Introduction

This book is about macroeconomics, as it centres on the key macroeconomic problem of involuntary unemployment, yet nowhere in it do we make use of the macroeconomist’s textbook tools, such as the IS-LM model and developments thereof. The reason for such a choice is that the aggregate nature of that model is necessarily bound to overshadow the relevant agents’ decision processes, so that the only policy suggestion that can possibly be drawn from it is aggregate demand management: now the latter has come under increasing critical fire over the last two decades for its ineffectiveness in coping with the problem of stagflation, which in varying degrees besets all industrialised economies of the Western world. We do accept, however, the basic logic of the ‘neoclassical synthesis’, summarised by the twin propositions that, first, global demand is not independent of the overall price level, and that, second, goods prices are not independent of production costs, from which it follows that aggregate demand, as such, sets no absolute limit on the levels of output and employment. This entails recognising, with Clower (1965), that involuntary unemployment is due to a failure of coordination among decisions at the micro level, in the sense that transactions can indeed take place at disequilibrium prices, but also that a positive price vector exists that would clear all markets if only it could establish itself.