Question

What did the shift from marginal revolution economics to the macroeconomics paradigm entail? Particulary the Keynesian school of thought

Answer 1

Marginalist Revolution involved three changes to the economic paradigm.  These are: (a) the shift from the growth and evolution of the economy as the focus of attention to allocative efficiency; (b) the shift from descriptive to mathematical reasoning with a concentrated focus on the maximization principle; and, (c) resolution of the Classical disjunction between the theories of value and distribution on the basis of a single principle – scarcity relative to consumer wants, needs and desire

The shift from the Keynesian model (marginal revolution economics) to the macroeconomic paradign was mainly because of its inability to explain subsequent macroeconomic developments when new theories could. Some of the reasons are as follows:

• Poor forecasting performance of Keynesian econometric models,
• Increasing recognition of supply-side factors as drivers of fluctuations, and
• The breakdown of the Phillips curve.

Moreover, theoretical developments identified theoretical weaknesses of the Keynesian model and provided new theories grounded in the language of optimisation and equilibrium for understanding business cycles.

Charles Nelson (1972) levelled the first significant empirical criticism of the Keynesian model by showing that low-order integrated autoregressive-moving average models produced lower mean square error forecasts than detailed Keynesian models that were the industry standard.

Nowhere were these empirical inconsistencies more evident than with the Phillips curve.

In addition, economists began to understand that a substantial fraction of fluctuations, particularly those in the 1970s, arise from the supply side of the economy.

The Keynesian framework, as presented in large-scale econometric models, was not microfounded, and thus was sharply at odds with the developments in economic theory of the 1960s and 1970s.