emerged in the 1980s and are even further from Keynes’ theory than the neoclassical synthesis Keynesians. New Keynesians are one of the two main schools of mainstream macroeconomics today. The “new macroeconomic consensus” is essentially a mix of New Classical and New Keynesian theory, but the “Keynesianism” of the latter is so watered down that it hardly even deserves that name. In the wake of the monetarist and New Classical assault on neoclassical synthesis Keynesianism, New Keynesianism emerged by providing a more consistent neoclassical microeconomic foundation for Keynesian macroeconomics. New Keynesians are essentially neoclassicals who believe that monetary intervention is the main instrument of economic policy, although there are different strands of opinion within New Keynesian analysis, most notably that of Joseph Stiglitz (King 2002: 239). Some have recognised the usefulness of fiscal policy, but others are actually sceptical about fiscal intervention (Snowdon and Vane 2005: 364). For example, in some modern “New Keynesian” textbooks, one finds a loanable funds theory, Say’s law, opposition to budget deficits (on the grounds that they crowd out private investment and produce higher interest rates), the quantity theory of money, monetarist inflation targeting, and no discussion of aggregate demand – a complete and utter travesty of Keynes’s thinking (Lodewijks 2003: 29).

New Keynesians use rational expectations and assume that the cause of involuntary unemployment is sticky prices and wages, but also assume neutral money in the long run and Say’s law as well (King 2002: 233–239). Prominent New Keynesian include Joseph E. Stiglitz, Olivier Blanchard, John B. Taylor, David H. Romer, Christina D. Romer, Bradford DeLong, and N. Gregory Mankiw. Paul Krugman is a New Keynesian, but the question of how far he has deviated from New Keynesianism is controversial.

(3) Post Keynesians.
Post Keynesians are the true heirs to Keynes and have built upon his work. The forebears of the Post Keynesian school were the Cambridge associates and students of Keynes who rejected the neoclassical synthesis. These were Joan Robinson (1903–1983), Richard F. Kahn (1905–1989), E. Austin G. Robinson (1897-1993), and Nicholas Kaldor (1908–1986). After WWII, Cambridge Keynesianism and Post Keynesianism were influential in the UK, Canada, continental Europe, and Australia (King 2002: 141–159), but went into decline after 1980, as neoclassical economics once again became mainstream economic theory. It should be noted that both the Sraffians (or Neo-Ricardians) and Kaleckians emerged as economic schools strongly associated with Post Keynesianism after 1945. But today Post Keynesianism can be clearly defined in the “narrow tent” sense advocated by Paul Davidson, which excludes the Sraffians and Kaleckians. As Paul Davidson argues,
[sc. it is an error to include] … Sraffians as well as Kaleckians in … [the] Post Keynesian classification. Sraffians reject Keynes’s notion of the importance of uncertainty (i.e., nonergodicity) in determining the effective demand equilibrium solution. Moreover Sraffa and the Sraffians have no room for money in their analytical system. While Keynes argued that interest rates and liquidity preference were at the heart of the involuntary unemployment problem, Kalecki assumed that interest rates had no important effects on the economic system. To grant Sraffians and Kaleckians citizenship in the Post Keynesian school, therefore, assures that some “Post Keynesians” will rely on an analytical model that is logically inconsistent …. [and] Kalecki’s monetary analysis is so different from Keynes’s General Theory that Kalecki cannot be classified as a Post Keynesian (Davidson 2003–2004: 247–248).
Paul Davidson (2003-2004: 251) dates the emergence of Post Keynesianism as a distinct school to the publication of Sidney Weintraub’s book An Approach to the Theory of Income Distribution (1958). Post Keynesians emphasise Keynes’ principle of effective demand and the fundamental role that liquidity preference plays in market economies. Post Keynesians also reject the three axioms of neoclassical economics, which are as follows:

(1) the gross substitution axiom;
(2) the neutrality of money axiom, and
(3) the axiom of an ergodic economic world.

None of these axioms is correct. They are simply not an accurate description of the real world characteristics of modern capitalist economies. In reality, money is never neutral, non-reproducible financial assets are not gross substitutes for commodities, and we face a fundamentally non-ergodic future.

Post Keynesians also emphasise liquidity preference theory and its role in causing involuntary unemployment. The essence of this is that increasing demand for liquid assets (money and financial assets) will not lead to demand for goods and services. Shifts in liquidity preference can cause long-run involuntary unemployment, since, in the face of fundamental uncertainty about the future, investment in commodity production can become unstable (Barkley Rosser 2001: 560).

One of the most interesting, original and exciting developments in Post Keynesianism is neochartalism or modern monetary theory (MMT). This provides a bold and empirically-grounded theory of how our modern fiat monetary systems actually work, and, most notably, destroys the tired old analogy between private debt and government debt that is a favourite of conservatives.

Finally, it should be noted that Post Keynesianism is not mainstream economics and remains a heterodox school. Prominent Post Keynesians (living and dead) include Sidney Weintraub (1914–1983), Paul Davidson, Geoffrey C. Harcourt, Victoria Chick, Jan A. Kregel, Basil J. Moore, Sheila Dow, Thomas I. Palley, Malcolm Sawyer, Philip Arestis, Marc Lavoie, Steve Keen and Mark Hayes. Some well known neochartalists include L. Randall Wray, Bill Mitchell, and Warren Mosler.


Hyman Minsky’s financial instability thesis is clearly an important insight into financial markets, and is certainly directly relevant to the crisis of 2008. Hyman Minsky undoubtedly had an affinity with the Post Keynesian school, and his work is taken very seriously in Post Keynesian economics (most notably by Steve Keen). Nevertheless, Minsky was an idiosyncratic Keynesian and the question whether he should be categorised as a Post Keynesian is debateable. Paul Davidson has argued that
Hyman Minsky is identified [sc. in King 2002: 110] as the second American Post Keynesian … Minsky attended many “Post Keynesian” summer schools in Trieste, Italy as did Kaleckians and many Sraffians who now identify themselves as neo-Ricardians. Accordingly, mere attendance at the Trieste school does not make one a Post Keynesian. Minsky often told me that he never wanted to be identified as a Post Keynesian (hence he fails King’s test of identifying oneself as a Post Keynesian). According to King, Minsky was not an advocate of incomes policies — a hallmark of Post Keynesianism in America. King states that Minsky “had no particular objection to aggregate supply-demand analysis or to a tax based incomes policy — but did not regard them as especially interesting or important” … It is hard to understand why someone who thinks that Keynes’s aggregate supply and demand analysis of the principle of effective demand is neither interesting nor important can be classified as a Post Keynesian … In reality Minsky was, and always wanted to be, a mainstream Keynesian who used the Modigliani variant of the ISLM system and whose major distinction from other mainstream Keynesians was that he possessed knowledge of actual real world financial markets. His “inherently unstable” financial fragility hypothesis … was based on his reading of the activities on financial markets during the period between the onset of the Great Depression and the beginning of the Second World War …. Since Minsky refused to adopt Keynes’s principle of effective demand as the basic analytical system, and instead adopted an analytical structure that relied on some of the restrictive axioms of the special case classical theory, it is difficult for me to understand why King classifies Minsky as a Post Keynesian much less the “second US Post Keynesian” (Davidson 2003–2004: 252–253).
Minsky, then, was closer to the neoclassical synthesis Keynesians than to the Post Keynesians. It can also be said that Abba Lerner was never really a Post Keynesian either (King 2002: 119), although his functional finance theory was very influential in the development of neochartalism (or modern monetary theory).


I quote Davidson (2003–2004: 263–264) on the differences between the Sraffians/Kaleckians and “narrow tent” Post Keynesians:
[n]either Sraffians nor Kaleckians explicitly reject the classical axioms of ergodicity and the neutrality of money …. For example, the Sraffians reject the importance of uncertainty and hence the [non-neutral] role of money as well as Marshallian microfoundations … The Kaleckians emphasized that Keynes’s stress on uncertainty was because Keynes adopted an “atomistically competitive” model while Kalecki’s analysis is essentially oligopolistic. According to Kalecki and the Kaleckians it was the imperfections in capital markets and therefore the need to internally finance investment via retained earnings that was a significant cause of unemployment and not liquidity preference under uncertainty.

Barkley Rosser, J. 2001. “Alternative Keynesian and Post Keynesian Perspectives on Uncertainty and Expectations,” Journal of Post Keynesian Economics 23.4: 545–566.

Davidson, P. 2002, Financial Markets, Money, and the Real World, Edward Elgar, Cheltenham, UK.

Davidson, P. 2003–2004. “Setting the Record Straight on ‘A History of Post Keynesian Economics,’” Journal of Post Keynesian Economics 26.2 245–272.

Davidson, P. 2005. “Responses to Lavoie, King, and Dow on what Post Keynesianism is and who is a Post Keynesian,” Journal of Post Keynesian Economics 27.3: 393–408.

Davidson, P. 2010. “Keynes’s Revolutionary and ‘Serious’ Monetary Theory,” in R. W. Dimand, R. A. Mundell and A. Vercelli (eds), Keynes’s General Theory after Seventy Years, Palgrave Macmillan, Basingstoke, Hampshire, UK.

Hicks, J. R. 1980–1981. “IS-LM: An Explanation”, Journal of Post Keynesian Economics 3.2: 139–154.

King, J. E. 2002. A History of Post-Keynesian Economics since 1936, Edward Elgar, Chelten

Lodewijks, J. 2003. “Bastard Keynesianism,” in J. E. King (ed.), The Elgar Companion to Post Keynesian Economics, Edward Elgar Publishing, Cheltenham, UK. 24–29.

Snowdon, B. and Vane, H. R. 2005. Modern Macroeconomics: Its Origins, Development and Current State, Edward Elgar, Cheltenham.

Turgeon, L. 1996. Bastard Keynesianism: The Evolution of Economic Thinking and Policymaking since World War II, Greenwood Press, Westport, Conn.


  1. Could you point out the differences, if any, between the New Keynesians and the Chicago School?

  2. The Chicago School is in fact a broad tradition. Tt includes:

    First Chicago School of 1920-1945
    Post-War Chicago of the 1945-1960
    Second Chicago School of the 1960s-1970s
    Milton Friedman and Chicago Monetarism
    James M. Buchanan and the Public Choice Economics
    Robert E. Lucas and New Classical Macroconomics
    Ronald H. Coase and New Institutionalist Economic


    Perhaps you mean what are the differences between the New Classicals and New Keynesians?

    The New Classicals are essentially modern neo-Walrasians, who support rational expectations and the efficient markets hypothesis. They also try and explain the business cycle through Real business cycle theory (RBC theory).

    The New Keynesians are weak Keynesians whose macrotheory in fact has many elements of neoclassical economics.

  3. In fact, I was asking about the difference between the New Keynesians and the Chicago Monetarist School. As I see, monetary intervention is the main instrument of economic policy for both economic schools.

  4. "As I see, monetary intervention is the main instrument of economic policy for both economic schools."

    Some of the New Keynesians stress the need for fiscal policy at times, when monetary policy is impotent.

    The New Keynesians are not monolithic, however: some are skeptical of fiscal policy (because of the neoclassical ideas), while others strongly support it.

    There are also political differences, from conservative New Keynesians (e.g., Mankiw) to liberal/progressive ones (Stiglitz or Krugman).

  5. On the issue of New Keynesians being real Keynesians or not, you can check this link from Mankiw's blog:

  6. "In fact, I was asking about the difference between the New Keynesians and the Chicago Monetarist School. As I see, monetary intervention is the main instrument of economic policy for both economic schools."

    The New Keynesians emphasise monetary policy since fiscal policy is relatively ineffective when exchange rates are floating.

    The Monetarist School do believe that 'monetary intervention' {if required}, is more effective than fiscal intervention. However, they believe that the economy will fairly quickly return to a full employment position and that, in general, no intervention is required.

    The New Keynesians see that monetary intervention is required in the face of persistent involuntary unemployment.

    Since, the Monetarists believe the economy is virtually 'self stabilising' they propose, to keep the economy on an even keel, to allow the money supply to only grow by a small percentage per annum.

    This was the basis of the UK's, 1980, MTFS - medium term financial strategy.

    Followers of Friedman are still proposing the same policies.

    "The MTFS, dropped by Gordon Brown when he became Chancellor in 1997, needs to be reintroduced."

  7. do you know or have information about the keynesians in latinamerica?

  8. This was a great read and helped me understand the differences between the different schools and how they came about.

    This helped me understand why there is so much strife between "New Keynesians" and "Post Keynesians". For a while I was wondering if the fight was the equivalent of the fight between the "Judean People's Front" and the "People's Front of Judea". Now I see that the differences are massive. New Keynesian seems much closer to mainstream neoclassicals than it is to "Post Keynesian".

  9. Excellent post, and thank you for the bibliography. the only thing i could ask, is that there be an actual keynes position to start with, so that one could compare the post neo classical and those that follow...

  10. Should Edward J. Nell be included in the post-Keynesians?