Neoclassical synthesis

The Neoclassical Synthesis (also Neo - Keynesian synthesis) is today still the main direction of theoretical economics that is taught in most universities and is represented in the standard textbooks. It combines a number of critical approaches by John Maynard Keynes with the old dogmas of the neoclassical theory and was also a bastard - Keynesianism ( Joan Robinson ) refers.

History

Paul Samuelson understood by the neoclassical synthesis that with appropriate use of monetary and fiscal policy, mass unemployment and inflation could be overcome, so that now the old classic truths would fully apply again at full employment and price stability.

Usually the connection of the IS-LM model of John Richard Hicks is meant by a neoclassical labor market with the neoclassical synthesis. In this unemployment is the result of sticky wages due to the resistance of the workers against wage cuts, while Keynes had argued that reductions in money wages and falling prices in general would lead to rising real wages, a cut in real wages by reducing nominal wages in a deflationary environment so was not possible. Falling prices would result in a higher burden of debt and falling nominal wages increase a postponement of investment and so with a double obstacle to the marginal efficiency of capital unemployment.

Theory

The neoclassical synthesis has taken three points of Keynes:

First, the dependence of savings on income. Because of falling with increasing income marginal propensity to consumption, the savings function increases with the income of the economy. Because the saving is always identical to the dependent interest investment, a slight variation of the investment to wide fluctuations in employment and hence income must result in economics after Keynes. The total saving is dominated by the investment and a rise in the rate of interest must therefore depress incomes to a level at which the savings is reduced to the same extent as the dependent interest investment.

Second, the non- neutrality of money, so that the amount of interest influenced the identical with the savings and investment over the changed investment, amplified by the multiplier, the total income of the economy. However, in Keynes and in reality is the central bank set the interest rate for central bank money, while the IS- LM model easily gives the impression that would settle on the money market, the equilibrium interest rate. John Richard Hicks but has already stated on the first presentation of his model that the central bank determined in his model as only the money supply and thus practically fixes the interest rate. The interpretation, as if a particular money supply fixed and would determine the LM curve was unrealistic because the authorities of monetary policy would adjust the money supply and thus the elasticity of the LM curve depends on the elasticity of monetary policy.

Third, the so-called liquidity trap was taken over by Keynes. Mainly because of the price risk of long-term bonds will not fall nearly as far as it would be necessary for the revival of the economy whose interest. Therefore you see the LM curve in the IS- LM model of the neoclassical synthesis run as a representation of the bond interest rate at the bottom horizontal above the zero point, even though the interest rate for central bank money quite to zero and can even be set lower, but the curve is well once the bond market interest rates and then represent the money market rate.

The IS- LM model are added to the neoclassical synthesis, a neoclassical labor market ( supply and demand in the labor market depends on the real wage ) and a neoclassical production function. Basically, the model also shows states of underemployment, which by assumption can not occur in the neoclassical theory. As far as a Keynesian variant of the labor market is treated, which assumes a fixed downward wage rate, so that no complete flexibility prevails in the labor market, is not borne the explanation of Keynes that strengthen especially in a deflation falling wages and prices, unemployment and the real wage of macroeconomic reasons can not or insufficiently covered, but called a resistance of the workers against wage reduction as a justification of the rigidity of wages.

Another feature of this theory is the assumption that prices are fixed in the short term ( slow to change ). The IS-LM models construct a balance between the goods market equilibrium condition, the IS curve ( investment = saving) and the money market equilibrium, the LM curve ( money supply = money demand ) curve. Depending on the intersection of these two curves in a national income / (bond ) interest rate chart, it may be a change in investing activities for example. The model is thus able to render the liquidity trap and the investment case and should therefore be applicable to an analysis of fiscal and monetary policy measures in that framework.

Criticism

A fundamental criticism practiced the neo-classicists. By the assumption that all economic agents have the same model of the economy and behave rationally, this derives the strict neutrality of money. In the neoclassical models, there is therefore no possibility of long term influence through political control of the economy. As a result of the oil crisis in 1973, both inflation and unemployment rose ( stagflation ), this was considered by the Neoklassikern as confirmation of its criticism and the theory of the neoclassical synthesis lost its influence in policy and doctrine.

On the part of the Neo-Keynesians criticized the spillover effects between product and labor market were not considered. In addition, the theory of a micro-foundation household behavior is absent; so the consumption of the transaction size of the national income is derived, and not by a neoclassical decision calculus, which arises from the mathematical optimization. It also criticizes the fact that economic agents save though, but that occurring wealth effects are neglected.

Furthermore portfolio theoretical considerations play no role. Any property which is not used for transaction purposes is microeconomic either fully invested in bonds or stored without interest. A diversification due to the risk minimization does not take place.

Recent Developments

Recent Macroeconomic theories are: Real Business Cycle, New Neoclassical Synthesis, Keynesianism, and Post- Keynesianism.