Keynes did not challenge the efficacy of price adjustment mechanisms in clearing particular markets in the Marshallian partial equilibrium theory on which he had been reared. He did challenge the mindless application of those mechanisms to economy-wide markets. Founding what came to be known as macroeconomics, he was modeling a whole economy as a closed system. He knew he could not use the Marshallian assumption that the clearing of one market could be safely described on the assumption that the rest of the economy was unaffected.
James TobinRelated topics
adjustment assumption came clearing efficacy equilibrium founding known market modeling partial rest unaffected use Keynes macroeconomicsRelated quotes
Were I to deduce any system from my feelings on leaving Eton, it might be called The Theory of Permanent Adolescence. It is the theory that the experiences undergone by boys at the great public schools, their glories and disappointments, are so intense as to dominate their lives and to arrest their development. From these it results that the greater part of the ruling class remains adolescent, school-minded, self-conscious, cowardly, sentimental, and in the last analysis homosexual.
Cyril Connolly
Ball, Mankiw, Romer and others style themselves as New Keynesians. Their program is to develop improved microeconomic foundations for imperfectly flexible prices. In the process, they hope to illuminate the paradox that individually rational or near-rational behavior can result in significant collective market failures. These are certainly laudable objectives. In the end, I suspect, the program will not change the essential substance of Keynesian macroeconomics. But it will make Keynes more palatable to theorists.
James Tobin
Now I'm not saying that Keynes was right about everything, that we should treat The General Theory as a sort of secular bible - the way that Marxists treat Das Kapital. But the essential truth of Keynes's big idea - that even the most productive economy can fail if consumers and investors spend too little, that the pursuit of sound money and balanced budgets is sometimes (not always!) folly rather than wisdom - is as evident in today's world as it was in the 1930s. And in these dangerous days, we ignore or reject that idea at the world economy's peril.
Paul Krugman
Now there are two ways in which the authorities of a particular country may combine the use of financial policy and of price adjustment. (i) First, financial policy may be used for the preservation of internal balance and price adjustment for the preservation of external balance. (ii) Second, financial policy may be used for the preservation of external balance and price adjustment for the preservation of internal balance. On either of these principles the authorities of any one country can set about the simultaneous preservation of internal and external balance.
James Meade
The effectiveness of any model used to describe and understand behavior of a particular system as a whole ultimately depends on the degree to which that model accurately represents that system. Nevertheless, there have been and are situations in which application of deterministic or animate models to social systems have produced useful results for a short period of time. However, in a longer run, such mismatches usually result in less than desirable results because critical aspects of the social systems were omitted in the less complex model that was used.
Russell L. Ackoff