Abstract:In The General Theory Keynes attempted to prove the possible coexistence of macroeconomic equilibrium with involuntary unemployment. However, with the introduction of the Pigou effect, the neoclassica...In The General Theory Keynes attempted to prove the possible coexistence of macroeconomic equilibrium with involuntary unemployment. However, with the introduction of the Pigou effect, the neoclassical synthesis concluded that in terms of theory Keynes failed to prove his case and the Monetarists appear to be in agreement with this conclusion, e.g. Friedman [26] accepts the theoretical impossibility of unemployment equilibrium and states that 'Keynes's error consisted in neglecting the role of wealth in the consumption function'.1 However, the implications of the Pigou effect are that price flexibility is sufficient to ensure full employment and therefore Keynesians and Monetarists accept that price rigidities must be the root cause of unemployment, e.g. Friedman's explanation of the existence of unemployment is entirely consistent with the conclusion of the neoclassical synthesis: 'All sorts of frictions and rigidities may interfere with the attainment of a hypothetical long run equilibrium position at full employment … but there is no fundamental "flaw in the price system" that makes unemployment the natural outcome of a fully operative market mechanism' [26].Read More
Publication Year: 1978
Publication Date: 1978-01-01
Language: en
Type: book-chapter
Indexed In: ['crossref']
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