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An Old Keynesian Counterattacks

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Abstract

Both New Classical and New Keynesian macroeconomic theorists misunderstand and distort old Keynesian economics, alleging that its diagnoses and prescriptions depend on the indefensible assumption that money wages and prices are "rigid." Here it is argued that all Keynesian macro requires is that labor and product markets are not instantaneously and continuously cleared by perfectly flexible prices. Assuming imperfect flexibility, not necessarily rigidity, suffices to open the door for involuntary unemployment. Moreover, once the economy is displaced from full employment, it is far from clear that economy-wide movements of money wages and prices will, in the absence of Keynesian demand policies, restore equilibrium. The real balance effect is too feeble, and may be overcome by debt burdens. The processes of deflation and disinflation can be inherently destabilizing. These problems, stressed by Irving Fisher as well as by Keynes and Keynesians, are ignored in "new" macroeconomics.

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Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1042.

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Length: 22 pages
Date of creation: Mar 1993
Date of revision:
Publication status: Published in Eastern Economic Journal (Fall 1992), 18(4): 387-400
Handle: RePEc:cwl:cwldpp:1042

Note: CFP 843.
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  1. James Tobin, 1975. "Keynesian Models of Recession and Depression," Cowles Foundation Discussion Papers 387, Cowles Foundation for Research in Economics, Yale University.
  2. J. Bradford De Long & Lawrence H. Summers, 1985. "Is Increased Price Flexibility Stabilizing?," NBER Working Papers 1686, National Bureau of Economic Research, Inc.
  3. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  4. Chadha, Binky, 1989. "Is Increased Price Inflexibility Stabilizing?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(4), pages 481-97, November.
  5. Okun, Arthur M, 1980. "Rational-Expectations-with-Misperceptions as a Theory of the Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(4), pages 817-25, November.
  6. Dudley Dillard, 1988. "The Barter Illusion in Classical and Neoclassical Economics," Eastern Economic Journal, Eastern Economic Association, vol. 14(4), pages 299-318, Oct-Dec.
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Cited by:
  1. Michel DE VROEY & Pedro GARCIA DUARTE, 2012. "In Search Of Lost Time: The Neoclassical Synthesis," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2012026, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  2. Altman, Morris, 2006. "Involuntary unemployment, macroeconomic policy, and a behavioral model of the firm: Why high real wages need not cause high unemployment," Research in Economics, Elsevier, vol. 60(2), pages 97-111, June.
  3. Peter Flaschel & Reiner Franke, 2000. "An Old-Keynesian Note on Destabilizing Price Flexibility," Review of Political Economy, Taylor & Francis Journals, vol. 12(3), pages 273-283.

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