Leijonhufvud on New Keynesian Economics and the Economics of Keynes
In a famously unpublished paper on 'The Uses of the Past', presented at ESHET 2006 in Porto, Axel Leijonhufvud (AL) compared the evolution of economic thinking to the growth of a decision tree. Currently predominant theories have emerged from earlier decisions about modelling standards that once appeared feasible for reducing complexity, but may now critically limit their scope and create blind spots. In his classic 'On Keynesian Economics and the Economics of Keynes' (1968) and later writings, AL has amply demonstrated how blind spots can be detected by looking at research questions in theories that branched off at lower forks of the Econ tree. In this spirit, AL has looked for strategies to revive insights about macroeconomic coordination and instability that can be found in the works of Keynes and other writers in the inter-war years of high theory. The theme that he extracted from the Economics of Keynes is the incompleteness of information and resulting failures in the intertemporal coordination of activities in large, complex economic systems. 50 years ago, AL attacked standard Keynesian Economics for its view of macroeconomic pathologies as frictional deviations from optimal general equilibrium. With the rise of DSGE-based New Keynesian Economics, AL has pointed out time and again, that 'standard macroeconomics' may have made much technical progress since the 1960s, but is still stuck in the frictions view. Referring to the recent global financial crisis, he considers DSGE modelling conventions to be fundamentally obstructive to analysing core problems of macroeconomic coordination and instability. Yet, many New Keynesians now claim claim that they have found ways to deal with the critical coordination failures within their DSGE frameworks. The aim of the proposed paper is to describe continuity and change in AL's critique of Old and New Keynesians, and to assess the contrary claims of progress made in the DSGE world.
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Keywords: Leijonhufvud, coordination failures, New Keynesian Economics, DSGE
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