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Ask an Expert: Balancing Keynesian and classical ideas
Question: When teaching macroeconomics, how do you achieve a balance of Keynesian and classical ideas? Answer: When I started teaching in 1985, I soon realized that the leading texts of the time were too Keynesian for my taste. The theories of John M. Keynes and his followers advocated monetary and fiscal programs by the government to increase employment and spending. Although my training as a student of Alan Blinder, Stanley Fischer and Larry Summers was heavily Keynesian and my own research is often dubbed "new Keynesian," I thought that many ideas of classical macroeconomics were given inadequate attention. My goal was to teach macroeconomics with a better balance of classical and Keynesian ideas. This means giving more attention to the forces that shape the economy in the long run. Compared to the course I took as a freshman, as a teacher I spend more time on the theory of economic growth, the role of financial markets in equilibrating saving and investment and the determinants of the natural rate of unemployment. I also spend more time on classical monetary theory, such as quantity theory of money, the Fisher effect, the causes of hyperinflation and purchasing-power parity. Both of my texts follow the strategy of teaching these long-run classical ideas before introducing short-run Keynesian ideas. There are several advantages to this approach. First, long-run issues are extraordinarily important for human welfare. Consider: A century ago, Japan had one-third the income per person of the United States. Now the two countries have comparable income. Why is that? What does it mean for the future? What can poor countries do to replicate the Japanese experience? These questions get students excited about studying economics, and they are best addressed with long-run, classical models.
Second, classical macroeconomics is more linked to microeconomics. After students have learned about supply and demand, it is natural for them to apply these tools to macroeconomics. This is precisely what the classical model does. The classical model is built on the foundations of supply and demand -- for labor, for loanable funds and for money. Third, the theory of short-run fluctuations is more easily understood after a grounding in the economy's long-run equilibrium. According to standard theories, the business cycle represents a transitory deviation of the economy from its trend growth path. Thus, it is natural to study the determinants of trend growth before studying what pushes the economy temporarily away from that trend. Fourth, short-run fluctuations are more complicated than long-run growth. This follows from the classical dichotomy -- the theoretical tenet that nominal variables (such as the money supply and the price level) do not influence real variables (such as real gross domestic product and unemployment). The classical dichotomy allows macroeconomics to be broken up into smaller, more easily digested pieces. Once students have swallowed each of these pieces, they are ready to study the short-run business cycle to which the classical dichotomy does not apply. Fifth, the macroeconomic theory of the short run is more controversial than the macroeconomic theory of the long run. Although I believe that the traditional model of aggregate supply and aggregate demand remains the best framework for understanding the business cycle, not all economists agree. By contrast, few economists today dispute classical economics as a description of the long run. It is better to begin the study of macroeconomics on the firm ground of consensus. At age 29, Greg Mankiw became one of the youngest tenured professors in the history of Harvard University. He received the first seven-figure advance ever in college textbook publishing for his version of basic economics, "Principles of Economics." In addition to teaching and writing, Mankiw is director of the monetary economics program at the National Bureau of Economic Research, a nonprofit think tank in Cambridge, Massachusetts. He is also an adviser to the Congressional Budget Office and the Federal Reserve Bank of Boston. RELATED STORIES: Ask an expert: Teaching microeconomics RELATED SITES: Introduction to Keynesians | ||||||||||||
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