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Price flexibility and full employment: barking up the wrong (neoclassical) tree

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  • Roy H Grieve

    (Department of Economics, University of Strathclyde)

Abstract

This paper (a revised version of Strathclyde Paper 2004-07) questions the thesis (again in fashion) that price flexibility ensures full employment. (See most standard macro textbooks.) We make the point that explanation of unemployment in terms of price/wage stickiness typified much pre-Keynesian analysis, but not Keynes’s theory of involuntary unemployment. Under uncertainty - an essential aspect of the Keynes conception - no set of prices consistent with full employment may actually exist: if so, price inflexibility is not the critical obstacle to the attainment of full employment. Finally, with respect to current use of the AD/AS model, we note that once-rejected ideas have returned to the mainstream and that the strong arguments against attribution of necessarily beneficent effects to price and wage flexibility, which ought to be well-known, seem now to be forgotten.

Suggested Citation

  • Roy H Grieve, 2016. "Price flexibility and full employment: barking up the wrong (neoclassical) tree," Working Papers 1601, University of Strathclyde Business School, Department of Economics.
    • Handle: RePEc:str:wpaper:1601
    as

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    File URL: http://www.strath.ac.uk/media/1newwebsite/departmentsubject/economics/research/researchdiscussionpapers/16.01.pdf
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    References listed on IDEAS

    as
    1. Laidler,David, 1999. "Fabricating the Keynesian Revolution," Cambridge Books, Cambridge University Press, number 9780521641739.
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    More about this item

    Keywords

    price adjustment - the rate of iterest; wages; the price level; classical and Keynesian perspectives; counting equations and unknowns; the ADAS model;
    All these keywords.

    JEL classification:

    • B13 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Neoclassical through 1925 (Austrian, Marshallian, Walrasian, Wicksellian)
    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics

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