James Tobin 47 For this reason, Keynesian macroeconomics alleges that capitalist societies are vulnerable to very costly economy-wide market failures. Individuals would be willing to supply more labor and other resources in return for the goods and services the employment of those resources would enable them to consume now or in the future, but they cannot implement this willingness in market transac tions. As the quotation from Ball, Mankiw, and Romer suggests, many contem porary theorists cannot believe any theory that implies socially irrational market failures. They suspect that individual irrationalities are lurking somewhere in the theory. In continuously price-cleared competitive markets, they know, individually rational behavior implies collectively rational outcomes. But this theorem does not apply if markets and price-setting institutions do not produce perfectly flexible competitive prices. Individual rationality does not necessarily create the institutions that would guarantee"invisible hand"results. Keynes as not questioning the rationality of individual economic agents; he was arguing that their behavior would yield optimal results if and only if they as citizens organized the necessary collective institutions and government policies In the same spirit though in different contexts, some modern theoretical research has shown that welfare-improving policies may be designed even when asymmetries of information and incompleteness of markets prevent the achievement of global optima Ball, Mankiw, Romer and others style themselves as New Keynesians Their program is to develop improved microeconomic foundations for imper fectly fexible prices. In the process, they hope to illuminate the paradox that individually rational or near-rational behavior can result in significant collective market failures. These are certainly laudable objectives. In the end, I suspect the program will not change the essential substance of Keynesian macroeco- nomics. But it will make Keynes more palatable to theorists In Keynesian business cycle theory, the shocks generating fluctuations are generally shifts in real aggregate demand for goods and services, notably in capital investment. Keynes would be appalled to see his cycle model described as one in which "fluctuations in output arise largely from fluctuations in nominal aggregate demand"(Ball, Mankiw, and Romer 1988, p. 2). The difference is important. The impact on real purchases of a one-time one percent shock to aggregate nominal spending will be eroded if and as nominal prices increase in response, and eliminated once prices have risen by the same one percent as nominal spending did. But suppose it is real demand that initially rises one percent. At the prevailing prices nominal spending will rise one percent too. But if and as prices rise in response the one percent real demand shock becomes an ever larger amount of nominal spending. Its impact is not mechanically eroded by the price response; if it is absorbed, the process subtle and indirect The big issue between Keynes and his"old classical"opponents was the efficacy of the economy's natural market adjustment mechanisms in restoring full employment equilibrium, once a negative real demand shock had pushed