The Return of (New) Keynesian Economics

The period spanning from the mid-1960s to the early 1980s is marked by a deceleration in economic activity. Nevertheless, the government's interventions in stabilization and welfare prevented the emergence of a severe depression, transforming it into a prolonged state of stagflation. This long-lasting period rightfully earned the characterization “Silent Depression,” akin to the 1930s, becoming fertile ground for further developing some economic theories and the withering away of some others. Discontent with the neoclassical synthesis and the impasse of disequilibrium macroeconomics paved the way for the ascent of Monetarism. However, Monetarism’s initial popularity waned, and by the mid-1970s, the works of Lucas and Sargent propelled New Classical economists to the forefront. Despite maintaining a critical stance towards their own theory, some New Classical economists laid the foundation for the real business cycles (RBC) approach in the early 1980s. Concurrently, Keynesian economists from the neoclassical synthesis, such as Tobin, Modigliani, and R.J. Gordon, persisted in their critique. Initially directed against Monetarism, their criticism extended to encompass New Classical economics and the RBC approach. New Keynesians, emerging in the early 1980s, challenged the shared assumption of continuous market clearing among these approaches. They contended that actual economies face numerous “obstacles” preventing markets from achieving complete clearing.