COMPARING SCHOOL OF THOUGHT

Classical School Keynesian School Neoclassical Synthesis New Neoclassical Post-Keynesian

School Synthesis School School
Adam Smith, Keynes Paul Samuelson, Michael Woodford, Michal Kalecki,
David Ricardo, Robert Solow, Marvin Goodfriend, Joan Robinson,
Jean-Baptiste Say, John Hick, Mark Gertler, Paul Davidson,
Lèon Walras, James Tobin Jordi Galí Nicholas Kaldor,
Alfred Marshall, Hyman Minsky,
William Stanley Jevons, Victoria Chick,
Arthur Cecil Pigou Malcolm Sawyer,
Philip Arestis

Supply-determined in Demand-determined in - Demand-determined - Demand-determined Demand-determined in

both long and short both long and short in the short run in the short run both long and short
run run - Supply-determined in - Supply-determined
the in run the
long run long run

Money is neutral in both Money is NOT neutral in - Money is neutral in the - Money is neutral in the Money is NOT neutral in
long and short run both long and short run long run long run both long and short run
- Money is NOT neutral - Money is NOT neutral
in the short run in the short run

- Prices and wages are - Prices and wages are

flexible in the long run sticky in the short run

No need for government Government intervention Government intervention Government intervention Government intervention
Intervention  Need is crucial is crucial especially in is crucial is crucial
market mechanism the short run

Fiscal policy is more Monetary policy is more Fiscal policy is more

effective than monetary effective than fiscal effective than monetary
policy policy policy
 Monetary policy leads  Fiscal policy leads to  Monetary policy leads
to inflation higher public debt to inflation

Expectations are adaptive Expectations are rational Expectations are adaptive

Firms and households Income distribution matters

maximize profits and for the determination of
utility intertemporally aggregate output

Instability is an inherent
feature of capitalism

For close economy:

AE = C + I + G
C = C0 + C1 . YD (C1: MPC – Marginal propensity to consumption)
I: Autonomous  I0
G: Autonomous  G0
 AE = C0 + I0 + G0 + C1 . YD

Autonomous Expenditure: Constant

AE
AE = Y A= C0 + I0 + G0
X 2: AE > Y  Y increases  Inventory decreases
X3: AE < Y  Y decreases  Inventory increases
X3
X1
X2
A

• Planned aggregate expenditure (AE): is the total spending on domestic goods and services in
an economy that is planned and desired.
• Actual aggregate expenditure (Y): includes planned and unplanned spending. The difference is
the change inventories which are unplanned (and can be considered as undesired).