ABSTRACT
Modern macroeconomic pedagogy has evolved into a curious sequence of arguments. In principles-level courses, we teach income-expenditure analysis – the fixed-price circular flow theory, complete with unemployment equilibrium and plenty of scope for policy-makers to take advantage of the spending and taxing multipliers. At the intermediate level, we bring the supply and demand for money into view by teaching ISLM, a model in which the rate of interest and the level of income are determined simultaneously. Then we allow for a binding supply-side constraint and consequent changes in the price level by teaching Aggregate-Supply/Aggregate-Demand. At the graduate level, we explain why these formulations are all wrong – or, at least, overly mechanistic and largely irrelevant. These potted, mechanistic versions of Keynesianism describe neither the actual workings of the economy nor Keynes’s understanding of them. After a wholesale rejection of these sorts of models, our focus shifts to rational expectations with possible information lags, optimal speeds of market adjustment to random technology shocks, and price stickiness that itself reflects optimizing behavior. Both Keynes and the economy are left behind as the graduate students learn to appreciate the logical integrity of these and other more modern constructions.
