Neo-Keynesianism

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The neo-Keynesianism is an economic theory that in part on the ideas of John Maynard Keynes , in part to neoclassical theory is based. Neo-Keynesianism should not be confused with Post- Keynesianism and New Keynesianism (English: New Keynesian Economics).

Main features

In response to the criticism of Keynesianism and as a reaction to the experiences of the economic crisis of the 1970s, neo-Keynesianism developed in the 1980s, which overall differs significantly from Keynes' theory. Keynes had explained the level of production and employment in an economy from the level of overall economic demand and concluded from this that excessive unemployment could only be eliminated in the economic cycle or in the longer term by influencing demand. In doing so, he rejected the neoclassical theory that one could fight unemployment by lowering wages. Keynes argued (in the 19th chapter of his “General Theory” from 1936) that although wage cuts had positive effects on employment on the cost side, these would be counteracted by the negative effects on the demand side.

This economic-political perspective is rejected by the neoclassics. In particular by John Richard Hicks , who reduced the Keynesian theory to a theory for the determination of the equilibrium income ( IS / LM model ), Franco Modigliani and Paul Samuelson , attempts were made to combine the assumptions of Keynes with the neoclassical theory. This gave rise to the so-called neoclassical synthesis .

The further development towards the neoclassical synthesis consists among other things of the explicit consideration of rationing barriers on the labor and goods market. This implicitly makes it possible to microfound the behavior of households. Furthermore, market situations can now be analyzed and characterized more precisely and more differentiated policy measures can be proposed.

The decisive step in the neoclassical synthesis was to link the assumption of a rigid price level with a neoclassical labor market in the IS / LM model. The assumption of a rigid price level proved to be neither theoretically nor empirically convincing. In contrast, New Keynesian Economics takes a more moderate position, in that only temporary price or wage rigidities are set up. In the short term, traditional Keynesian measures, especially those of a monetary policy nature, can be derived from this. It is disputed whether short-term policy also has long-term effects or whether it is solely supply-side factors that are decisive.

Example of measures to control the economy

  • Boost private demand through (for example) tax cuts and investment grants
  • Increased government spending financed by loans ( deficit spending ), e.g. B. through large public projects (road construction, etc.)
  • Interest rate cuts to stimulate private investment
  • and the opposite of these three measures in the case of rapid expansion of economic activity

Problems

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  • Active economic management requires timely and correctly dosed use of the measures, especially since they do not work on the spot, but only with a time lag.
  • When it comes to fiscal policy, governments and parliaments often find it difficult to compensate for budget deficits that they accepted in the recession with budget surpluses once the economy has started, so that the debt level is reduced again. This requirement is often not met in practice. Follow-up problems can be rising interest rates that hinder investment and inflationary tendencies.
  • Increased wages initially lead directly to increased wage costs which, if prices remain the same, reduce the company's profit margin. Provided that the companies can add the rising wage costs to the end consumer prices (possible, for example, through a powerful market position of the company that allows price increases), this can lead to increased inflation (wage-price spiral).

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