The resurrection and fall of homo oeconomicus

.

Chapter 7 in The Behavioral Economics of John Maynard Keynes, 2022, pp 125-148 from Edward Elgar Publishing

Abstract: The neoclassical counterrevolution based on Phelps' and Friedman's unique equilibrium unemployment rate–the natural rate of unemployment--hit Keynesianism badly. Based on neoclassical axioms (maximization, equilibrium), they argued that macroeconomic policy could not reduce unemployment in the long run or even the short run because unemployment results from individual utility maximization within the given institutional framework (i.e., incentive structure); it is the optimum. Again, unemployment with a choice. Expansionary macroeconomic policy would push the economy away from its optimum and produces inflation rather than higher production and employment, resulting in stagflation, the simultaneous occurrence of inflation, and unemployment. Since Phelps and Friedman published their natural rate theory before stagflation occurred in the 1970s, it was praised as a theory ahead of the facts, but it was simply a regression to Pre-Keynesian theory, ignoring market interdependencies, expectations, and reducing workers' motivations for real wages (goods). Responses to money wage variations were again merely "money illusion." The perception and political acceptance of natural rate theory is a first-class example of how axiomatic economic theory frames thinking and can narrow the space of economic opportunities. Although stagflation was short-lived, the theory remained and guided economic policy not only among conservatives but also among social-democratic politicians. It is also an example that deductive reasoning is easily satisfied with insufficient empirical evidence if it fits the deduced presumptions.

Keywords: Economics and Finance (search for similar items in EconPapers)
Date: 2022
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.elgaronline.com/view/9781802204896.00012.xml (application/pdf)
Our link check indicates that this URL is bad, the error code is: 503 Service Temporarily Unavailable

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:elg:eechap:21192_7

Ordering information: This item can be ordered from
http://www.e-elgar.com

Access Statistics for this chapter

More chapters in Chapters from Edward Elgar Publishing
Bibliographic data for series maintained by Darrel McCalla ().