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UM SCULO DE INFLAO: A EVIDNCIA EMPRICA Fbio S Eatp REGIES-CHAVE NA INTEGRAO ECONMICA REGIONAL NaIJ d e J e s u s d e S o u z a T H E SRAFFIAN INTERPRETATION O F RICARDO: A CRITIQUE Jos Ricardo Bezerra Nogueira QUALIDADE DO MEIO AMBIENTE E FALHAS DE M E R C A D O Francisco de Sousa R a m o s EFEITOS ECONMICOS DE ESTRATGIAS DE P R O M O O DE E X P O R T A E S Wilson da Cruz Vieira "KEYNESIANS",MONETARISTS,NEW CLASSICALS AND N E W KEYNESIANS F e r n a n d o Ferrari F i l h o
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CURSO DE EXTENSO EM ECONOMIA PREPARATRIO PARA A A N P E C

ano 14

maro e setembro, 1996

25 e 26

U N I V E R S I D A D E F E D E R A L D O RIO G R A N D E D O S U L Reitor Prof, H l g i o H e n r i q u e C a s s e s T r i n d a d e FACULDADE DE CINCIAS ECONMICAS Diretor. Prof, P e d r o C z a r D u t r a F o n s e c a CENTRO DE ESTUDOS E PEQUISAS ECONMICAS Diretor Prof. P a u l o A l e x a n d r e S o h r D E P A R T A M E N T O DE CINCIAS ECONMICAS Chefe: P r o f G e n t i l C o r a z z a CURSO DE PS-GRADUAO EM ECONOMIA Coordenador Prof Roberto C a m p s Moraes CURSO DE PS-GRADUAO EM ECONOMIA RURAL Coordenador P r o l Aray Miguel Feldens

C O N S E L H O EDITORIAL: Achyles Barcelos da Costa, Aray Miguel Feldens, Atos Freitas Grawunder, Carlos A u g u s t o Crusius, Eugenio L a g e m a n n , F e r n a n d o Ferrari F i l h o , G e n t i l C o r a z z a , M a r c e l o S a v i n o P o r t u g a l , M a r i a I m i l d a d a C o s t a e S i l v a , NaIi d e J e s u s d e Souza, N u n o R L de Figueiredo Pinto, Otilia Beatriz K Carrion, Paulo Alexandre Spohr, Paulo D a b d a b W a q u i l , Pedro Cezar Dutra Fonseca, Roberto C a m p s M o r a e s , Valter J o s Stlp, David Garlow ( W h a r t o n Econometrics Forecasts A s s o c i a t i o n , E U A ) , E d g a r A u g u s t o L a n z o r ( U F S C ) , E l e u t r i o F. S. P r a d o ( U S P ) , Fernando de Holanda Barbosa (FGV/RJ), Gustavo Franco (PUC/RJ), J o o Rogrio S a n s n ( U F S C ) , J o a q u i m P i n t o d e A n d r a d e ( U n B ) , J u a n H, M o l d a u ( U S P ) , W e r n e r B a e r ( U n i v d e Illinois, E U A ) , C O M I S S O E D I T O R I A L : F e r n a n d o Ferrari Filho, Gentil Corazza, P a u l o D a b d a b Waquil, Marcelo Savino Portugal, Roberto Camps Moraes E D I T O R : NaIi d e J e s u s d e S o u z a SECRETARIA: Cludia Porto Silveira, Jeferson Luis Bittencourt e Vanete

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"KEYNESIANS", MONETARISTS, NEW CLASSICALS AND NEW KEYNESIANS: A POST KEYNESIAN CRITIQUE F e r n a n d o Ferrari Filho*
ABSTRACT This article aims at presenting briefly a survey of main orthodox theoretical interpretations a n d criticisms of Keynes ideas that have become e m b e d d e d in theoretical discussions on macroeconomic theory Secondly, this article explains why, according to the post Keynesian view, most accepted theoretical interpretations and criticisms of Keynesian Theory (a) involve logical Inconsistencies w h e n c o m p a r e d with Keynes's theoretical analytical structure and (b) misrepresent the dynamic characteristics of m o d e r n entrepreneurial economies

1. I N T R O D U C T I O N S i x t y y e a r s after t h e p u b l i c a t i o n of The General Theory of Employment, Interest, and Money ( h e r e a f t e r r e f e r r e d t o a s GT), i n t e r p r e t a t i o n s a n d c r i t i c a l r e a c t i o n s o f K e y n e s ' s t h e o r y a r e still b e i n g d i s c u s s e d in E c o n o m i c s T h i s b o o k w a s w r i t t e n d u r i n g a t i m e w h e n S a y ' s L a w - t h a t is t o s a y , s u p p l y c r e a t e s its o w n d e m a n d - w a s t h e f o u n d a t i o n of o r t h o d o x e c o n o m i c t h o u g h t / " K e y n e s ' s e x p l a n a t i o n f o r t h e c h r o n i c u n e m p l o y m e n t of t h e G r e a t D e p r e s s i o n r e v o l u t i o n i z e d e c o n o m i c t h e o r y b y a r g u i n g t h a t in a m o n e t a r y c a p i t a l i s t e c o n o m y , e v e n w i t h f l e x i b l e p r i c e s a n d w a g e s , a l a c k o f a g g r e g a t e d e m a n d is a n o r m a l r e s u l t of t h e e c o n o m i c p r o c e s s T h e p r i m a r y , p u r p o s e of t h i s a r t i c l e is to p r e s e n t briefly a s u r v e y of m a i n o r t h o d o x t h e o r e t i c a l i n t e r p r e t a t i o n s a n d c r i t i c i s m s of K e y n e s ' s i d e a s t h a t h a v e b e c o m e e m b e d d e d in t h e o r e t i c a l d i s c u s s i o n s o n m a c r o e c o n o m i c t h e o r y . S e c o n d l y , t h i s p a p e r e x p l a i n s w h y , a c c o r d i n g to t h e P o s t K e y n e s i a n v i e w , m o s t a c c e p t e d t h e o r e t i c a l i n t e r p r e t a t i o n s a n d c r i t i c i s m s of K e y n e s i a n t h e o r y (a) i r i v o l v e l o g i c a l i n c o n s i s t e n c i e s w h e n c o m p a r e d w i t h K e y n e s ' s t h e o r e t i c a l a n a l y t i c a l s t r u c t u r e a n d (b) m i s r e p r e s e n t the d y n a m i c characteristics of m o d e r n entrepreneurial economies. T h e article proceeds as follows S e c t i o n 1 s u m m a r i z e s (i) n e o c l a s s i c a l K e y n e s i a n , (ii) m o n e t a r i s m a n d n e w c l a s s i c a l , a n d (iii) n e w K e y n e s i a n t h e o r i e s . S e c t i o n 2 i n d i c a t e s h o w t h e s e t h e o r i e s differ f r o m K e y n e s ' s a n a l y t i c a l s t r u c t u r e , m i n i m i z i n g t h e r e v o l u t i o n a r y c h a r a c t e r of K e y n e s i a n t h e o r y , a n d w h y s o m e h y p o t h e s e s of t h e s e t h e o r i e s d o not r e p r e s e n t r e a l w o r i d e c o n o m i c a c t i v i t i e s F i n a l l y , some conclusive comments are presented

' Professor of Economics at The Federal University of Rio Grande do Sul, Brazil I would like to t h a n k Professors Peter Bearse, Paul Davidson, Charles Garrison, and Hans Jensen for c o m m e n t i n g The remaining errors, however, are the author's responsibility The author is grateful to the National Research Council of Brazil (CNPq) for financial support of his post-doctoral program a t The University of Tennessee ' To emphasize the importance of Say's L a w in the classical theory, Keynes wrote that " Ricardo's doctrine conquered England as the Holy Inquisition conquered Spain" (1964, p 32)

AEA Code
330

K e y words: Keynesian theory, monetarism and nevi/classical theories, and Post Keynesian theory. A N O 14 Maro/Setembro 96 p. 63-75

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1. T H E E V O L U T I O N O F O R T H O D O X M A C R O E C O N O M I C T H E O R Y 1.1 T h e IS-LM a n d d i s e q u i l i b r i u m m o d e l s : t h e neoclassical K e y n e s i a n a p p r o a c h T h e n e o c l a s s i c a l K e y n e s i a n a p p r o a c h a r g u e s t h a t S a y ' s L a w d o e s not h o l d b e c a u s e K e y n e s ' s t h e o r y , a s p r e s e n t e d in t h e GT, a s s u m e s s o m e r i g i d i t i e s a n d i m p e r f e c t i o n s in t h e m a r k e t s - T h e r e a r e t w o t h e o r e t i c a l s t r u c t u r e s r e p r e s e n t i n g t h e n e o c l a s s i c a l K e y n e s i a n a p p r o a c h t o K e y n e s ' s a n a l y t i c a l f r a m e w o r k . T h e first a p p r o a c h is H i c k s ' s I S - L M a n a l y s i s , w h i c h a r g u e s t h a t K e y n e s i a n i n v o l u n t a r y u n e m p l o y m e n t is d u e to t h e e x i s t e n c e of t h e l i q u i d i t y t r a p ^ A d i f f e r e n t a p p r o a c h , c a l l e d d i s e q u i l i b r i u m t h e o r y , i n t e r p r e t s K e y n e s ' s p r i n c i p l e of e f f e c t i v e d e m a n d in a c o n t e x t in w h i c h t h e e c o n o m y m o v e s itself f r o m o n e s i t u a t i o n of p a r t i a l e q u i l i b r i u m to a n o t h e r of g e n e r a l e q u i l i b r i u m . 1.1.1 H i c k s a n a l y t i c a l f r a m e w o r k H i c k s ' s 1 9 3 7 a r t i c l e , Mr Keynes and the "Classics" a suggested interpretation,

a i m s at c o n f r o n t i n g K e y n e s ' s a n a l y s i s w i t h t h e c l a s s i c a l t h e o r y . A s s u m i n g t h a t t h e K e y n e s i a n a n d classical theories have the same basic structure, Hicks formalizes three models as follows:
"Classicar' model ( 1 ) M = kl; (2) IX = 0(1), (3) IX = 8(1,1). "Keynes's special" model ( 1 ) M = L(i); ( 2 ) l x = C(i), (3) lx = S(l). "Keynesian" model ( 1 ) M = L(i,l); (2) lx = C(i), (3) Ix = 8(1).

w h e r e M is t h e t o t a l q u a n t i t y of m o n e y , k is t h e M a r s h a l l i a n c o n s t a n t in t h e C a m b r i d g e q u a n t i t y e q u a t i o n , I is t h e i n c o m e l e v e l , Ix is t h e t o t a l i n v e s t m e n t , i is t h e i n t e r e s t r a t e , a n d S is s a v i n g T h e first e q u a t i o n of e a c h m o d e l d e f i n e s t h e L M c u r v e w h i l e t h e t w o o t h e r e q u a t i o n s d e f i n e t h e IS c u r v e / ' T h e next step is the presentation afvM Hicks considers to b e the differences fi-om ttie "Classicaf, "Keynes's special" and "Keynesian" n n d e l s "Keynes's special" n n d e l differs from the "Classical" model in two points' tfie savings Hinction and the demand for money function Hicks argues that ttie essential difference tjetween the referred models is associated with the demand f a money in "Keynes's special" model tfie demand f a money is explained by the liquidity prefaence function, while in the "Classical" model it is explained by ttie Cambridge quantity equation. Hcwever, Hicks claims that this difference is irrelevant t)ecause, when comparing Ifie "Keynes's special" model with the "Keynesian" model, the introduction of ttie rate of interest in ftie Keynes's demand f a money is not contradictory to the Cambridge quantity equation A s a r e s u l t , a c c o r d i n g t o H i c k s , t h e d e m a n d f o r m o n e y , a s p r e s e n t e d in t h e GT, " . is s o m e t h i n g a p p r e c i a b l y m o r e o r t h o d o x " ( 1 9 3 7 , p 152) T h i s is a s s o c i a t e d w i t h w h a t H i c k s u n d e r s t a n d s t o b e K e y n e s ' s r e t u r n to t h e o r t h o d o x m o n e t a r y t h e o r y In H i c k s ' s o w n w o r d s , "[w]ith t h i s r e v i s i o n , Mr. K e y n e s t a k e s a b i g s t e p b a c k t o M a r s h a l l i a n orthodoxy, a n d his theory b e c o m e s hard to distinguish from the revised a n d qualified M a r s h a l l i a n t h e o r i e s , w h i c h , a s w e h a v e s e e n , a r e not n e w " ( i b i d , p , 1 5 3 )

^ The situation in w h i c h the d e m a n d for money is perfectly elastic with respect to a low positive rate of Interest ' The IS curve traces out a locus of combinations of interest rates and income levels associated with equilibrium in the goods market, while the LM curve presents combinations of interest rates and income levels along w h i c h the money market is in equilibrium

F o l l o w i n g H i c k s ' s a r g u m e n t a t i o n , w h e n t h e d e m a n d f o r s p e c u l a t i v e m o n e y is i n f i n i t e l y e l a s t i c w i t h r e s p e c t t o t h e r a t e of i n t e r e s t , t h e K e y n e s i a n a n d c l a s s i c a l d e m a n d s f o r m o n e y h a v e a s i m i l a r r e l a t i o n in b o t h m o d e l s t h e d e m a n d f o r m o n e y d e p e n d s only o n the income level C o n s e q u e n t l y , Hicks a r g u e s that K e y n e s i a n involuntary unemployment persists solely because monetary policy cannot lower the i n t e r e s t r a t e s u f f i c i e n t l y to r e s t o r e t h e e c o n o m y to its full e m p l o y m e n t i n c o m e l e v e l T h e r e f o r e , Hicks concludes that " t h e G e n e r a l T h e o r y of e m p l o y m e n t is t h e E c o n o m i c s of D e p r e s s i o n " ( i b i d , p 1 5 5 ) A s a r e s u l t of t h i s H i c k s i a n c o n c l u s i o n , t h e K e y n e s ' s t h e o r y w a s i n t e r p r e t e d a s t h e s i t u a t i o n in w h i c h u n e m p l o y m e n t is o n l y a t e m p o r a r y p h e n o m e n o n d u e t o t h e e x i s t e n c e o f t h e l i q u i d i t y t r a p i n t h e d e m a n d f o r m o n e y In t h i s c i r c u m s t a n c e , t h e H i c k s i a n a n a l y s i s a r g u e d t h a t K e y n e s ' s s o l u t i o n f o r u n e m p l o y m e n t is f o c u s e d o n f i s c a l p o l i c y a s i n s t r u m e n t of r e g u l a t i n g t h e l e v e l s of o u t p u t a n d e m p l o y m e n t . T h e i d e n t i f i c a t i o n of K e y n e s ' s t h e o r y w i t h t h e l i q u i d i t y t r a p a n d w i t h a c t i v i s t g o v e r n m e n t programs, i e fiscalism, dominated mainstream economics and b e c a m e the standard a p p r o a c h to m a c r o e c o n o m i c a n a l y s i s , 1.1.2 T h e d i s e q u i l i b r i u m interpretation of K e y n e s ' s theory P a t i n k i n ( 1 9 5 6 ) w a s t h e first e c o n o m i s t to f o r m a l i z e a " K e y n e s i a n " m o d e l t h a t t r e a t s u n e m p l o y m e n t a s a d i s e q u i l i b r i u m s i t u a t i o n . In c h a p t e r 13 of his Money, Interest, and Prices, P a t i n k i n d e v e l o p s a t h e o r e t i c a l s t r u c t u r e in w h i c h i n v o l u n t a r y u n e m p l o y m e n t is e x p l a i n e d s o l e l y a s a r e s u l t o f s h o r t - r u n w a g e rigidity. A s s u m i n g that, in t h e l o n g r u n , t h e m a r k e t s b e h a v e a c c o r d i n g to t h e W a l r a s i a n tatonnemenl^s logic, Patinkin r e m a r k s that " t h e s e forces [flexible prices a n d w a g e s ] w i l l r e s t o r e t h e e c o n o m y to a s t a t e of full e m p l o y m e n t , " ( 1 9 6 5 , p 3 2 8 ) , B e s i d e s , P a t i n k i n e m p h a s i z e s t h a t , at least in t h e l o n g r u n , " ., a n e q u i l i b r i u m p o s i t i o n always exists a n d ... t h e e c o n o m y will always converge to it ( i b i d , p 3 2 8 , i t a l i c s a d d e d ) . In t h i s c o n t e x t , P a t i n k i n e x p r e s s e s t h e v i e w t h a t t h e K e y n e s i a n t h e o r y c a n b e i n t e r p r e t e d a s a d y n a m i c d i s e q u i l i b r i u m a n a l y s i s of a W a l r a s i a n g e n e r a l equilibrium system T h e " K e y n e s i a n " d i s e q u i l i b r i u m m o d e l s w e r e a l s o e x p l o r e d in t h e w r i t i n g s Barro a n d Grossman (1971), Benassy (1975), and Malinvaud (1977) of

Unlike Patinkin, w h o a n a l y z e s t h e K e y n e s i a n disequilibrium as a result of failure t o o b t a i n s h o r t - r u n f l e x i b l e w a g e s in t h e l a b o r m a r k e t , B a r r o a n d G r o s s m a n d e v e l o p a g e n e r a l disequilibrium model, both for b o o m s a n d depressions, to specify rationing r u l e s in t h e g o o d s a n d l a b o r m a r k e t s w h e n t h e v e c t o r of p r i c e s a n d w a g e s is e x o g e n o u s T h e m a i n i n s i g h t of t h i s m o d e l , a c c o r d i n g t o B a r r o a n d G r o s s m a n , i s t h a t t h e e c o n o m i c s y s t e m will a l w a y s r e s p o n d d i f f e r e n t l y t o a s p e c i f i c s h o c k , d e p e n d i n g o n h o w p r i c e s a n d w a g e s d i f f e r f r o m t h e v e c t o r of p r i c e s a n d w a g e s a t f u l l employment equilibrium B e n a s s y a n d M a l i n v a u d i n v e s t i g a t e t h e m i c r o f o u n d a t i o n s of d i s e q u i l i b r i u m m a c r o e c o n o m i c s t o e x p l a i n t h e c a u s e s of p r i c e a n d w a g e r i g i d i t i e s . D e s p i t e s o m e i n s i g h t s r e l a t e d to i m p e r f e c t c o m p e t i t i o n in t h e g o o d s a n d l a b o r m a r k e t , s u c h a s u n c e r t a i n t i e s a n d t r a n s a c t i o n or i n f o r m a t i o n c o s t s , t h e a u t h o r s r e s t r i c t t h e m s e l v e s t o s u g g e s t i n g f u r t h e r r e s e a r c h in t h i s a r e a . F o r i n s t a n c e , M a l i n v a u d s t a t e s t h a t " [ t ] h e g e n e r a l e q u i l i b r i u m a p p r o a c h , in a w o r l d w h e r e p r i c e s a r e s t i c k y in s h o r t r u n , is n o t o n l y h i g h l y r e l e v a n t b u t a l s o h i g h l y c h a l l e n g i n g " ( 1 9 7 7 , p. 1 6 6 ) .

In c o n c l u s i o n , t h e d i s e q u i l i b r i u m a p p r o a c h c l a i m s t h a t c y c l i c a l f l u c t u a t i o n s in t h e l e v e l s of o u t p u t a n d e m p l o y m e n t a r e r e l a t e d to t h e f a c t t h a t p r i c e s , in m o n e t a r y u n i t s , a d j u s t s l o w l y t o b r i n g s u p p l y a n d d e m a n d b a c k into a m a r k e t - c l e a r i n g e q u i l i b r i u m In t h i s c o n t e x t , t h e d i s e q u i l i b r u m t h e o r y s e e m s to a c c e p t t h e t h e o r y of t h e e x i s t e n c e of t h e W a l r a s i a n e q u i l i b r i u m of l o n g r u n a s a m a t t e r of faith 1.2 T h e c l a s s i c a l c o u n t e r - r e v o l u t i o n 1.2.1 F r i e d m a n a n d t h e M o n e t a r i s t s In t h e l a t e 1 9 6 0 s t h e n e o c l a s s i c a l K e y n e s i a n i s m s u f f e r e d a t t a c k s f r o m a d i f f e r e n t school of thought, called monetarism, w h e n many economies b e g a n to experience h i g h r a t e s of i n f l a t i o n T h i s t h e o r e t i c a l a t t a c k c a m e in t h e f o r m of r e - e s t a b l i s h i n g t h e q u a n t i t y t h e o r y of m o n e y to m a c r o e c o n o m i c a n a l y s i s The debate between " K e y n e s i a n " a n d M o n e t a r i s t e c o n o m i s t s w a s f o c u s e d o n t w o s p e c i f i c p o i n t s (i) t h e relationship b e t w e e n the m o n e y interest rate a n d the levels of price a n d output, a n d (ii) t h e r o l e a n d c o n d u c t of m a c r o e c o n o m i c s t a b l i z a t i o n p o l i c y T h e M o n e t a r i s t s e x p r e s s t h e v i e w t h a t m o n e y is e x t r e m e l y i m p o r t a n t in m a c r o e c o n o m i c s , e i t h e r b e c a u s e it a f f e c t s t e m p o r a r i l y t h e o u t p u t a n d e m p l o y m e n t l e v e l s o r b y t h e f a c t t h a t , in t h e l o n g r u n , c h a n g e s in t h e m o n e y s u p p l y a f f e c t o n l y t h e p r i c e l e v e l In F r i e d m a n ' s o w n w o r d s , " . m o n e y is all t h a t m a t t e r s f o r c h a n g e s in nominal i n c o m e a n d f o r short-run c h a n g e s in real i n c o m e " ( 1 9 7 0 , p . 2 1 7 ) If m o n e y m a t t e r s , w h i c h s h o u l d b e t h e m o n e t a r y r u l e s to m a i n t a i n s t a b i l i t y in t h e e c o n o m i c s y s t e m ? F r i e d m a n ' s 1 9 6 8 a r t i c l e . The Role of Monetary Policy, considers this subject A r g u i n g that the Keynesian theory d o e s not h a v e a monetary e x p l a n a t i o n for a l o n g - r u n t h e o r y of u n e m p l o y m e n t , F r i e d m a n c o n c e n t r a t e s h i s a n a l y s i s o n t w o q u e s t i o n s : W h a t a r e t h e l i m i t a t i o n s of m o n e t a r y p o l i c y ? H o w s h o u l d the monetary authorities run monetary policy? T h e a n s w e r to t h e first q u e s t i o n is r e l a t e d to t h e F r i e d m a n ' s e x p e c t a t i o n s a u g m e n t e d P h i l l i p s c u r v e m o d e l , F r i e d m a n ' s a r g u m e n t is t h a t , in t h e l o n g r u n , t h e P h i l l i p s c u r v e is u n s t a b l e b e c a u s e p o l i c y m a k e r s i n c o r r e c t l y a s s u m e t h e y c a n i n t e r f e r e in t h e e c o n o m i c s y s t e m F r i e d m a n p r e s e n t s a m o d i f i e d v e r s i o n of t h e Phillips curve w h i c h incorporates expectations about inflation to explain w h y this v i e w b y p o l i c y m a k e r s is m i s t a k e n T h e a s s u m p t i o n m a d e b y F r i e d m a n is t h a t e c o n o m i c a g e n t s a d a p t t h e i r e x p e c t a t i o n s in light of p a s t e x p e r i e n c e a n d r e v i s e t h e i r e x p e c t a t i o n s f o r e a c h p e r i o d of t i m e Formally, the F r i e d m a n m o d e l c a n be represented as follows: Pr =f{Pt-x).^ e {1,2, } (1)

w h e r e P is t h e e x p e c t e d r a t e of i n f l a t i o n in p e r i o d t a n d Pt_x is t h e r a t e of i n f l a t i o n w h i c h o c c u r r e d in t h e p a s t W h a t will h a p p e n in t h i s a d a p t a t i v e e x p e c t a t i o n m o d e l w h e n t h e g o v e r n m e n t attempts to reduce u n e m p l o y m e n t by monetary e x p a n s i o n ? A c c o r d i n g to F r i e d m a n , t h e initial effect of m o n e t a r y e x p a n s i o n will b e t o i n c r e a s e a g g r e g a t e d e m a n d , s p e c i f i c a l l y , c o n s u m p t i o n a n d i n v e s t m e n t A s a c o n s e q u e n c e , t h e r a t e of i n f l a t i o n will

According t o the Phillips curve, there is always a trade-off u n e m p l o y m e n t See, for instance, Phillips (1958) between the rates of inflation and

a l s o i n c r e a s e . In a c o n t e x t in w h i c h e x p e c t a t i o n s a r e f o r m e d a c c o r d i n g t o a d a p t a t i v e r u l e s , a s e q u a t i o n (1) s h o w s , t h e e c o n o m i c a g e n t s , s o o n e r o r later, w i l l l e a r n a b o u t t h e i n f l a t i o n ; c o n s e q u e n t l y , t h e e x p e c t e d r a t e of i n f l a t i o n will a d j u s t to e q u a l t h e c u r r e n t r a t e of i n f l a t i o n . W h e n t h i s s i t u a t i o n o c c u r s , t h e u n e m p l o y m e n t r a t e w i l l r e t u r n to its initial p o s i t i o n F r i e d m a n ' s c o n c l u s i o n is that, in t h e l o n g r u n , m o n e t a r y p o l i c y c a n n o t c a u s e r e a l f l u c t u a t i o n s in t h e e c o n o m y A s a c o n s e q u e n c e , F r i e d m a n r e j e c t s t h e l o n g - r u n s t a b i l i t y o f t h e P h i l l i p s c u r v e In F r i e d m a n ' s o w n w o r d s ,

" there is always a temporary trade-off between inflation and unemployment, there is no permanent trade-off The temporary trade-off comes not from inflation per se, but from unanticipated inflation, w h i c h generally means, from a rising rate of inflation" (1968, p 11)

T h e n e x t s t e p is F r i e d m a n ' s a n a l y s i s c o n c e r n i n g h o w m o n e t a r y p o l i c y s h o u l d b e c o n d u c t e d b y m o n e t a r y a u t h o r i t i e s F r i e d m a n ' s p r o p o s a l is r e l a t i v e l y s i m p l e : if t h e m o n e t a r y a u t h o r i t i e s e x p a n d t h e m o n e y s u p p l y at a s t e a d y r a t e o v e r t i m e t h e e c o n o m y w i l l t e n d to s e t t l e d o w n at t h e n a t u r a l r a t e of e m p l o y m e n t w i t h a s t e a d y r a t e of inflation T o s u m u p , F r i e d m a n a n d t h e M o n e t a r i s t s b e l i e v e t h a t t h e e c o n o m y is i n h e r e n t l y s t a b l e - t h a t is to s a y , t h e e c o n o m y a l w a y s r e t u r n s t o its l o n g - r u n e q u i l i b r i u m at t h e n a t u r a l r a t e of u n e m p l o y m e n t . In t h i s c o n t e x t , m o n e t a r y a n d f i s c a l p o l i c i e s o n l y i n c r e a s e i n s t a b i l i t y . I m p l i c i t is t h e v i e w that f r e e m a r k e t is t h e s o l u t i o n f o r s t a b i l i z i n g t h e e c o n o m i c s y s t e m at f u l l e m p l o y m e n t 1.2.2 T h e n e w c l a s s i c a l t h e o r y In t h e e a r l y 1 9 7 0 s t h e c l a s s i c a l e c o n o m i c s u n d e r w e n t its o w n " r e v o l u t i o n " : t h e r a t i o n a l e x p e c t a t i o n h y p o t h e s i s w a s i n c o r p o r a t e d in t h e g e n e r a l e q u i l i b r i u m m o d e l s ^ A l t h o u g h initially d e v e l o p e d by M u t h (1961), the rational e x p e c t a t i o n h y p o t h e s i s w a s i n c o r p o r a t e d into m a c r o e c o n o m i c t h e o r y m a i n l y t h r o u g h t h e w o r k s of L u c a s (1972, 1973), Sargent (1973) and Sargent and W a l l a c e (1975). T h e s e authors, soc a l l e d N e w C l a s s i c a l e c o n o m i s t s , a i m at p r e s e n t i n g a n a l t e r n a t i v e v i e w t o t h e m a i n s t r e a m n e o c l a s s i c a l K e y n e s i a n m a c r o e c o n o m i c s , i.e. I S - L M a n a l y s i s , a n d a t criticizing Friedman's version of the expectations-augmented Phillips curve. T h e N e w Classicals b e c a m e dissatisfied with neoclassical Keynesian models d u e t o t h e f a c t t h a t t h e y c o u l d not p r o v i d e a l o g i c a l e x p l a n a t i o n f o r t h e " s t a g f l a t i o n " p r o c e s s , i e. b o t h h i g h u n e m p l o y m e n t a n d i n f l a t i o n , of t h e w o r l d ' s e c o n o m y in t h e early 1 9 7 0 s For instance, Lucas a n d Sargent a r g u e that " , r e c o m m e n d a t i o n s based on Keynesian models produced the highest unemployment rates since the 1 9 3 0 s T h i s w a s e c o n o m e t r i c f a i l u r e o n g r a n d s c a l e . [ T h e ] c e n t r a l f a c t is t h a t K e y n e s i a n p o l i c y r e c o m m e n d a t i o n s h a v e n o s o u n d e r b a s i s , in a s c i e n t i f i c s e n s e " (1981, p 303) Given that neoclassical Keynesian models have some econometric failures b e c a u s e t h e y c a n n o t p r e d i c t t h e v a l u e of c e r t a i n e c o n o m i c v a r i a b l e s ( e . g . t h e l e v e l s of o u t p u t a n d e m p l o y m e n t a n d t h e p r i c e l e v e l ) , t h e N e w C l a s s i c a l s a r g u e t h a t K e y n e s ' s t h e o r y is n o t a g o o d g u i d e f o r m o n e t a r y a n d f i s c a l p o l i c i e s
^ Rational expectation hypothesis supposes that economic agents know the stochastic process w h i c h determines the behavior of the variables in each period of time See, for instance, Muth (1961)

In c o n t r a s t t o t h e n e o c l a s s i c a l K e y n e s i a n m o d e l s , t h e N e w C l a s s i c a l s i n v e s t i g a t e t h e m i c r o f o u n d a t i o n s of m a c r o e c o n o m i c t h e o r y . T h e n e w c l a s s i c a l a p p r o a c h t o m a c r o e c o n o m i c s p r e s e n t s t h r e e m a i n h y p o t h e s e s : (i) t h e r a t i o n a l e x p e c t a t i o n h y p o t h e s i s , (11) t h e h y p o t h e s i s t h a t p r i c e s a n d w a g e s a r e s e t at m a r k e t - c l e a r i n g l e v e l s , a n d (iii) t h e a g g r e g a t e s u p p l y h y p o t h e s i s R e g a r d i n g t h e c r i t i c i s m of F r i e d m a n ' s m o d e l , t h e n e w c l a s s i c a l a n a l y s i s c o n c e n t r a t e d o n t h e f o l l o w i n g q u e s t i o n : H o w a r e t h e e x p e c t a t i o n s of e c o n o m i c agents f o r m e d ? According to N e w Classicals, expectations about the future value of i n f l a t i o n is not n e c e s s a r i l y a s t a b l e f u n c t i o n of its p a s t v a l u e s . A t t h i s p o i n t , t h e n e w classical m o d e l s introduce the idea that the expectations are rational Mathematically, rational expectations can be represented as follows: P,l, where = E{Pt,,\k) P,^^ is the , X e {0, 1 , 2 , rate of } inflation in period f + A, t + A Pf_^x and If is (2) Ihe

expected

mathematical

e x p e c t a t i o n o f t h e r a t e o f i n f l a t i o n in p e r i o d

is t h e

a v a i l a b l e i n f o r m a t i o n s e t a t t h e e n d of p e r i o d t. T h e i n t r o d u c t i o n of t h e r a t i o n a l e x p e c t a t i o n h y p o t h e s i s i n t o t h e m a c r o e c o n o m i c m o d e l s p e r m i t t e d , a c c o r d i n g to L u c a s , " a t r e a t m e n t of t h e r e l a t i o n of i n f o r m a t i o n t o e x p e c t a t i o n s w h i c h is in s o m e w a y s m u c h m o r e s a t i s f a c t o r y t h a n is p o s s i b l e w i t h conventional adaptative expectations hypotheses" (1972, p.104). T h u s , the analyses of t h e e x i s t e n c e of a t r a d e - o f f , e i t h e r t e m p o r a r y or p e r m a n e n t , b e t w e e n i n f l a t i o n a n d u n e m p l o y m e n t , a r e q u e s t i o n e d a n d r e j e c t e d b y t h e n e w c l a s s i c a l a p p r o a c h . In t h i s context, w h e n the expectations are not persistently erroneous, the N e w Classicals a r g u e t h a t a n t i c i p a t e d m o n e t a r y a n d f i s c a l p o l i c i e s d o not h a v e i m p a c t in t h e l e v e l s of o u t p u t a n d e m p l o y m e n t e v e n in t h e s h o r t r u n . In o t h e r w o r d s , t h e N e w C l a s s i c a l s e m p h a s i z e the real supply-side factors rather t h a n monetary a n d fiscal impulses G i v e n that d e m a n d shocks are neglected, h o w do the N e w Classicals explain the o b s e r v e d f l u c t u a t i o n s o n o u t p u t a n d u n e m p l o y m e n t l e v e l s in t h e r e a l w o r l d ? A c c o r d i n g to N e w C l a s s i c a l s , c y c l i c a l f l u c t u a t i o n s in real o u t p u t c a n b e e x p l a i n e d a s a r e a l b u s i n e s s c y c l e d u e t o t e c h n o l o g i c a l a n d p r o d u c t i v i t y c h a n g e s in t h e e c o n o m y In c o n c l u s i o n , c o n s i d e r i n g t h a t c y c l i c a l f l u c t u a t i o n s a r e e x p l a i n e d b y a g g r e g a t e s u p p l y a n d t a k i n g into a c c o u n t t h e f a c t of n e w c l a s s i c a l m o d e l s s u p p o s e t h a t e c o n o m i c s y s t e m is a l w a y s s e l f - c o r r e c t i n g , t h e r e is n o d o u b t t h a t t h e c l a s s i c a l a n d new classical theories have the same basic foundations: Say's Law and/or Walras's L a w a n d t h e q u a n t i t y t h e o r y of m o n e y , i e m o n e y is n e u t r a l It f o l l o w s f r o m t h i s c o n c l u s i o n t h a t N e w C l a s s i c a l s h a v e a t t e m p t e d to b r i n g b a c k t h e s a m e a s s u m p t i o n s of " o l d " c l a s s i c a l e c o n o m i c s t h a t K e y n e s ' s G T c r i t i c i z e d a n d r e j e c t e d s i x t y y e a r s a g o . T h u s , a s w e k n o w , it is n o t h i n g " n e w "

" There are t w o microeconomics assumptions related to the aggregate supply hypothesis, (i) workers and firms optimize their behavior, and (ii) the supply functions of labor and output by workers and firms d e p e n d upon relative prices

1.3 T h e n e w K e y n e s i a n t h e o r y : Walrasian equilibrium

the "Keynesian" microfoundations of non-

N e w K e y n e s i a n t h e o r y , d e v e l o p e d d u r i n g t h e 1 9 8 0 s a s a r e s p o n s e to n e w c l a s s i c a l t h e o r y , a i m s at p r e s e n t i n g a t h e o r e t i c a l s t r u c t u r e , b a s e d o n t h e m i c r o e c o n o m i c f o u n d a t i o n s of " K e y n e s i a n " e c o n o m i c s , c r i t i c a l of t h e n e w c l a s s i c a l m o d e l s / This new Keynesian structure investigates what the N e w Keynesians b e l i e v e to b e t h e e s s e n t i a l a s p e c t o f K e y n e s ' s t h e o r y t h e e x i s t e n c e o f p r i c e a n d w a g e r i g i d i t i e s A c c o r d i n g to M a n k i w a n d R o m e r , " [ b ] e c a u s e w a g e a n d p r i c e r i g i d i t i e s are o f t e n v i e w e d a s c e n t r a l to K e y n e s i a n e c o n o m i c s , m u c h effort w a s a i m e d at showing h o w t h e s e rigidities arise from the microeconomics of w a g e a n d p r i c e s e t t i n g " ( 1 9 9 1 , p . 1 , italic a d d e d ) W h y are prices and w a g e s inflexible? W h a t are the macroeconomic implications w h e n prices and w a g e s are sticky? T h e new Keynesian theory tries to answer these questions G o r d o n ( 1 9 9 0 ) a n d G r e e n w a l d a n d S t i g l i t z ( 1 9 9 3 ) i d e n t i f y s o m e i n s i g h t s of t h e n e w K e y n e s i a n t h e o r y W a g e r i g i d i t y is e x p l a i n e d b y m o d e l s r e l a t e d t o d i s e q u i l i b r i u m in t h e l a b o r m a r k e t , s u c h a s e f f i c i e n c y w a g e s , implicit c o n t r a c t s , a n d / o r i n s i d e r o u t s i d e r w o r k e r s O n t h e o t h e r h a n d , p r i c e r i g i d i t y is e x p l a i n e d b y m o d e l s r e l a t e d t o i m p e r f e c t c o m p e t i t i o n in t h e g o o d s m a r k e t , s u c h a s t h e h i g h m a r g i n a l c o s t s o f p r i c e adjustment S i n c e l a b o r is n o t a h o m o g e n o u s g o o d , t h e m o d e l s of e f f i c i e n c y w a g e s s u p p o s e t h a t l a b o r ' s p r o d u c t i v i t y is a f f e c t e d by t h e w a g e p a i d by f i r m s If t h e q u a l i t y of w o r k e r s is r e l a t e d t o t h e w a g e s r e c e i v e d , a n y w a g e r e d u c t i o n p r o p o s e d b y f i r m s w i l l c a u s e a fall in l a b o r ' s p r o d u c t i v i t y ; a s a result, profit a l s o f a l l s . In t h i s s i t u a t i o n , f i r m s w i l l n o t cut w a g e s w h e n d e m a n d declines. H e n c e , u n e m p l o y m e n t results T h e m o d e l s of i m p l i c i t c o n t r a c t s a r g u e that, in a c o n t e x t in w h i c h t h e w o r k e r s a r e risk a v e r s e a n d h a v e l i m i t e d a c c e s s to t h e f i n a n c i a l m a r k e t s , f i r m s o f f e r t h e m a n insurance against i n c o m e fluctuations by stabilizing their real w a g e s If w o r k c o n t r a c t s a r e n e g o t i a t e d a c c o r d i n g to t h i s " c l a u s e " , f l u c t u a t i o n s in t h e l e v e l o f o u t p u t d o n o t c a u s e c h a n g e s in r e a l w a g e s . In o t h e r w o r d s , a c c o r d i n g t o t h e i m p l i c i t contract models, the w a g e rate not only represents p a y m e n t for labor services but a l s o r e p r e s e n t s a n i n s u r a n c e a g a i n s t t h e risk of f l u c t u a t i o n s in t h e l e v e l s o f i n c o m e a n d output d u e to e x o g e n o u s shocks T h e i n s i d e r - o u t s i d e r w o r k e r s m o d e l e x a m i n e s t h e i m p l i c a t i o n s of w h a t h a p p e n s w h e n w o r k e r s h a v e s o m e bargaining power A c c o r d i n g to this m o d e l , the labor m a r k e t is f o r m e d b y h i r e d w o r k e r s ( i n s i d e r s ) a n d u n e m p l o y e d w o r k e r s ( o u t s i d e r s ) A s s u m i n g t h a t t h e i n s i d e r w o r k e r s h a v e s o m e b a r g a i n i n g p o w e r , t h e r e is a "tacit c o n s e n s u s " b e t w e e n firms and e m p l o y e d workers which militates against w a g e r e d u c t i o n i n t h e f a c e o f r e d u c t i o n s i n a g g r e g a t e d e m a n d . In t h i s c i r c u m s t a n c e , f i r m s a c c e p t t h e c o n s t a n t w a g e d e m a n d of i n s i d e r w o r k e r s b e c a u s e t h e s u b s t i t u t i o n of a n o u t s i d e r w o r k e r f o r a n i n s i d e r o n e i n v o l v e s h i g h c o s t s of h i r i n g a n d t r a i n i n g f o r t h e f i r m s . F u r t h e r , t h i s h i g h c o s t of s u b s t i t u t i o n p r o v i d e s i n s i d e r w o r k e r s w i t h b a r g a i n i n g p o w e r to a v o i d d i s m i s s a l a n d w a g e r e d u c t i o n .

' According to New Keynesians, the new classical theory does not provide a consistent explanation w h y labor and output supply functions do not change w h e n there are d e m a n d shocks

T h e m o d e l s of c o s t s of p r i c e a d j u s t m e n t , s o - c a l l e d m e n u c o s t s , c o n s i d e r t h a t , according to Mankiw, the firm " s e t s its p r i c e in a d v a n c e , a n d c h a n g e s t h a t p r i c e e x p o s t o n l y b y i n c u r r i n g a s m a l l m e n u c o s t " ( 1 9 8 5 , p 5 3 0 ) . E v e n if t h e r e a r e d e m a n d f l u c t u a t i o n s , t h e r e f o r e , p r i c e s d o n o t a d j u s t in t h e s h o r t r u n b e c a u s e t h e r e a r e s o m e c o s t s i n v o l v e d in c h a n g i n g p r i c e s In o t h e r w o r d s , t h e c o n c e p t of m e n u c o s t s i m p l i e s that firms are price-setters and have monopoly power T w o q u e s t i o n s r e l a t e d t o t h e c e n t r a l h y p o t h e s i s of t h e n e w K e y n e s i a n t h e o r y , price and w a g e rigidities determining m a c r o e c o n o m i c fluctuations, d e s e r v e s o m e r e f l e c t i o n s ; W h a t d o p r i c e a n d w a g e r i g i d i t i e s i m p l y in g e n e r a l e q u i l i b r i u m a n a l y s i s ? T h e a n s w e r w a s partly presented by the disequilibrium theory developed during the 1 9 7 0 s T h e o r i g i n a l i t y of t h e n e w K e y n e s i a n t h e o r y , h o w e v e r , lies in t h e a t t e m p t to f i n d a c o n s i s t e n t m i c r o e c o n o m i c t h e o r y of p r i c e a n d w a g e r i g i d i t i e s , s h o w i n g h o w t h e e c o n o m i c a g e n t s optimize their behavior under such imperfections. W h y are such models called Keynesian? The explanation seems to be associated with a m i s l e a d i n g r e a d i n g of t h e GT K e y n e s i a n i n v o l u n t a r y u n e m p l o y m e n t is i n t e r p r e t e d b y N e w K e y n e s i a n s , not a s t h e r e s u l t o f a n i n s u f f i c i e n c y of e f f e c t i v e d e m a n d , e x p l a i n e d b y t h e e x i s t e n c e of m o n e y per s e , but r a t h e r d u e to t h e f a c t t h a t p r i c e s a n d w a g e s a r e s t i c k y In o t h e r w o r d s , t h e N e w K e y n e s i a n s a r g u e t h a t a n u n d e r e m p l o y m e n t e q u i l i b r i u m c a n o n l y o c c u r if p r i c e s a n d w a g e s a r e not p e r f e c t l y f l e x i b l e 2. A POST KEYNESIAN CRITIQUE OF ORTHODOX MACROECONOIVIIC THEORIES

K e y n e s w r o t e in t h e GT's p r e f a c e t h a t "[t]he difficulty lies not in t h e n e w i d e a s , b u t in escaping from the old ones, w h i c h r a m i f y , f o r t h o s e b r o u g h t u p a s m o s t of u s h a v e b e e n , i n t o e v e r y c o r n e r of o u r m i n d s " ( 1 9 6 4 , p viii; italics a d d e d ) T h e a b o v e quotation applies undoubtedly to the several theoretical structures p r e s e n t e d in t h e p r e v i o u s s e c t i o n W h e n i n t e r p r e t i n g a n d c r i t i c i z i n g K e y n e s ' s a n a l y s i s , a s p r e s e n t e d in t h e GT, m a n y m a c r o e c o n o m i c t h e o r i s t s a t t e m p t to e x p l a i n u n e m p l o y m e n t a s s h o r t - r u n m a l a d j u s t m e n t s d u e to (i) e l a s t i c i t i e s of t h e d e m a n d f o r m o n e y , i e. t h e s l o p e o f t h e L M c u r v e , (ii) p r i c e a n d w a g e r i g i d i t i e s , (iii) i n c o r r e c t e x p e c t a t i o n s , a n d / o r (iv) m a c r o e x t e r n a l i t i e s , s u c h a s c o o r d i n a t i o n f a i l u r e s U n l i k e K e y n e s , w h o a r g u e d t h a t l o n g - r u n u n e m p l o y m e n t e q u i l i b r i u m is a l w a y s p o s s i b l e , m o s t o r t h o d o x m a c r o e c o n o m i c t h e o r i e s s e e m to b e l i e v e t h a t , in t h e l o n g r u n , t h e " i n v i s i b l e h a n d " a n d f r e e m a r k e t still c o n t i n u e to b e t h e s o l u t i o n f o r k e e p i n g t h e e c o n o m y a t its l o n g - r u n full e m p l o y m e n t e q u i l i b r i u m In t h e GT K e y n e s e x p l a i n e d w h y in a m o n e t a r y c a p i t a l i s t e c o n o m y t h e e c o n o m i c s y s t e m is not s e l f - c o r r e c t i n g in e i t h e r t h e s h o r t - r u n or t h e l o n g - r u n S i m u l t a n e o u s l y , K e y n e s s u g g e s t e d e c o n o m i c i n s t i t u t i o n s w h i c h c o u l d h e l p t o a v o i d p e r i o d s of depression

K e y n e s ' s a n a l y s i s is d e v e l o p e d o n t h r e e t h e o r e t i c a l p r o p o s i t i o n s : t h e t h e o r y of i n c o m e d e t e r m i n a t i o n ( p r o p e n s i t y to c o n s u m e a n d m u l t i p l i e r ) , t h e t h e o r y o f investment (marginal efficiency of capital), a n d the theory of interest rate (liquidity p r e f e r e n c e ) . T h e s e t h e o r i e s , a c c o r d i n g t o P o s t K e y n e s i a n s , a r e d e v e l o p e d in a c o n t e x t in w h i c h t h e r e a l w o r l d h a s t h e f o l l o w i n g c h a r a c t e r i s t i c s ; (i) m o n e y m a t t e r s in b o t h t h e s h o r t - r u n a n d l o n g - r u n , (ii) t h e f u t u r e is u n c e r t a i n , (iii) c o n t r a c t s a r e d e n o m i n a t e d in m o n e y t e r m s , (iv) m o n e y h a s t w o s p e c i f i c p r o p e r t i e s t h a t d i f f e r e n t i a t e it f r o m t h e o t h e r p r o d u c i b l e g o o d s , a n d (v) u n e m p l o y m e n t in a n m o n e t a r y o r e n t r e p r e n e u r i a l e c o n o m y , i e. a n e c o n o m y in w h i c h f l u c t u a t i o n s of e f f e c t i v e d e m a n d a r e e x p l a i n e d a s a m o n e t a r y p h e n o m e n o n , is a n o r m a l r e s u l t , * M o s t o r t h o d o x i n t e r p r e t a t i o n s a n d c o n t r o v e r s i e s r e l a t e d t o w h a t K e y n e s m e a n t in h i s GT h a v e n o t b e e n a n a l y z e d w i t h r e f e r e n c e t o t h e s e p r o p o s i t i o n s a n d characteristics. T h e H i c k s i a n i n t e r p r e t a t i o n of G T p r o v i d e d s o m e l o g i c a l m i s u n d e r s t a n d i n g s of K e y n e s ' s t h e o r y ^ F o r e x a m p l e , (i) it s u b s t i t u t e d t h e W a l r a s i a n s y s t e m of g e n e r a l e q u i l i b r i u m f o r K e y n e s ' s M a r s h a l l i a n e q u i l i b r i u m ; (ii) it d i c h o t o m i z e d t h e r e a l a n d m o n e t a r y m a r k e t s , a n d (iii) it d i d n o t a n a l y z e t h e r o l e t h a t e x p e c t a t i o n a n d uncertainty have on effective d e m a n d T h e K e y n e s i a n e q u i l i b r i u m in t h e GT is r e l a t e d t o a p r o c e s s in w h i c h f l u c t u a t i o n s in t h e e c o n o m y a l w a y s i n v o l v e c h a n g e s in t h e ceteris paribus conditions, i e other things being equal In o t h e r w o r d s , K e y n e s u s e s M a r s h a l l ' s m e t h o d of p a r t i a l e q u i l i b r i u m in his e q u i l i b r i u m a n a l y s i s in t h e G T , ' " Implicitly, H i c k s ( 1 9 7 4 , 1 9 8 0 - 8 1 ) recognized his i n t e r p r e t a t i v e m i s u n d e r s t a n d i n g regarding the Keynes's GT e q u i l i b r i u m m e t h o d w h e n h e s t a t e s t h a t " , t h e i d e a of I S - L M d i a g r a m c a m e t o m e a s a r e s u l t o f t h e w o r k I h a d b e e n d o i n g o n t h r e e - w a y e x c h a n g e , c o n c e i v e d in a Walrasian manner" (1980-81, p 141-2) T h e d i c h o t o m y b e t w e e n r e a l a n d m o n e t a r y m a r k e t s is not c o m p a t i b l e w i t h K e y n e s ' s t h e o r y w h e n m o n e y is n e v e r n e u t r a l In o t h e r w o r d s , K e y n e s i n s i s t e d o n a n a l y z i n g a s y s t e m w h e r e m o n e t a r y t h e o r y is a t h e o r y of o u t p u t a s a w h o l e . T h e f o l l o w i n g p a s s a g e f r o m t h e GT i l l u s t r a t e s t h a t t h e r e a l a n d m o n e t a r y m a r k e t s a r e always interdependent and, therefore, cannot be dichotomized "The division of E c o n o m i c s b e t w e e n T h e o r y of V a l u e a n d D i s t r i b u t i o n o n t h e o n e h a n d a n d t h e T h e o r y of M o n e y o n t h e o t h e r h a n d is, I t h i n k , a false division" ( 1 9 6 4 , p 2 9 3 , i t a l i c s added) F i n a l l y , H i c k s a d m i t t e d t h a t t h e e x p e c t a t i o n s , f o r m e d in a c o n t e x t of u n c e r t a i n t y , a r e left o u t in t h e I S - L M ' s a n a l y s i s . In H i c k s ' s o w n w o r d s , ". t h e r e is n o s e n s e in l i q u i d i t y , u n l e s s e x p e c t a t i o n s a r e u n c e r t a i n . But h o w is a n u n c e r t a i n e x p e c t a t i o n t o be r e a l i z e d ? W h e n t h e m o m e n t a r r i v e s to w h i c h t h e e x p e c t a t i o n r e f e r s , w h a t r e p l a c e s it is f a c t , f a c t w h i c h is not uncertain" ( 1 9 8 0 - 8 1 , p . 1 5 2 ; italics a d d e d ) . It is n o t s u r p r i s i n g , t h e r e f o r e , t h a t K e y n e s i a n t h e o r y h a s b e e n e a r l i e r i n t e r p r e t e d b y H i c k s a s t h e " e c o n o m i c s of d e p r e s s i o n " T h e r e is, h o w e v e r , another m i s u n d e r s t a n d i n g of Hicks w h i c h can be explained by chronological r e a s o n i n g .
" See, for instance, Davidson (1994, p 17-8) ^ Ttiese logical misunderstandings w e r e admitted by Hicks years later According to film, " as time has gone on, I have myself become dissatisfied with it [IS-LM diagram]" (1980-81, p 139) A specific analysis about equilibrium in Keynes's theory can be found in Chapter 2 of Leijonhufvud's book (1968)

K e y n e s ' s 1 9 4 0 a r t i c l e , How to Pay for the War, a r g u e d t h a t K e y n e s i a n t h e o r y c a n b e a l s o a s s o c i a t e d w i t h s i t u a t i o n s in w h i c h t h e e c o n o m i c r e s t r i c t i o n s a r e n o t o n l y of d e m a n d M o r e s p e c i f i c a l l y , in t h i s a r t i c l e K e y n e s a n a l y z e d t h e m a c r o e c o n o m i c e q u i l i b r i u m i m p l i c a t i o n s w h e n t h e e c o n o m y is a t its full e m p l o y m e n t e q u i l i b r i u m . T h e d i s e q u i l i b r i u m i n t e r p r e t a t i o n of K e y n e s ' s t h e o r y a n d , b y e x t e n s i o n , t h e n e w K e y n e s i a n t h e o r y b e l i e v e , a t l e a s t in t h e s h o r t r u n , t h a t K e y n e s i a n u n e m p l o y m e n t o c c u r s s o l e l y d u e t o t h e f a c t t h a t p r i c e s a n d w a g e s a r e s t i c k y . In o t h e r w o r d s , t h e s e t h e o r i e s a r g u e t h a t it is s u p p l y c o n s t r a i n t s a n d not a n i n s u f f i c i e n c y of e f f e c t i v e d e m a n d that c a u s e s unemployment. D e s p i t e t h e f a c t t h a t in C h a p t e r 3 of t h e G T K e y n e s s u p p o s e d , only io s i m p l i f y his a n a l y s i s a b o u t t h e p r i n c i p l e of e f f e c t i v e d e m a n d , t h a t p r i c e s a n d w a g e s a r e i n f l e x i b l e in t h e s h o r t r u n ( 1 9 6 4 , p 2 7 ) , t h i s is n e i t h e r a n e c e s s a r y n o r a s u f f i c i e n t c o n d i t i o n to explain Keynesian involuntary unemployment According to Keynes, e c o n o m i c fluctuations appear because " b o o m s a n d d e p r e s s i o n s a r e p h e n o m e n a p e c u l i a r to a n e c o n o m y in w h i c h ... money is not neutral' ( 1 9 7 3 a , p 4 1 1 , italics a d d e d ) . T h e following p a s s a g e s f r o m the G T s h o w that Keynesian disequilibrium c a n occur e v e n w h e n prices and w a g e s are flexible
' the Classical Theory has been accustomed to rest the supposedly self-adjusting character of the e c o n o m i c system on an assumed fluidity of money-wages, and, w h e n there is rigidity, to lay on this hgidity the blame of maladjustment A reduction in money-wage is quite capable in certain circumstances of affording a stimulus to output, as the classical theory supposes My difference from this theory is primarily a difference of analysis" (1964, p 257, italic added) "There is no ground for the fceftef that a flexible w a g e policy is capable of maintaining a state of continues full employment The economic system cannot be made self-adjusting along [this line]" (ibid , p 267, italics added)

In light of t h e a b o v e q u o t a t i o n s , it is difficult to a c c e p t t h e i d e a t h a t , in t h e K e y n e s ' s GT, p r i c e a n d w a g e r i g i d i t i e s a r e the c a u s e of t h e u n d e r e m p l o y m e n t e q u i l i b r i u m . In o t h e r w o r d s , a c c o r d i n g to K e y n e s ' s a n a l y s i s , w h a t e v e r t h e c o n d i t i o n s of supply are, unemployment equilibrium can always occur Further, the d i s e q u i l i b r i u m a n d n e w K e y n e s i a n m o d e l s p r o v i d e o n l y a n e x p l a n a t i o n of t h e l a c k of v a r i a b i l i t y in p r i c e s a n d w a g e s , b u t d o not e x p l a i n u n e m p l o y m e n t e q u i l i b r i u m . T h e m o n e t a r y t h e o r y of m o n e t a r i s t a n d n e w c l a s s i c a l m o d e l s is e s s e n t i a l l y d i f f e r e n t f r o m K e y n e s ' s m o n e t a r y t h e o r y in t h e s e n s e t h a t t h e y c o n s i d e r t h a t m o n e y m u s t b e , at l e a s t in t h e l o n g r u n , n e u t r a l . M o r e o v e r , s o m e h y p o t h e s e s in t h e s e m o d e l s m i s r e p r e s e n t t h e d y n a m i c c h a r a c t e r i s t i c s of m o d e r n entrepreneurial economies." Keynes's monetary theory explores a specific question: W h a t are the essential p r o p e r t i e s of m o n e y ? In C h a p t e r 17 of t h e GT", K e y n e s a r g u e s t h a t m o n e y h a s t w o e s s e n t i a l p r o p e r t i e s w h i c h f o l l o w f r o m t h e e x i s t e n c e of u n c e r t a i n t y o n t h e o n e h a n d , m o n e y ' s e l a s t i c i t y of p r o d u c t i o n is z e r o (or n e g l i g i b l e ) ; t h a t is t o s a y , m o n e y is n o t p r o d u c i b l e b y t h e u s e of l a b o r in t h e p r i v a t e s e c t o r S e c o n d l y , m o n e y ' s e l a s t i c i t y of s u b s t i t u t i o n w i t h r e s p e c t t o t h e p r o d u c t s of i n d u s t r y is z e r o (or n e g l i g i b l e ) , w h i c h m e a n s t h a t a n y p r o d u c i b l e g o o d c a n n o t r e p l a c e m o n e y a s a l i q u i d s t o r e of v a l u e w h e n t h e r e l a t i v e p r i c e of m o n e y i n c r e a s e s . G i v e n t h e s e e l a s t i c i t y p r o p e r t i e s , f l u c t u a t i o n s in e f f e c t i v e d e m a n d a p p e a r b e c a u s e , w h e n t h e f u t u r e is u n c e r t a i n , p e o p l e d e c i d e to h o l d m o n e y a s a s t o r e of
" The characteristics of an entrepreneurial economy are explored by Keynes (1979, p 76-101)

v a l u e A s a c o n s e q u e n c e , t h e y p o s t p o n e t h e i r e x p e n d i t u r e d e c i s i o n s o u t of c u r r e n t income In o t h e r vi/ords, in a w o r l d w h e r e p e o p l e c a n n o t p r e d i c t f u t u r e , unemployment equilibrium can always occur because, w h e n the future b e c o m e s m o r e u n c e r t a i n , p e o p l e d e c i d e to i n c r e a s e t h e i r d e m a n d f o r l i q u i d a s s e t s , e s p e c i a l l y m o n e y t h a t is l i q u i d par excellence, at t h e e x p e n s e of p u r c h a s i n g p r o d u c i b l e g o o d s . Consequently, people decide to buy fewer products a n d entrepreneurs, following their "animal spirits", d e c r e a s e e m p l o y m e n t hiring. In t h i s w a y , c o n t r a r y t o F r i e d m a n ' s s t a t e m e n t t h a t m o n e y d o e s n o t h a v e i m p o r t a n c e in K e y n e s ' s a n a l y s i s ( 1 9 6 8 , p i ) , m o n e y h a s a n i n d i s p e n s a b l e r o l e in t h e K e y n e s ' s t h e o r y : K e y n e s ' s t h e o r y is a m o n e t a r y t h e o r y of p r o d u c t i o n , i.e. in a w o r l d w i t h u n c e r t a i n t y , m o n e y a f f e c t s t h e p r o d u c t i o n p r o c e s s of a n e c o n o m y m o v i n g through time If m o n e y m a t t e r s b o t h f o r F r i e d m a n a n d K e y n e s , t h e c e n t r a l q u e s t i o n is w h e t h e r m o n e y is n e u t r a l in t h e e c o n o m i c s y s t e m In K e y n e s , m o n e y is n e v e r n e u t r a l , w h i l e F r i e d m a n a c c e p t s t h e l o n g - r u n n e u t r a l i t y of m o n e y . O n t h e o t h e r h a n d , t h e n e w c l a s s i c a l m o d e l s a s s u m e t h a t m o n e y is a l w a y s n e u t r a l in b o t h t h e s h o r t - r u n a n d long-run C o n c e r n i n g t h e r e a l i s m of s o m e a s s u m p t i o n s of t h e m o n e t a r i s m a n d n e w c l a s s i c a l t h e o r i e s , t h e r e a r e at l e a s t t h r e e m a i n c r i t i c i s m s First, it is d i f f i c u l t t o i m a g i n e t h a t t h e r e is a n " i n v i s i b l e h a n d " g u i d i n g t h e e c o n o m y t o t h e e f f i c i e n t a l l o c a t i o n of r e s o u r c e s C o n t r a r y t o t h i s a s s u m p t i o n , K e y n e s ' s t h e o r y s u g g e s t s t h a t , i n t h e r e a l w o r l d , t h e " v i s i b l e h a n d " of a S t a t e o r g a n i z a t i o n is ". t h e o n l y m e a n s o f s e c u r i n g a n a p p r o x i m a t i o n to full e m p l o y m e n t " ( 1 9 6 4 , p 3 7 8 ) S e c o n d , in t h e real w o r l d , d o e c o n o m i c a g e n t s f o r m t h e i r e x p e c t a t i o n s b a s e d o n an ergodic stochastic process?"^ Davidson (1982-83, p 188-9) argues that t h e rational expectation hypothesis denies the risk-uncertainty distinction d e v e l o p e d by K e y n e s T h u s , t h e N e w C l a s s i c a l s r e d u c e u n c e r t a i n t y to s i t u a t i o n of risk. C o n t r a r y t o rational expectation hypothesis, Keynes a r g u e d that p e o p l e form their e x p e c t a t i o n s as "uncertain knowledge" A c c o r d i n g to K e y n e s , in a n u n c e r t a i n w o r l d , ". human d e c i s i o n s a f f e c t i n g t h e f u t u r e , w h e t h e r p e r s o n a l or p o l i t i c a l o r e c o n o m i c , c a n n o t d e p e n d o n strict m a t h e m a t i c a l e x p e c t a t i o n , s i n c e t h e b a s i s f o r m a k i n g s u c h c a l c u l a t i o n s d o e s n o t exist" ( 1 9 6 4 , p . 1 6 2 - 3 ) T h i r d , a c c e p t i n g t h e n e w c l a s s i c a l a s s u m p t i o n of i n t e r t e m p o r a l s u b s t i t u t i o n o f l e i s u r e to e x p l a i n u n e m p l o y m e n t is t o b e l i e v e , a c c o r d i n g to G r e e n w a l d a n d S t i g l i t z , that" w o r k e r s in 1 9 3 2 , f o r e x a m p l e , t o o k m o r e l e i s u r e b e c a u s e w a g e s l o o k e d l o w " ( 1 9 8 7 , p 1 1 9 ) It f o l l o w s f r o m t h i s q u o t a t i o n t h a t N e w C l a s s i c a l s b e l i e v e t h a t t h e e c o n o m i c system has solely a temporary disequilibrium due to "frictional" a n d "voluntary" unemployment hypotheses 3. C O N C L U S I O N T h i s a r t i c l e h a s a t t e m p t e d to s h o w t h a t t h e o r t h o d o x i n t e r p r e t a t i v e t h e o r i e s of t h e GT ( " K e y n e s i a n " ) a n d t h e c r i t i c a l t h e o r i e s of t h e K e y n e s i a n r e v o l u t i o n ( m o n e t a r i s m a n d n e w classical) have s o m e logical inconsistencies w h e n c o m p a r e d with K e y n e s ' s
In an ergodic stochastic process the expected value of a probability distribution can be always estimated from past observation " See, for instance, Keynes (1973b, p 113-4)

GT a n a l y s i s . T h e y a l s o m i s r e p r e s e n t t h e d y n a m i c c h a r a c t e r i s t i c s of m o d e r n entrepreneurial economies The "Keynesians" (Neoclassical Keynesians and New K e y n e s i a n s ) s u p p o s e t h a t K e y n e s i a n i n v o l u n t a r y u n e m p l o y m e n t o c c u r s d u e to e i t h e r a l i q u i d i t y t r a p a n d / o r p r i c e a n d w a g e r i g i d i t i e s In t h i s c o n t e x t , t h e y d i f f e r f r o m t h e e s s e n c e of K e y n e s ' s a n a l y s i s , i.e t h e m o n e t a r y t h e o r y of p r o d u c t i o n , m i n i m i z i n g t h e revolutionary character of the Keynesian theory. T h e Monetarists and N e w Classicals bring back some assumptions from classical economics, such as Say's L a w , n e u t r a l i t y of m o n e y , a t least in t h e l o n g r u n , m a r k e t - c l e a r i n g a n d p e r f e c t c o m p e t i t i o n a n d i n f o r m a t i o n , w h i c h s e e m not t o b e s e e n in r e a l w o r l d e c o n o m i c a c t i v i t i e s P a r a p h r a s i n g K e y n e s ' s a r g u m e n t ( 1 9 6 4 , p.16), w h e n h e a t t e m p t e d t o explain w h y the fundamental classical axioms w e r e wrong, the monetarist a n d new c l a s s i c a l t h e o r i e s " r e s e m b l e E u c l i d e a n g e o m e t e r s in a n n o n - E u c l i d e a n w o r l d " Moreover, w h e n analyzing unemployment a n d proposing unemployment policies, t h e s e o r t h o d o x m a c r o e c o n o m i c t h e o r i e s s e e m t o b e l i e v e in t h e c o n c l u s i o n s of t h e c l a s s i c a l e c o n o m i c s t h a t , s o o n e r o r later, t h e " i n v i s i b l e h a n d " is c a p a b l e t o r e s t o r e t h e e c o n o m i c s y s t e m to its full e m p l o y m e n t o u t p u t W i t h t h e p e r s i s t e n c e of u n e m p l o y m e n t in t h e 1 9 9 0 s , h o w l o n g will it b e b e f o r e t h e " i n v i s i b l e h a n d " , in t h e l o n g r u n , r e s t o r e s t h e e c o n o m y to its e q u i l i b r i u m at full e m p l o y m e n t ? D e s p i t e t h e f a c t that "in t h e l o n g r u n w e w i l l b e d e a d " , t h e d e b a t e in Economics cannot neglect Keynes's revolutionary analysis to explain a n d , maybe, s o l v e t h e u n e m p l o y m e n t c r i s i s o b s e r v e d in t h e w o r l d ' s e c o n o m y T h i s is t h e a r t i c l e ' s message REFERENCES BARRO, R & GROSSMAN, H A general disequilibrium model of income and employment, American Economic Review, v.61, n.1, 82-93, March, 1971 BENASSY, J P. Neo-Keynesian disequilibrium theory in monetary economy Review/ of Economic Studies, V 42, n 4, 503-23, October, 1975 DAVIDSON, P. Rational expectations: a fallacious foundation for studying crucial decision-making processes Journal of Post Keynesian Economics, v 5, n 2, 182-98, Winter, 1982-83 Post Keynesian macroeconomic tfieory. Aldershot, Edward Eigar, 1994 FRIEDMAN, M. The role of monetary theory American Economic Review, v.58, n 1, 1-17, March, 1968 A theoretical framework for monetary analysis. Journal of Political Economy, v 78, n 2,193238, March/April, 1970 GORDON, R What is New-Keynesian economics? Journal of Economic Literature, v,28, 1115-71, September, 1990. GREENWALD, B & STIGLITZ, J E New Keynesian and new classical economics Oxford Economic Papers, v 39, n 1, 119-32, March, 1987 New and old Keynesians. Journal of Economic Perspectives, v 7, n 1, 23-44, Winter, 1993 HICKS, J Mr Keynes and the "classics", a suggested interpretation. Economtrica, v.5, 145-59, April, 1937 . The crisis in Keynesian economics New York, Basic Books, 1974. IS-LM: an explanation Journal of Post Keynesian Economics, v 3, n 2, 139-54, Winter, 198081 KEYNES, J, M The general theory of employment, interest, and money New York: HBS Book, 1964. Essays in persuasion London, Macmillan, 1972 (The collected writings of John Maynard Keynes, v IX) The General Theory and after preparation, London, Macmillan, 1973a (The collected writings of John Maynard Keynes, edited by D Moggridge, v.XIII). The General Theory and after defence and development London: Macmillan, 1973b (The collected writings of John Maynard Keynes, edited by D.Moggridge, v.XIV)

The General Theory and after a supplement London: Macmillan, 1979 (The collected writings of John Wlaynard Keynes, edited by D.Moggridge, vXXIX). LEIJONHUFVUD, A On Keynesian economics and the economics of Keynes. New York: Oxford University, 1968 LUCAS, R Expectations and the neutrality of money. Journal of Economic Theory, v 4, n 2, 103-24, April, 1972 Some international evidence on output-inflation trade-offs. American Economic Review, 63(3):326-34, June, 1973 LUCAS, R. & SARGENT, T After Keynesian macroeconomics In: (eds.) Rational expectations and econometric practice Minneapolis: University of Minnesota, 1981 (reprinted from the original of 1978). MALINVAUD, E. The theory of unemployment reconsidered. Oxford: Basil Blackwell, 1977. MANKIW, N.G. Small menu costs and large business cycles: a macroeconomic model of monopoly. Quarterly Journal of Economics, 100:529-39, May, 1985. MANKIW, N.G. & ROMER, D (eds) NewKeyr)esian economics Cambridge, MIT, 1991 MUTH, J Rational expectations and the theory of price movements. Economtrica, v 29, 315-35, July, 1961. PATINKIN, D Money, interest, and prices New York: Harper& Row, 1965 PHILLIPS, A W . . The belation between unemployment and the rate of change of money wage rates in the united kingdom, 1861-1957 Econmica, v 2 5 , nlOO, 283-99, November, 1958 SARGENT, T Rational Expectations, the Real Rate of Interest, and the Natural Rate of Unemployment, Brookings Papers on Economic Activity, v.2, 429-80, 1973 SARGENT, T. & WALLACE, N "Rational" Expectations, the optimal monetary instrument, and the optimal money supply rule Journal of Political Economy, v.83, n.2, 241-54, April, 1975.
SINOPSE " K E Y N E S I A N O S " , MONETARISTAS, NOVOS - C L S S I C O S E N O V O S - KEYNESIANOS: UMA CRTICA PS-KEYNESIANA Este artigo apresenta urna resenha das principais Interpretaes tericas ortodoxas da "Teoria Geral" e das c o n c e p e s monetarista e novo-clssica, criticas s idias de Keynes contidas na referida obra Procura-se t a m b m mostrar, luz da teoria ps-keynesiana, que essas interpretaes e crticas apresentam inconsistncias lgicas q u a n d o confrontadas com a estrutura terico-analitica de Keynes e no representam as caractersticas da dinmica das economias empresariais modernas