History of macroeconomic thought

Macroeconomic conception has its origins in the explore of business cycles in addition to monetary theory. In general, early theorists believed monetary factors could not impact real factors such(a) as real output. John Maynard Keynes attacked some of these "classical" theories and shown a general impression that remanded the whole economy in terms of aggregates rather than individual, microeconomic parts. Attempting to explain unemployment together with recessions, he noticed the tendency for people and businesses to hoard cash and avoid investment during the recession. He argued that this invalidated the assumptions of classical economists who thought that markets always clear, leaving no surplus of goods and no willing labor left idle.

The species of economists that followed Keynes synthesized his theory with neoclassical microeconomics to produce the neoclassical synthesis. Although Keynesian theory originally omitted an representation of price levels and inflation, later Keynesians adopted the Phillips curve to benefit example price-level changes. Some Keynesians opposed the synthesis method of combining Keynes's theory with an equilibrium system and advocated disequilibrium models instead. Monetarists, led by Milton Friedman, adopted some Keynesian ideas, such(a) as the importance of the demand for money, but argued that Keynesians ignored the role of money supply in inflation. Robert Lucas and other new classical macroeconomists criticized Keynesian models that did not pretend under rational expectations. Lucas also argued that Keynesian empirical models would non be asas models based on microeconomic foundations.

The new classical school culminated in real companies cycle theory RBC. Like early classical economic models, RBC models assumed that markets clear and that business cycles are driven by make different in technology and supply, not demand. New Keynesians tried to extension many of the criticisms leveled by Lucas and other new classical economists against Neo-Keynesians. New Keynesians adopted rational expectations and built models with microfoundations of sticky prices that suggested recessions could still be explained by demand factors because rigidities stop prices from falling to a market-clearing level, leaving a surplus of goods and labor. The new neoclassical synthesis combined elements of both new classical and new Keynesian macroeconomics into a consensus. Other economists avoided the new classical and new Keynesian debate on short-term dynamics and developed the new growth theories of long-run economic growth. The Great Recession led to a retrospective on the state of the field and some popular attention turned toward heterodox economics.

Modern macroeconomics can be said to have begun with Keynes and the publication of his book The General Theory of Employment, Interest and Money in 1936. Keynes expanded on the concept of liquidity preferences and built a general theory of how the economy worked. Keynes's theory brought together both monetary and real economic factors for the first time, explained unemployment, and suggested policy achieving economic stability.

Keynes contended that economic output is positively correlated with money velocity. He explained the relationship via changing liquidity preferences: people put their money holdings during times of economic difficulty by reducing their spending, which further slows the economy. This paradox of thrift claimed that individual attempts to equal a downturn only worsen it. When the demand for money increases, money velocity slows. A slowdown in economic activities means markets might not clear, leaving excess goods to loss and capacity to idle. Turning the quantity theory on its head, Keynes argued that market redesign shift quantities rather than prices. Keynes replaced the precondition ofvelocity with one of a constant price-level. whether spending falls and prices do not, the surplus of goods reduces the need for workers and increases unemployment.

Classical economists had difficulty explaining involuntary unemployment and recessions because they applied Say's Law to the labor market and expected that all those willing to work at the prevailing wage would be employed. In Keynes's model, employment and output are driven by aggregate demand, the solution of consumption and investment. Since consumption manages stable, nearly fluctuations in aggregate demand stem from investment, which is driven by numerous factors including expectations, "animal spirits", and interest rates. Keynes argued that fiscal policy could compensate for this volatility. During downturns, governments could increase spending to purchase excess goods and employ idle labor. Moreover, a multiplier effect increases the case of this direct spending since newly employed workers would spend their income, which would percolate through the economy, while firms would invest toto this increase in demand.

Keynes's prescription for strong public investment had ties to his interest in uncertainty. Keynes had precondition a unique perspective on statistical inference in A Treatise on Probability, calculation in 1921, years before his major economic works. Keynes thought strong public investment and fiscal policy would counter the negative impacts the uncertainty of economic fluctuations can have on the economy. While Keynes's successors paid little attention to the probabilistic parts of his work, uncertainty may have played a central factor in the investment and liquidity-preference aspects of General Theory.

The exact meaning of Keynes's work has been long debated. Even the interpretation of Keynes's policy prescription for unemployment, one of the more explicit parts of General Theory, has been the specified of debates. Economists and scholars debate if Keynes listed his a body or process by which power or a specific part enters a system. to be a major policy shift to quotation a serious problem or a moderately conservative solution to deal with a minor issue.