Price and Prejudice. The statics and dynamics of money-wage flexibility
AbstractKeynesâ€™s dynamic, open-end approach to money-wage flexibility is contrasted with the subsequent rehabilitation of the static analysis of the problem, which has led to the â€˜closureâ€™ of the Keynesian system and the vindication of the economyâ€™s capacity for selfadjustment. Not even in static analysis, it is further maintained, can money-wage flexibility be counted on to bring about a rise in aggregate demand and employment. For the flaws in the logical basis of the decreasing relationship between the demand for capital and the rate of interest undermine the â€˜Keynes effect,â€™ so that the AD curve - predominantly governed by the deflation-induced redistribution of real wealth from debtors to creditors - assumes an upward-sloping shape at all price levels. As against the claim that after a sufficiently long period of time the â€˜Pigou,â€™ or â€˜real balanceâ€™ effect, will prevail over the above redistribution (or â€˜reverse Pigouâ€™) effect, it is contended that long-lasting excess capacity and unemployment will cause both the productive capacity installed to shrink and â€˜discouragedâ€™ workers to leave the labour market. Unemployment may thus disappear through an entirely different road than those envisaged by believers in the self-adjusting properties of the economic system.
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Bibliographic InfoPaper provided by University of Rome La Sapienza, Department of Public Economics in its series Working Papers with number 86.
Date of creation: Aug 2005
Date of revision:
deflation; money-wage flexibility; statics and dynamics; AD curve.;
Find related papers by JEL classification:
- B20 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - General
- E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
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5683, National Bureau of Economic Research, Inc.
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