Post Keynesian Macroeconomic Theory: A Foundation for Successful Economic Policies in the Twenty-First Century.

• Author: Malamud, Bernard

This book by Paul Davidson, co-founder and editor of the Journal of Post Keynesian Economics, presents a careful reading of Keynes and a sharp critique of mainstream macroeconomics as it has developed in the years since Keynes. In The General Theory and his subsequent QJE and Economic Journal articles, Davidson explains, Keynes depicts capitalism as unstable and prone to stagnation in the absence of government direction. The future is uncertain and people lack confidence in their own best opinions of what might happen. This inhibits spending, particularly on long-lived capital assets, and leads people to hold onto money instead. Demand then generally falls short of the economy's full output potential; growth is slowed while business is buffetted by waves of optimism and pessimism.

Keynes's ideas about how people react to uncertainty are hard to model, however, and they are not stressed in the familiar IS-LM framework, originally developed to explain The General Theory but soon used to refute it. Classically flexible wages and prices can restore an IS-LM economy to full employment from the depths of a depression when the effects of deflation on financial conditions and on confidence are ignored. Seen in the light of this Keynes/Classical synthesis, Keynes's theory explains no more than a special case of underemployment disequilibrium maintained in the short-run by wage and price rigidities. It offers Mainstream Keynesians, whom Davidson also labels Old Keynesians and Bastard Keynesians, no more than some hints on how to relieve temporary economic distress. Davidson views the evolution of macroeconomics as we know it as an aberration, starting with the IS-LM caricature of Keynes's theory, continuing through the Monetarist and New Classical reactions to Old Keynesian policy exercises, and including today's New Keynesian search for microfoundations on which to base sticky wages and prices, presumed to be necessary for underemployment to arise in even the short-run in a rational world.

Post Keynesian Macroeconomic Theory is firmly grounded in The General Theory. An overview of its contents follows. Davidson first demonstrates that equilibrium can result and persist at less than full employment when people hoard money, a nonproducible asset without ready substitutes. He then examines the components of domestic spending and the multiplier. His treatment of investment instability turns on the difficult but powerful concepts of backwardation and...