A important part of mainstream economic belief in the ability of price and wage flexibility to eliminate unemployment has been the so-called Keynes effect, viz., downward flexibility in prices and wages reducing interest rates and stimulating effective demand. Yet, the theoretical real wage -interest rate relation underlying this effect appears to be incompatible with the long-period relation between these variables in a capitalist economy. Moreover, at least in terms of a Sraffa-Keynes framework, the relation between the rate of interest and employment cannot be assumed to be monotonically inverse in the presence of alternative techniques of production.
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Paper provided by University of Ottawa, Department of Economics in its series Working Papers with number
9712e.
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