Why myths in neoclassical economics threaten the world economy: a post-Keynesian Manifesto

Geoffrey Harcourt, Peter Kriesler and John Nevile
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John Nevile: School of Economics, Australian School of Business, the University of New South Wales

No 2013-36, Discussion Papers from School of Economics, The University of New South Wales

Abstract: There is a myth underlying neoclassical economic analysis of a ‘Western’ economy, which is that in anything but the relatively short run, defined as the length of a business cycle, the economy reaches an equilibrium position determined entirely by supply side factors and unaffected by measures taken to increase aggregate demand during a slump This myth is not based on any factual analysis, it is simply assumed. It threatens the wellbeing of the world economy because it allows those who hold it to deny there is any need to change the deregulated state of the international financial sector, that caused the global crisis which started in 2007 and the effects of which have persisted ever since. The fundamental myth has a number of corollaries, which are worth calling associated myths. One of the most important is that the composition of spending to increase aggregate demand during a slump is irrelevant, so that it does not matter if the spending is directed towards consumer goods or to increasing physical and human capital. Another is that monetary policy has a more desirable impact on the economy than does fiscal policy. The paper focusses on neo-classical growth theory; comparative static implications are not considered. Finally, the policy implications are discussed.

Keywords: Financial crisis; Macroeconomic policy; deregulation; neo-classical growth theory (search for similar items in EconPapers)
JEL-codes: E32 E6 O4 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2013-12
New Economics Papers: this item is included in nep-hpe, nep-mac and nep-pke
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