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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.

Suggested Citation

  • Roy Grieve, 2009. "Price flexibility and full employment: a common misconception," Working Papers 0910, University of Strathclyde Business School, Department of Economics.
  • Handle: RePEc:str:wpaper:0910
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    File URL: http://www.strath.ac.uk/media/1newwebsite/departmentsubject/economics/research/researchdiscussionpapers/2009/09-10RHG.pdf
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    References listed on IDEAS

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    1. Blinder, Alan S, 1988. "The Fall and Rise of Keynesian Economics," The Economic Record, The Economic Society of Australia, vol. 64(187), pages 278-294, December.
    2. Hahn, Frank, 1981. "Reflections on the Invisible Hand," The Warwick Economics Research Paper Series (TWERPS) 196, University of Warwick, Department of Economics.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

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

    JEL classification:

    • E11 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Marxian; Sraffian; Kaleckian
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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