Disequilibrium Market Adjustment: Marshall Revisited

It is often argued that certain fundamental differences between Keynes and the neoclassics derive from different implicit assumptions about relative speeds of adjustment of prices and quantities in response to changes in demand. Indeed, Leijonhufvud has asserted that ‘The “revolutionary” elements in The General Theory can perhaps not be stated in simpler terms’ (1968, p. 52). Moreover, certain issues currently in dispute among monetarists and between monetarists and Keynesians appear to turn on much the same issue. For example, Friedman and Patinkin have quarrelled over whether Fisher and the quantity theorists ‘simply took over Marshall’s assumption [that] prices adjust more rapidly than quantities’ (Friedman, 1972, pp. 933–4; also Patinkin, 1972, pp. 892–7). Friedman insists that Fisher and all other quantity theorists must adopt Marshall’s assumption, which Friedman describes as follows: prices adjust more rapidly than quantities, indeed, so rapidly that the price adjustment can be regarded as instantaneous. An increase in demand (a shift to the right of the long-run demand curve) will produce a new market equilibrium involving a higher price but the same quantity. The higher price will, in the short run, encourage existing producers to produce more with their existing plants … it takes time for output to adjust but no time for prices to do so. (Friedman, 1972, p. 934)