The Missing Motivations in Macroeconomics

Introduction

    At the end of the 1970's, Keynesian economics was on the decline because of an occurence of increased inflation and increased unemployment.  These occurring simultaneously had seemed impossible under the idea of a simple (non-accelerationist) Phillips Curve.  However, economic views were also changing because world views were changing.  
    Many felt that the simple ideas used in Keynesian economics, increased inflation means decreased unemployment, were too simple.  These economist believed that macroeconomic relations should be derived from economic principles: behavior of profit maximizing firms and utility maximizing consumers.  These thoughts had a significant impact on macroeconomics because they did not reproduce the standard macroeconomic models.  They produced five neutrality results:

• independence of consumption and current income
• Modigliani-Miller Theorem
• natural rate theory
• inability to stabilize output in the presence of rational expectations
• Ricardian equivalence

The Five Neutrality Results

• Ricardian Equivalence

• Dependence of Consumption on Wealth, not Income

• The Modigliani-Miller Theorem

• Natural Rate Theory

• Rational Expectations