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Price flexibility and full employment: a common misconception

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  • Roy Grieve

    ()
    (Department of Economics, University of Strathclyde)

Abstract

This paper highlights and builds upon Michio Morishima’s sadly neglected thesis that multi-market economies should be envisaged, and modelled, as over-determined systems, in that the number of conditions to be satisfied for equilibrium exceeds the number of unknowns (equilibrium prices and quantities) to be discovered. This understanding undermines the comfortable supposition (underpinning both New Keynesian and New Classical theoretical approaches) that, even when the economy is not in a position of full employment, a potential equilibrium solution does exist which - if not instantly, at least eventually – will be achieved by market forces. In other words, contrary to the conventional view, observed price and wage stickiness should be considered as contributing to macroeconomic stability rather than inhibiting adjustment to full employment equilibrium. A further casualty of the Morishima perspective is the common textbook rationalisation that the Keynes theory applies only in the short run (with sticky prices) while the classical analysis comes into its own (with flexible prices) in the longer term.

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Bibliographic Info

Paper provided by University of Strathclyde Business School, Department of Economics in its series Working Papers with number 0910.

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Length: 29 pages
Date of creation: Apr 2009
Date of revision:
Handle: RePEc:str:wpaper:0910

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Keywords: Price flexibility; General equilibrium (macro) models; Walras' Law and Say's Law; Over-determined systems;

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  1. Hahn, Frank, 1981. "Reflections on the Invisible Hand," The Warwick Economics Research Paper Series (TWERPS) 196, University of Warwick, Department of Economics.
  2. Barro,Robert J. & Grossman,Herschel I., 2008. "Money Employment and Inflation," Cambridge Books, Cambridge University Press, number 9780521068659, October.
  3. Blinder, Alan S, 1988. "The Fall and Rise of Keynesian Economics," The Economic Record, The Economic Society of Australia, vol. 64(187), pages 278-94, December.
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