The Neoclassical Synthesis formed the mainstream of macroeconomic thought after World War II, up until the early 1970’s. The macroeconomics was based on models formed around from an interpretation of John Maynard Keynes’s ideas in The General Theory of Employment, Interest, and Money (1936), starting with the IS-LL model introduced by John Hicks in Mr Keynes and the Classics: a suggested interpretation (1937). This model provided a starting point for a development for various extensions of Keynes’s analysis (Dixon and Gerrard, 2000), and was subsequently elaborated on by Modigliani (1944) and later modified and popularised in the United States by Hansen (1949, 1953) to produce the IS-LM system familiar to generations of economics students (Fletcher, 2002), and Paul Samuelson through his Principles textbook.
The Neoclassical synthesis was concerned with to what extent the principle innovations introduced by Keynes in The General Theory could be reconciled with the existing framework of neoclassical economics. Through its development, the Neoclassical Synthesis confirmed the validity of orthodox theory and subsumed Keynesian economics as a special case of the classical one; one relevant to policy making in a slowly, imperfectly adjusting real world. In the macroeconomic theory of the Neoclassical Synthesis, automatic adjustment to achieve full employment was apparent if money and prices are flexible, through the IS-LM and Pigou effect (Patinkin,1948).
In this essay, in chronological fashion, I will discuss a short history of the neoclassical synthesis, the popularity it gained through the ‘golden age of capitalism’, the theoretical schizophrenia that arose from the synthesis, its ultimate demise within the political context of the 1970’s, and subsequent contributions to mainstream economics resolving the inconsistencies within the synthesis, both in theory and what has come to be influential within mainstream economics/policy making. I will then discuss the legacy and the influence the synthesis has on today.