Fundamental Perspectives

Abstract

Today’s dominant interpretation as embodied in the neoclassical synthesis holds that Keynes’s The General Theory presents an equilibrium model not truly different from that which would have been accepted by a sophisticated follower of Marshall at the time Keynes wrote. In this view, if what is taken to be Keynes’s main unconventional proposition—that enduring underemployment is a possible state of a capitalist economy—is true, it is because either rigidities, especially of money wages, or particular shapes of functional relations, such as the liquidity trap, are assumed to be empirically valid. A standard view is that the neoclassical synthesis, achieved when the real-balance effect was introduced into a Keynesian framework to assure that the simultaneous equilibrium in the commodity and money markets would be consistent with labor-market equilibrium, was implicit in the pre-Keynesian arguments. Once this real-balance effect has been introduced, standard theory shows that the market mechanism is not inherently flawed: market processes will achieve and sustain full employment.