The Three Schools of Economic Thought
22 December 2016 | Pago Pago, American Samoa
Post-Keynesian economists are united in maintaining that Keynes' theory is seriously misrepresented by the two other principal Keynesian schools. The theoretical foundation of post-Keynesian economics is the principle of effective demand, that Say's law does not apply because of liquidity preferences and hoarding, so that a competitive market economy has no natural or automatic tendency towards full employment at all. It is the dominant working school of economics.
Neo-Classical Keynesian Economics or Neo- Keynesian Economics is the IS-LM Keynesian graphical orthodoxy, merged with neoclassical micro economics to form a neoclassical synthesis which too largely still believes the interest rate is the equilibrating mechanism that leads us to full employment. It was dominate in the 50's and 60's and is still the core of mainstream economics taught in most economics departments today through first year graduate school. It was largely what I was taught along with all of Friedman's criticisms of it and his monetarism at Chicago.
New Keynesian Economics, strives to provide the aggregating micro economic foundations for Keynesian economics, but it ignores far too much of Keynesianism, including most all of the things the Post Keynesians focus on. It has been the dominant mathematical and statistical cutting edge in macroeconomics since the 1980s. Chicago is at the vanguard here, focusing on Dynamic Stochastic General Equilibrium modeling as a branch of applied general equilibrium theory which Post Keynesians in the Minsky tradition deny even exists.
Post-Keynesian Economics can be seen as an attempt to rebuild economic theory in the light of Keynes' stronger and more useful ideas and insights. However, post-Keynesians cannot always agree on which those are and much current post-Keynesian thought cannot much be found in Keynes very easily at all. Some post-Keynesians focus more on income and wealth distributional issues, some on what Hyman Minsky has added to Keynes, and some go beyond the theory of continuing disequilibria to theories of growth, trade and development in which liquidity preferences play a key role.
Most all agree that Neo-Classical Keynesian Economics or Neo-Keynesian Economics of the 50's and 60's is dated, not very predicatively useful, but is a good teaching first approximation. The Post Keynesians argue that the New Keynesians are playing with modeling toys and throwing too much of the baby out with the bath water and the New Keynesian counter that without micro economic foundations for Keynesianism, we will never get anywhere.
In Neo-Classical Keynesian Economics or Neo-Keynesian Economics when interest rates failed to provide equilibrium, adherents now say continuing disequilibria are caused by the forces of technology, new preferences, new endowments and and the like, recognizing equilibrium is unlikely and they focused on those as reasons why.
In the field of monetary theory, post-Keynesian economists were the first to explain that the money supply responds to the demand for bank credit, so that the central bank or the Fed cannot directly get control of the quantity of money as Friedman hoped, but can only manage the federal funds interest rate and make secondary bond purchases and sales to thereby indirectly control the quantity of monetary reserves in the banking system. Post Keynesians have been at the vanguard of monetary theory. New Keynesianism all but ignores it.
Post Keynesians also understand the role of uncertainty as it bears on liquidity preferences and the demand for cash and near cash and the role of hoarding. Modern Monetary Theory is a relatively recent offshoot of Post Keynesianism, which was already well oriented toward many such aspects of monetary theory, and the influences of Hyman Minsky, of functional finance and of chartalism
You will never guess toward which school my sympathies lie.