The old-Keynesian model is driven completely by an income effect with no substitution effect. Consumers don’t think about today vs. the future at all. The new-Keynesian model based on the intertemporal substitution effect with no income effect at all.
Read the whole thing. He argues, I believe correctly, that advocates of Keynesian stimulus use the old Keynesian model to persuade laymen and policymakers and use the new Keynesian model to fend off other economists. You tell the simplistic “spending creates jobs, and jobs create spending” story to the public, and you tell a mathematically elegant but quite different intertemporal substitution story in academic work.
Arnold, some of your posts like this one are utterly cryptic to anyone who is not a graduate economist. If you want to reach a readership of intelligent non-professionals, clearer explanation is needed.
Thanks for your good work.
I laughed when I read the formula following “In its simplest version”. It’s not simple at all!
Thinking further on it, I believe the general public would run out on rails anyone who openly pushed new Keynesianism. It reeks of the Ivory Tower.
Sounds like Keynsian economists could be the subject of a behavioral economics study. Think Daniel Kahneman and heuristics.