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.
KeywordsBusiness Cycle Capitalist Economy Full Employment Capital Asset Money Wage
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