Keynesian Business Cycle Theory, Part Deux: Inflexible Prices and Wages

In chapter 1, I discussed two variations on Keynes’s ideas that his followers advocate. First, I discussed the followers who, in response to mild criticisms of Keynes’s ideas, claimed that falling wages could eliminate unemployment but that wages would have to fall too far to eliminate it and that this would be “hopelessly disruptive” because of the dramatic decrease in spending this would allegedly cause. I refuted this claim in chapter 1. However, there are also the followers who say falling wages and prices might be able to reduce unemployment but that wages and prices are “sticky” (especially in the downward direction with regard to wages) and therefore will not eliminate unemployment very quickly. Furthermore, I mentioned that in more recent years so-called new Keynesians have spent much effort trying to provide reasons why prices and wages are allegedly inflexible. Finally, I stated that the acceptance of these ideas by Keynes’s followers represents a significant abandonment of the substance of the Keynesian position.