Keynesian Macro Concepts in Neoclassical Synthesis

“The difficulty lies not in the new ideas, but in escaping from the old ones,” wrote British economist John Maynard Keynes in his 1935 text The General Theory of Employment, Interest and Money. “As these old ideas ramify, for those brought up as most of us have been, into every corner of our minds.” Keynes was a maverick economist. The popular school of economic thought in the early 20th century stressed the importance of the micro level and private sector of economics in influencing the public and macro level institutions of the economy. The popular thought was that because humans were rational in their pursuit to maximize their commodities and satisfaction, the free market would remain efficient and operate properly because it offered the best opportunity for individuals to create an economy that could insure maximum utility. In the wake of an economic collapse during the Great Depression, John Keynes launched what would be known as an economic “Keynesian Revolution” that stressed the importance of the mixed economy: one that valued the neoclassical importance of the micro level, with the need for accountability and stability protected by the macro level.

Keynesian Neoclassical Synthesis

“Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone,” Keynes wrote facetiously. This ridicule encapsulates exactly what the economic Keynesian Revolution sought to accomplish. Keynes wanted to highlight that the belief held by neoclassical economists that the health of the economy (in terms of commodity values and national employment) was dictated by labor costs and marginal utility alone viewed only part of the equation. For Keynes, the value of a commodity was dictated by how much it cost – and as a result, the monetary economy needed to be looked at first and foremost when deciding how to rectify economic woes. A healthy economy needs plenty of money circulation and consumer spending, which is known as the aggregate demand of an economy. Keynes asserted that during tough economic times with high unemployment, the private sector was inadequate in remedying depressions. Indeed, the micro level was not only helpless, but inaction by the private sector often made economic crisis even worse! If there was high unemployment in the private sector, then consumer spending decreases which in turn affects output production which hurts unemployment, and the positive feedback cycle is exacerbated. Resultantly, Keynes offered a solution that balanced macro level Keynesian ideas with neoclassical economics focus on the micro level: a combination that became characterized as neoclassical synthesis.

“Most men love money and security more, and creation and construction less, as they get older.” Like neoclassical economists, Keynes agreed that great attention to the private sector was a positive thing. Protectionist or state-run economies were inefficient, repressive, and compromised human nature urge to pursue maximum utility in their daily life. Even Keynesian macro economics stressed the importance of low interest rates and taxes as incentives to have consumers spend as they wish. However, as noted, the private sector was prone to deviate from the stable equilibrium seen in a robust economy. Whether because of overspending, under spending, over consumption, under consumption – the middle ground is hard to achieve in the long term with neoclassical economics. Therefore, Keynesian macro economics proposed that greater involvement was required from the public sector, such as from banks or the government, to prevent high unemployment and to help stabilize the equilibrium. Government investment during times of economic depressions can help stimulate the economy on the micro-level. Critics from the left and right argue against the role of government to artificially stimulate demand in an economy, but in the wake of World War II, the “Keynesian Consensus” and neoclassical synthesis was adopted in many countries to boost supply and demand.

Neoclassical synthesis became – and remains to be – the most popular system of economics employed by states. The balance between the public and private sector demonstrate a meeting between neoclassical economic and Keynesian macro economic thought. Economists that supported neoclassical synthesis, such as John Hicks, linked the neoclassical model of diminishing utility with the role of prices which may be held in check by government forces. Affordability, prices, and employment can be partly the responsibility of the public sector if the micro goes astray. Understanding employment and the methods used to insure employment has become the cornerstone of neoclassical synthesis. Keynesian macro economics are viewed to provide stability in an otherwise uncertain private sector.

Still, although Keynesian macro economics valued the importance of neoclassical economics focus on the individual, Keynes warned that the reason macro level institutions were necessary was because of the dangers of the micro level in the first place. “The decadent international but individualistic capitalism in the hands of which we found ourselves after the war is not a success. It is not intelligent. It is not beautiful. It is not just. It is not virtuous. And it doesn’t deliver the goods.” Neoclassical synthesis was the ideal middle ground, but it remained imperfect.