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This chapter presents a real RBC-style model in which the interplay of real rigidities in the markets for credit and labor causes fluctuations. It also examines similar ideas in a monetarist-style model — which is un-new Keynesian in that it is not based on maximizing behavior and rational expectations. It investigates the effectiveness of monetary policy under rational expectations and staggered wage setting. Lastly, it evaluates a model with aggregate demand externalities.

The global economic crisis, initiated by the burst of the US subprime bubble, aroused doubts about the efficacy of existing macroeconomic theories. These doubts arose among the economists themselves as well as among the outsiders. One prominent economist even said that most macroeconomics of the past 30 years had turned out to be either useless or harmful. This chapter rebuts these criticisms by defending existing macroeconomics. Macroeconomics has evolved from the heyday of Keynesian economics in the 1960s to that of today through the monetarist counter-revolution, the rational expectation revolution, the spread of real business cycle (RBC) models, and the rise of the new Keynesian model. This chapter shows that these evolutions had their internal reasons that led to better macroeconomics that can provide better reliable policy guidance than the models of previous generations

This chapter examines some of the most important developments in Keynesian economics — the Keynesian income expenditure analysis, the multiplier accelerator model, the Hicks-Fleming-Mundell model, and aggregate supply-aggregate demand (AS-AD) analysis. It explains that the income expenditure analysis demonstrates that if investment is exogenous, the economy may fail to reach full employment equilibrium due to lack of AD. It also discusses that the interaction of the Keynesian multiplier and the principle of acceleration suffices to explain business cycles. This chapter also clarifies that if prices are sticky, lack of AD may prevent the achievement of full employment even though investment is interest elastic. It is also pointed out that with nominal wage stickiness instead of price stickiness, expansionary demand-side policies raise both equilibrium aggregate production and the equilibrium price level. Lastly, this chapter discusses that Keynesian economics gave rise to the so-called neoclassical synthesis.

This chapter begins by discussing that business cycles came to be regarded as such in the nineteenth century. It then enumerates five schools of thought which provide alternative explanations for business cycles: Keynesian economics, monetarism, new classical economics, the RBC theory, and new Keynesian economics. Subsequently, it explains that business cycles can be viewed as disturbed sine wave-like movements in aggregate production. Otherwise, business cycles can be characterized with the statistical properties of observed time series for aggregate output: aggregate production displays variability, persistence, and reversion. Moreover, as suggested by Frisch, business cycles can be modeled by means of stochastic second-order difference equations. The solution to a stochastic second-order difference equation can be viewed as a disturbed sine wave. For appropriate parameter values, it features variability, persistence, and reversion. Lastly, it discusses that the co-movements of many macroeconomic variables show a high degree of conformity with GNP.

This chapter examines indeterminacies in wage and asset price expectations. It first considers what it argues are fatal flaws in Keynesian economics, comparing crude Keynesianism with a crude natural rate of unemployment. It then introduces a structuralist model of employment and economic growth that better illuminates the long slump without inflation in the United States. In a structuralist model, nonmonetary forces operate through structural channels to impact the path of employment and its medium-term level (as well as its long-term level). Asset prices, such as housing prices, are expressed in real terms. The chapter describes how structuralist models approaches issues relating to asset prices and wages and concludes by explaining how to think about expectation formation in modern economies—economies of the sort that became the lifetime subject of Frank H. Knight, John Maynard Keynes, and F. A. Hayek.

This chapter discusses that Monetarism emerged as a separate school of thought in business cycle theory from Friedman's work on monetary economics in the 1950s and 1960s. The major accomplishment of monetarism is to bring the economy's supply side, which had been pushed to the background by Keynesian economics. In addition, monetarism is much more skeptical than Keynesian economics with regard to the need for, and efficacy of, stabilization policies. In order not to distort price signals, the government should make the supply of money stable and predictable. An independent central bank is helpful in achieving this goal. Laidler's model shows that the interplay between a Friedmanian accelerationist Phillips curve and the quantity equation is sufficient to generate business cycles in R. Frisch's sense. The supply side determines average aggregate output (the NAIRO) and the interplay between supply and demand determines the fluctuations around this average level.

The Second World War gave Polanyi time and incentive to write about the foundations of freedom in economics, scientific inquiry, and socio-political organization. He felt that developing a satisfactory philosophy of freedom was the greatest contribution he could make to the war effort; in 1944, he rounded out his work on Keynesian economic theories with the publication of Full Employment and Free Trade. Because of his commitment to science as a model of free but responsible inquiry, he helped John Baker found the Society for Freedom in Science, an organization that opposed socialist philosophies of science as a tool that could and should be subordinated to the interests of the state.

One of the most important and exciting aspects of university life is the lively interchange of ideas. This took place in the Amherst Economics Department of the University of Massachusetts as “cross-paradigmatic” interaction among four competing paradigms: neoclassical economics, Marxism combined with political and social liberalism, Marxism combined with Keynesian economics, and Marxism as the mutual interaction of all analytical elements. One side effect of these interactions involved conflicts that arose in administering the Department as the different constituencies had different visions of how the Department should be run. Another side effect was the prodigious research output that emerged from the Department.

This chapter provides a background to John Maynard Keynes and his influence on the theory and practice of modern macroeconomics. His branch of economics is referred to as Keynesian economics. Keynes was an international figure renowned for his General Theory of Employment, Interest and Money, which appeared in February 1936. In the General Theory, Keynes implies that current economic policies were misguided and some of the most basic understandings of how market economies worked were fatally flawed. The chapter concludes with an analysis of the events that lead to the fall and return of Keynesian economics.

This chapter looks at the achievements of James Tobin who received the Nobel Prize in 1981. Tobin was born in 1918. He earned his under- and post graduate degrees from Harvard, including his doctorate in 1947. He was sterling professor of economics at Yale University from 1957 to 2002. His work after the war involved statistics and econometrics in research which led him to propose a new statistical method known as Tobit analysis. He was interested in Keynesian economics and macroeconomics and sought to improve the theoretical foundations of existing macro models, and to clarify the roles of monetary and fiscal policies. The bulk of his work in the 1950s and 1960s was on the monetary side of macroeconomics. Key publications of his include The American Business Creed and National Economic Policy.