The Neo-Keynesian world has faced several challenges since the 1960s. Here, we shall highlight only a few. The first substantial challenge which made the Neo-Keynesians stand up and take notice was the "disequilibrium" dispute posed by Robert Clower (1965) and then followed up by Axel Leijonhufvud (1967, 1968) and Robert Barro and Herschel Grossman (1971, 1976). As the title of Leijonhufvud's famous tome insinuates, On Keynesian Economics and the Economics of Keynes (1968), they charged the Neo-Keynesians not only with a complete misreading of the General Theory but, more importantly, with a misguided modelling approach. They argued that the Neo-Keynesians had spent far too much time trying to incorporate two contradictory objectives: namely, the modelling of a Keynesian "unemployment equilibrium" and the pursuit of a quasi-Walrasian grounding for particular relationships (consumption, investment, etc.). They claimed these objectives were incompatible. They argued that if one wants to ground macroeconomic relationships in "Walrasian" microeconomics, then, consequently, one cannot accept an "unemployment equilibrium" as implied by the IS-LM structure but rather must consider unemployment a result of "disequilibrium" which the Walrasian price mechanism is either incapable of curing or takes too long a time doing so. For this last point, they suggested the "disequilibrium" approach to macroeconomics first outlined by Don Patinkin (1956) - namely, of differentiating between "notional" (Walrasian) demand and "effective" (Keynesian) demand. The latter could be conceived of as an "aggregate" imposition on an otherwise standard Walrasian budget constraint so that disequilibrated markets would be rationed on the short-side -- thus obtaining a "Non-Walrasian" equilibrium in a "Walrasian" setting. To justify the division between notional and effective demand, Clower, Leijonhufvud et al. appealed to the crucial roles of money, information, expectations and coordination. By attempting to integrate Keynesian effective demand, money and expectations with Walrasian microfoundations, one might reasonably argue that Patinkin, Clower, Leijonhufvud and company were pursuing a "Walrasian-Keynesian Synthesis" (in contrast to just fuzzy "Neoclassical"). The Clower-Leijonhufvud critique was an awakening call for macroeconomists everywhere. The Neo-Keynesians began to realize the importance both of proper microfoundations and of the possibility of remodelling their theory as "prolonged disequilibrium" instead of "underemployment equilibrium". However, the Neo-Keynesians did not have much of an opportunity to change their strategy - for they were quickly faced with a series of other challenges. The Clower-Leijonhufvud critique also woke up the Cambridge Keynesians. As the old jibe goes, Cambridge, Massachusetts (i.e. Harvard and M.I.T.), may believe it is the center of the world, but Cambridge, U.K., believes it is the world. Consequently, since the 1930s, the Cambridge Keynesians had been pursuing a distinct research programme, almost oblivious to the fact that the Neoclassical-Keynesian Synthesis had been establishing a monopoly over macroeconomics. Joan Robinson, Nicholas Kaldor and, across the way at Oxford, Roy Harrod and John Hicks, had been absorbed in working on extending Keynes's theory to the "long run" and thus, throughout the 1950s and early 1960s, their engagements with the Neo-Keynesians had been largely limited to acrimonious battles over capital and distribution. However, they continued producing work on growth theory, business cycle theory, capital and distribution along Keynes's lines without really realizing that their impact on wider economics had been eclipsed by the American Neo-Keynesian edifice. When the Clower-Leijonhufvud critique emerged and informed them of what had been happening in the meantime, the Cambridge Keynesians received the news with what elderly Englishmen call "concern" and the rest of us would call "panic". The Cantabrigian research programme, carefully built over the years, was virtually dropped onto the wayside overnight as their efforts were redirected towards dismantling the Neoclassical-Keynesian Synthesis. Like a modern Joan of Arc, Joan Robinson rallied the Cantabrigians and went on a blood hunt: trying first to redirect the cannons of the Capital Controversy to the wider Neo-Keynesian edifice, and then, when that seemed to fail to impress, she focused on developing a wide-ranging methodological critique of the Synthesists - an effort in which she was significantly assisted by a shocked and penitent Sir John Hicks. The panic deepened in the late 1970s when sensing the disarray in their field and the futility of the Robinsonian tactic, the Sraffian subset of Cambridge Keynesians, notably Piero Garegnani (1978) and John Eatwell (1979), presented a radical new plan of attack: discard Keynes and the General Theory! More precisely, they proposed to throw out everything except the theory of effective demand (which they considered Keynes's only useful contribution), and build up an entirely new Keynesian theory from Ricardian-Sraffian microeconomic foundations. This radical "Neo-Ricardian" suggestion was not exactly palatable to Robinson, but she was looking for allies wherever she could find them. But she also found enemies everywhere. She applauded the Clower-Leijonhufvud camp for their critique, but balked at their solution; she then turned Richard Kahn on to them and, further afield, unleashed the Sraffian dogs of war against the relatively quiet Walrasians. This last step irked the resident Cambridge Walrasian, Frank Hahn, and the gleeful Sraffian assault resulted in another distracting debate over capital and methodology. In Hahn's eyes, and more significantly, Nicholas Kaldor's, the real threat over the horizon was not the Neo-Keynesians (whose days seemed numbered anyway), nor indeed the Walrasians (who worked quietly on the precipice of irrelevance), but rather the rising and virulent Monetarist dawn - "a terrible curse, a visitation of evil spirits" as Kaldor (1981) pronounced it. Robinson disagreed - or rather lumped Neo-Keynesians, Monetarists, Walrasians and Non-Walrasians as birds of a feather fit to be discarded together - and deep fissures began to develop among the Cambridge Keynesians. At one point, Robinson turned to the American Post Keynesian school of Weintraub, Davidson, Minsky and Eichner, who shared a similar methodological revulsion to Neo-Keynesianism, but their own research programme was not exactly synchronous with the Cantabrigian one - and brought another set of distinct views on board an already tight, bickering boat. In particular, the suggestion of a "Ricardian-Keynesian Synthesis" did not go down well with the Post Keynesians, who were suspicious that Ricardian concepts like "long-run positions", money neutrality and "objectivist" theories of value might seriously undermine what they believed were Keynes's crucial insights. While the Cambridge Keynesian ship, their original research programme abandoned, was sinking into a mire of confusion, controversy and division, the Monetarists slipped into the fray and gave the Neo-Keynesians the broadside charge that ultimately overturned them. Unlike the Cantabrigians, the Monetarists had been very well aware of the existence of the Neo-Keynesians and were building up a slow and careful challenge. Milton Friedman's (1956) perhaps premature "restatement" of the Quantity Theory, wherein he argued for a new transmission channel where excess money supply translates into excess demand for goods, was quickly dismissed by fellow economists as pre-Keynesian hash and duly ignored. He then presented unto them his weighty Monetary History of the United States (1963) with Anna Schwartz, which made the Keynesians take notice. "Money matters!", Friedman seemed to shout at the Neo-Keynesians through piles of historical evidence, effectively challenging them to a quantitative race to see by just how much. As Friedman's arguments were couched in Keynesian IS-LM language, his arguments did not seem to be mere pre-1936 relics. Then came the gauntlet: in his 1968 presidential address to the American Economic Association, Milton Friedman unveiled his "natural rate of unemployment" hypothesis and predicted the empirical break-up of the Phillips Curve relationship. It was a radical gamble that could have ruined his reputation, but Friedman's prediction came out to be true as evidence of the northeasterly migration of the Phillips Curve began being reported. The credibility of the Monetarists shot up with every extra percentage point of inflation and unemployment and this was assisted by Friedman's growing public image, his increasingly vocal political philosophy and, above everything, his remarkable ability to draw in, engage and then elude the most prominent Keynesians, most notably James Tobin, in an often cacophanous theoretical debate. However, fox hunts do not make for intellectual revolutions and it is conceivable that had Friedman been convinced to sit still for a moment, or if his pursuers had grown exhausted of chasing him, Monetarism might have faded away as a credible challenge. The real theoretical revolution, what kept the Monetarist boat afloat, was Edmund Phelps's (1967, 1970) formalization of the concept of the natural rate of unemployment - for then a theoretical alternative was born. The natural rate hypothesis was given an immense boost with the publication of Robert Lucas's (1972, 1973) groundbreaking thesis on rational expectations and the neutrality of monetary policy. Its theoretical and formal sophistication made Tobin's (1972) response to Friedman (and indeed, Friedman's original arguments) seem almost amateuristic. A "New Classical" macroeconomics was born, with a sufficient degree of rigor and controversy to impress the elders and entice the young. As Lucas, Sargent, Barro and company were integrating optimizing agents into their approach, they seemed to possess the necessary "microfoundations" that Leijonhufvud (1968) had insisted upon. As a result, the appeal of the Clower-Leijonhufvud disequilibrium approach disappeared virtually overnight - or rather, migrated to Europe and stayed there. Now, it was the turn for the older Neo-Keynesians to panic. Unable to challenge the Phelps-Lucas natural rate hypothesis on a theoretical basis, they turned onto methodological critique, citing the superiority of their empirical intuition, the policy relevance of their work and the obvious untruth of the rational expectations hypothesis. The first charge was demolished as stagflation took root in the Western world -- Phelps-Lucas seemed to at least give a coherent theoretical justification for it, while the Neo-Keynesians barely knew where to begin. The second claim was subsequently taken apart by Lucas (1976) in a damning critique of the conduct of optimal policy via Keynesian macroeconometric models. The third charge fell apart on two counts. Firstly, the New Classicals worked on an "as if" methodology and appealed to the intuition of the law of large numbers - they admitted that rational expectations may be too strong to assume for any single agent, but it did not seem incredulous for the aggregate, particularly when predictive power was not lost. Secondly, and this was a lesson unlearned by Robinson, methodological challenges will not be heeded unless there is a coherent theoretical alternative offered as enticement - and the Neo-Keynesians had none, and the Cambridge Keynesians had too many. By 1977, a year after Milton Friedman won the Nobel Prize, Franco Modigliani, in his presidential address to the AEA, virtually announced the surrender of the Neo-Keynesians and the acceptance of the natural rate hypothesis:
These words, perhaps more than any other, indicated that the era of the Neoclassical-Keynesian Synthesis had ended.
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