Abstract
In The General Theory Keynes attempted to prove the possible coexistence of macroeconomic equilibrium with involuntary unemployment. However, with the introduction of the Pigou effect, the neoclassical synthesis concluded that in terms of theory Keynes failed to prove his case and the Monetarists appear to be in agreement with this conclusion, e.g. Friedman [26] accepts the theoretical impossibility of unemployment equilibrium and states that ‘Keynes’s error consisted in neglecting the role of wealth in the consumption function’.1 However, the implications of the Pigou effect are that price flexibility is sufficient to ensure full employment and therefore Keynesians and Monetarists accept that price rigidities must be the root cause of unemployment, e.g. Friedman’s explanation of the existence of unemployment is entirely consistent with the conclusion of the neoclassical synthesis: ‘All sorts of frictions and rigidities may interfere with the attainment of a hypothetical long run equilibrium position at full employment … but there is no fundamental “flaw in the price system” that makes unemployment the natural outcome of a fully operative market mechanism’ [26].
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Notes and References
See, for example, the proof developed in J. Quirk and R. Saposnik, Introduction to General Equilibrium and Welfare Economics (New York: McGraw-Hill, 1968), based on the original work of Arrow and Debreu.
Reproduced by R. Clower, ‘Reflections on the Keynesian Perplex’, in Zeitschrift für Nationalökonomie (1975) pp. 4–5. However, in spite of this Hicks and others continued to refine their analysis of the Walrasian system, but by the end of the 1960s many general-equilibrium theorists were found to be in close agreement with Keynes’s original position of 1933–4, e.g. ‘It must now I fear be admitted that the study of the Walrasian tâtonnement process has not been very fruitful…. The Walrasian economy is essentially one of barter.’ (Hahn [34]). ‘The Arrow-Debreu model describes a world in which none of the problems which interested Keynes can occur’ (F. H. Hahn, ‘Money and General Equilibrium’, Indian Economic Journal (Dec 1975)).
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© 1978 Brian Morgan
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Morgan, B. (1978). A Reappraisal. In: Monetarists and Keynesians. Palgrave, London. https://doi.org/10.1007/978-1-349-15963-5_5
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DOI: https://doi.org/10.1007/978-1-349-15963-5_5
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