The Market Fails: The Birth of an Idea

Abstract

Milton Friedman is supposed to have said, ‘There is no such thing as macroeconomics. All economics is microeconomics.’ If he did say it, and it sounds very much like what he would say, he would be reflecting the views of the Classical economists Keynes so damningly criticised in his writings during the interwar period. The Classical view is that competitive markets, if left to their own devices, will always converge to a competitive equilibrium. The competitive process was the basis of Classical economic thought. The labour market was no exception. However, they were not so naive as to think that the labour market would behave exactly as an auction market, like, say, the stock market or the market for commodities. It was generally accepted that unemployment can exist and will vary inversely with the business cycle. However, unemployment was seen more or less as a temporary phenomenon, caused by structural dislocation, changes in tastes and technology, the vagaries of the business cycle and the slowness of adjustment in the labour market. Unemployment implies that there are more workers willing to work at the going wage rate than there is available work. Workers may dislike adjusting wage rates downwards in a recession, but the excess supply of labour in such a situation, and the competitive forces opened up by it, is a necessary fact of life, according to the Classical view.