Audio Mises Wire The Tragic Path of New Keynesianism
Oct 14, 2026
Jonathan Newman, an Austrian economist and Mises Institute writer, traces New Keynesianism from the collapse of traditional Keynesian models after stagflation to today’s DSGE consensus. He discusses Hall and Woodford, representative-agent equations, central-bank interest-rate targeting, and what mainstream models leave out: money, capital structure, entrepreneurship, and the market process.
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Stagflation Rebuilt Keynesian Economics
- The 1970s stagflation exposed failures in old Keynesian models and encouraged rational expectations, micro-foundations, and DSGE approaches.
- Modern consensus preserves Keynesian stabilization ideas while embedding forward-looking households and firms in neoclassical equations.
The Three Equations Behind New Keynesianism
- Hall and Woodford’s framework links consumption, inflation, output gaps, and interest-rate policy through forward-looking behavior.
- It portrays households as anticipating economic conditions, firms as facing sticky prices, and central banks as stabilizers.
What New Keynesian Models Leave Out
- New Keynesian models omit money, capital structure, entrepreneurship, and the market process that coordinates prices.
- Austrian economics instead connects monetary theory and capital theory through individual action and entrepreneurial discovery.