Keynes’ psychology and behavioural macroeconomics: Theory and policy

Michelle Baddeley

The Economic and Labour Relations Review, 2017, vol. 28, issue 2, 177-196

Abstract: Until recently, modern macroeconomic models have remained solidly grounded on assumptions of rational expectations, efficient markets and representative agents, with policy prescriptions focused on the power of markets, and complex and esoteric financial intermediation instruments justified as solutions to problems of asymmetric information and risk. In modern microeconomics, behavioural economic analysis has flourished, focusing on individual responses and interactions. By contrast, in macroeconomics, humans are assumed to behave as if they are mathematical machines, making decisions in a mechanical, objective way. From this perspective, it is difficult to properly capture the instabilities that characterise modern macroeconomies and financial systems. While some progress has been made in recognising the bounds to rationality, the complexity of the macroeconomy can be captured fully only by embedding psychological and sociological forces more fully into macroeconomic models. Keynes was a pioneer in analysing the impacts of socio-psychological influences on macroeconomic phenomena. This article explores some of Keynes’ fundamental ideas about socio-psychological macroeconomic influences, including insights from A Treatise on Probability (1921) onwards, and links these insights both with modern behavioural economic theory and current macroeconomic policy debates.

Keywords: Behavioural macroeconomics; Keynes; macroeconomic policy (search for similar items in EconPapers)
JEL-codes: B22 E03 E6 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:sae:ecolab:v:28:y:2017:i:2:p:177-196

DOI: 10.1177/1035304617706849

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