A Consensus?

Abstract

‘It is usually considered as one of the most important achievements of the Keynesian theory that it explains the consistency of economic equilibrium with the presence of involuntary unemployment’ (Modigliani [60]). This quotation illustrates quite effectively that the debate which followed the publication of Keynes’s General Theory centred on the conditions under which the Keynesian system could settle at a position of unemployment equilibrium. It will be recalled that the classical system could remain at such a position only if money wages were rigid and therefore the question raised by the debate was whether the Keynesian system could remain at less than full employment despite flexibility of money wages. However, we illustrated in Chapter 2 that even when the IS and LM curves intersect at less than full employment, flexible wages and prices would, via the Keynes wealth effect, ensure a return to full employment. Therefore, if conclusions different from the classical analysis were to be arrived at, Keynesians needed to expound the conditions under which the Keynes effect would not succeed in generating a return to full employment.