Markets, Productivity, and Happiness in a Historical Perspective

Economic History & Macro Theory: The Rise and Decline of Keynesianism and the Later Domination of New Classical Macroeconomics

Arnon Arie, BGU

Economic reality is closely related to economic theory, as Hicks famously articulated in the case of monetary theory (1967, Ch. 9). The paper focus on the corresponding role of economic reality in macro theories, particularly examining how crises and stability impacted theoretical ideas. The paper will focus on the function played by the Great Depression in the rise of Keynesian thought and consequently in splitting economic theory between macro and micro up to the mid-1970s. The rise of New Classical Macroeconomics (NCM) to hegemony hinged partly on the empirical facts summarized in the Great Moderation. Thus, when the idea of ‘systemic fragility’ in the capitalist system had been discarded, it assisted NCM in its efforts to introduce a ‘scientific’ method for macro. This paradigmatic change contributed to repudiating the existence of two sub-theories in economics - micro and macro – pushing towards a unified theoretical economic perception. [short abstract]

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Keywords: Keynesianism; NCM; Macroeconomics; History and Theory