The Tragic Path of New Keynesianism
Summary
Jonathan Newman critiques the New Keynesian paradigm, arguing that the 2026 Nobel Prize winners Robert Hall and Michael Woodford built a flawed framework by reducing complex market processes to aggregate equations. He contends that their models ignore money, capital structure, and entrepreneurship, replacing them with unobservable variables like the natural rate of interest. Newman contrasts this with the Austrian tradition, which explains prices and business cycles through individual time preference and entrepreneurial calculation. He concludes that central bank interventions based on thes…
Topics discussed
The 1970s Stagflation and the Crisis of Old Keynesianism
The Rise of New Keynesianism and Micro-Foundations
The 2026 Nobel Prize: Hall and Woodford's Contributions
Explaining the Three Core New Keynesian Equations
Critique: Missing Money, Capital, and Entrepreneurship
The Austrian Alternative: Menger and the Marginal Revolution
Austrian Capital Theory and Business Cycle Analysis
Why Human Action Cannot Be Reduced to Equations
Critique of the Consumption Function and Neutral Rate
Circularity in Price Setting vs. Austrian Imputation
The Importance of Relative Prices and Cantillon Effects
Challenging the Goals of Stable Prices and Employment
Interest Rates, Time Preference, and Credit Expansion
The Unobservability of Key Macroeconomic Variables
Empirical Failures: Crises, Debt, and Inflation
The Austrian Prescription: Sound Money and Hands-Off Policy
Conclusion: Significance vs. Sound Economics
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