The Principle of Effective Demand and the Keynesian Revolution in Equilibrium Economics

Thomas Palley

Chapter 3 in Post Keynesian Economics, 1996, pp 25-40 from Palgrave Macmillan

Abstract: Abstract During the 1950s economists began to try and gird the economics of Keynes with neo-classical micro-foundations, and in particular they focused on the implications of disequilibrium in one market for supply and demand in other markets.1 This project ultimately developed into what became termed the “disequilibrium approach” to macroeconomics, the fullest expression of which is found in Barro and Grossman (1976) and Malinvaud (1977). The ultimate conclusions derived from this approach were that (i) Keynesian economics was a form of disequilibrium economics, and (ii) Keynes had failed in his claim to have provided a theoretically cogent explanation of equilibrium involuntary unemployment except for the special case where nominal wages were downwardly rigid. For mainstream neo-Keynesians these conclusions led to a re-casting of Keynesian economics in terms of price rigidities, and in terms of the speed with which prices adjusted so as to yield full-employment equilibrium (Tobin, 1975). In effect, this re-casting amounted to a tacit rediscovery of a position that had been identified by Modigliani (1944) and Patinkin (1948) almost thirty years earlier. However, in the 1970s this disequilibrium—rigid prices interpretation of The General Theory was itself subjected to challenge.

Keywords: Real Wage; Aggregate Demand; Money Demand; Full Employment; Nominal Wage (search for similar items in EconPapers)
Date: 1996
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-37412-6_3

Ordering information: This item can be ordered from
http://www.palgrave.com/9780230374126

DOI: 10.1057/9780230374126_3

Access Statistics for this chapter

More chapters in Palgrave Macmillan Books from Palgrave Macmillan
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().