Neoclassical synthesis

The neoclassical synthesis (NCS), neoclassical–Keynesian synthesis,[1] or just neo-Keynesianism was a post-World War II academic movement and paradigm in economics that worked towards reconciling the macroeconomic thought of John Maynard Keynes with neoclassical economics.[2] Being Keynesian in the short run and neoclassical in the long run, neoclassical synthesis allowed the economy to adjust via fiscal and monetary policies in the short run (especially focusing on fiscal policies that were considered to be more effective than monetary ones) whilst predicting that equilibrium in the long run will be reached without state intervention.[3] The synthesis, formulated by a group of economists (most notably John Hicks, Franco Modigliani and Paul Samuelson), dominated economics in the post-war period and formed the mainstream of macroeconomic thought in the 1950s, 1960s and 1970s.[4]

A series of developments occurred that shook the neoclassical synthesis in the 1970s as the advent of stagflation and the work of monetarists like Milton Friedman cast doubt on neo-Keynesian conceptions of monetary theory. The conditions of the period proved the impossibility of maintaining sustainable growth and low level of inflation via the measures suggested by the school.[5] The result would be a series of new ideas to bring tools to macroeconomic analysis that would be capable of explaining the economic events of the 1970s. Subsequent new Keynesian and new classical economists strived to provide macroeconomics with microeconomic foundations, incorporating traditionally Keynesian and neoclassical characteristics respectively. These schools eventually came to form a "new neoclassical synthesis", analogous to the neoclassical one,[5][6] that currently underpins the mainstream of macroeconomic theory.[7][8][9]