Understanding the nuances of economic thought can sometimes feel like navigating a maze. Two schools of thought that often get grouped together, but have distinct differences, are New Keynesian economics and Post Keynesian economics. Both emerged from the original Keynesian revolution sparked by John Maynard Keynes, but they've evolved in different directions. So, what exactly sets these two apart? Let's dive in and explore the key differences, assumptions, and policy implications of each.

What are New Keynesians?

New Keynesian economics represents a dominant strand of contemporary macroeconomics that seeks to provide microfoundations for Keynesian ideas. What does that mean? Basically, New Keynesians try to explain why the economy might not always operate at its full potential and why government intervention might sometimes be necessary. They do this by building models that incorporate things like sticky prices and wages, imperfections in the market, and asymmetric information. Think of it this way: imagine a world where prices don't adjust instantly to changes in supply and demand. This stickiness can lead to situations where markets don't clear, resulting in unemployment and underutilized resources. New Keynesians believe these frictions are real and have significant macroeconomic consequences. They use mathematical models, often drawing on neoclassical economic principles, to analyze these issues. A core tenet is that while markets are generally efficient, certain imperfections can prevent them from achieving optimal outcomes, especially in the short run. This justifies, in their view, a role for monetary and fiscal policy to stabilize the economy. For example, during a recession, New Keynesians might advocate for lower interest rates or increased government spending to stimulate demand and get things moving again. Their models often include rational expectations, where individuals make decisions based on the best available information, but these rational decisions are still made within the context of market imperfections. New Keynesian economics has heavily influenced mainstream economic policy, particularly in central banking and government responses to economic crises. The emphasis on microfoundations is a key characteristic, meaning that macroeconomic phenomena are explained by building up from individual-level behavior and market structures. New Keynesians typically support the use of monetary policy to stabilize the business cycle, often through adjusting interest rates to manage inflation and unemployment. Fiscal policy, such as government spending and taxation, is also considered a useful tool, particularly during severe recessions. Their approach tends to be more model-driven and mathematically rigorous than that of Post Keynesians, often relying on dynamic stochastic general equilibrium (DSGE) models to simulate the economy. These models allow economists to analyze the effects of different policies and shocks on key macroeconomic variables like GDP, inflation, and unemployment.

What are Post Keynesians?

Post Keynesian economics, on the other hand, takes a more critical and heterodox approach. While also rooted in Keynes's work, Post Keynesians reject some of the neoclassical assumptions that New Keynesians embrace. A central theme in Post Keynesian thought is the concept of fundamental uncertainty. Unlike the New Keynesians, who often assume that individuals have rational expectations and can, at least probabilistically, predict the future, Post Keynesians argue that the future is inherently unknowable. This uncertainty affects investment decisions, savings behavior, and overall economic stability. Businesses, for example, might postpone investments if they are unsure about future demand, leading to a slowdown in economic activity. Another key concept is the principle of effective demand, which emphasizes that aggregate demand drives economic output. Post Keynesians argue that the economy is not self-correcting and that fluctuations in demand can have long-lasting effects. This is in contrast to the neoclassical view, which suggests that markets will naturally return to equilibrium in the long run. Post Keynesians also emphasize the importance of institutions and historical context in shaping economic outcomes. They often analyze the role of power, social norms, and political factors in determining economic policies and outcomes. Financial markets also play a crucial role in Post Keynesian analysis. They argue that financial speculation and instability can have significant impacts on the real economy. They often advocate for stricter regulation of financial markets to prevent excessive risk-taking and bubbles. The policy implications of Post Keynesian economics differ from those of New Keynesians. Post Keynesians generally favor more active government intervention in the economy, including policies to promote full employment, regulate financial markets, and address income inequality. They might support policies like a job guarantee, where the government ensures that everyone who wants a job can have one, or stricter regulations on banks to prevent financial crises. Their approach is often more qualitative and historical than that of New Keynesians, relying on case studies and historical analysis to understand economic phenomena. Post Keynesians often critique the assumptions of mainstream economics, arguing that they are unrealistic and do not adequately capture the complexities of the real world. They tend to focus on the long-run implications of economic policies, emphasizing the importance of sustainable growth and equitable distribution of income. While New Keynesians seek to integrate Keynesian ideas into mainstream economics, Post Keynesians represent a more radical departure, challenging the foundations of neoclassical thought.

Key Differences

Okay, guys, let's break down the key differences between these two schools of thought in a way that's easy to digest. Imagine New Keynesians as the economists trying to refine and modernize the original Keynesian ideas using mainstream economic tools, while Post Keynesians are the rebels, questioning the very foundations of those tools. So, here’s a rundown:

1. Assumptions About Rationality and Expectations

• New Keynesians: Generally assume rational expectations, meaning people use all available information to make the best possible forecasts about the future. They acknowledge that there might be imperfections, but people are still trying to make rational decisions. However, New Keynesians also consider bounded rationality, where individuals make decisions based on limited information and cognitive abilities, leading to deviations from perfect rationality. This bounded rationality can explain why prices and wages are sticky, as firms and workers may not immediately adjust to changes in market conditions due to the costs of gathering and processing information.
• Post Keynesians: Reject the idea of rational expectations, emphasizing fundamental uncertainty. They believe the future is inherently unknowable, and people make decisions based on conventions, animal spirits, and gut feelings. In this view, psychological factors and herd behavior play a significant role in economic outcomes. Post Keynesians argue that uncertainty is pervasive and cannot be reduced to probabilistic calculations. This uncertainty affects investment decisions, savings behavior, and overall economic stability. Businesses, for example, might postpone investments if they are unsure about future demand, leading to a slowdown in economic activity.

2. Approach to Modeling

• New Keynesians: Use formal mathematical models, often DSGE models, to analyze the economy. These models are complex and require strong assumptions about individual behavior and market structure. They emphasize quantitative analysis and statistical testing.
• Post Keynesians: Are more skeptical of formal modeling, preferring qualitative analysis, historical case studies, and institutional analysis. They believe that economic phenomena are too complex to be captured by simple mathematical models. Post Keynesians often critique the assumptions of mainstream economics, arguing that they are unrealistic and do not adequately capture the complexities of the real world. They tend to focus on the long-run implications of economic policies, emphasizing the importance of sustainable growth and equitable distribution of income.

3. View of Market Efficiency

• New Keynesians: Believe that markets are generally efficient, but imperfections like sticky prices and wages can prevent them from reaching optimal outcomes in the short run. They see a role for government intervention to correct these imperfections.
• Post Keynesians: Are more critical of market efficiency, arguing that markets are inherently unstable and prone to crises. They see a greater need for government regulation and intervention to stabilize the economy. Post Keynesians also emphasize the importance of institutions and historical context in shaping economic outcomes. They often analyze the role of power, social norms, and political factors in determining economic policies and outcomes. Financial markets also play a crucial role in Post Keynesian analysis. They argue that financial speculation and instability can have significant impacts on the real economy. They often advocate for stricter regulation of financial markets to prevent excessive risk-taking and bubbles.

4. Policy Recommendations

• New Keynesians: Favor monetary policy, like adjusting interest rates, to stabilize the business cycle. They may also support fiscal policy during severe recessions. Their policy recommendations tend to be moderate and aimed at fine-tuning the economy.
• Post Keynesians: Advocate for more active government intervention, including policies to promote full employment, regulate financial markets, and address income inequality. They may support policies like a job guarantee or stricter regulations on banks. Post Keynesians generally favor more active government intervention in the economy, including policies to promote full employment, regulate financial markets, and address income inequality. They might support policies like a job guarantee, where the government ensures that everyone who wants a job can have one, or stricter regulations on banks to prevent financial crises.

Examples in Practice

To make these differences clearer, let's consider some real-world examples.

• During the 2008 Financial Crisis: New Keynesians largely supported the use of monetary policy, such as quantitative easing, to lower interest rates and stimulate demand. They also supported fiscal stimulus packages to boost economic activity. Post Keynesians, while also supporting stimulus measures, emphasized the need for stricter financial regulation to prevent future crises. They argued that the crisis was a result of unchecked financial speculation and called for more radical reforms.
• In Addressing Unemployment: New Keynesians might advocate for policies to make labor markets more flexible, such as reducing regulations that hinder hiring and firing. Post Keynesians, on the other hand, might support policies like a job guarantee, where the government ensures that everyone who wants a job can have one. They argue that unemployment is a structural problem that requires direct government intervention.

Conclusion

In conclusion, while both New Keynesian and Post Keynesian economics trace their roots back to Keynes, they represent distinct approaches to understanding and managing the economy. New Keynesians seek to integrate Keynesian ideas into mainstream economics, using formal models and emphasizing microfoundations. Post Keynesians, on the other hand, offer a more critical and heterodox perspective, challenging the assumptions of neoclassical economics and advocating for more active government intervention. Understanding these differences is crucial for anyone interested in economic policy and the ongoing debates about how to best manage our economies. Whether you lean towards the model-driven approach of New Keynesians or the more critical perspective of Post Keynesians, both schools of thought offer valuable insights into the complexities of the economic world.