Price and Prejudice. The statics and dynamics of money-wage flexibility

Annamaria Simonazzi and Fernando Vianello

No 86, Working Papers in Public Economics from Department of Economics and Law, Sapienza University of Roma

Abstract: Keynes’s dynamic, open-end approach to money-wage flexibility is contrasted with the subsequent rehabilitation of the static analysis of the problem, which has led to the ‘closure’ of the Keynesian system and the vindication of the economy’s capacity for selfadjustment. Not even in static analysis, it is further maintained, can money-wage flexibility be counted on to bring about a rise in aggregate demand and employment. For the flaws in the logical basis of the decreasing relationship between the demand for capital and the rate of interest undermine the ‘Keynes effect,’ so that the AD curve - predominantly governed by the deflation-induced redistribution of real wealth from debtors to creditors - assumes an upward-sloping shape at all price levels. As against the claim that after a sufficiently long period of time the ‘Pigou,’ or ‘real balance’ effect, will prevail over the above redistribution (or ‘reverse Pigou’) effect, it is contended that long-lasting excess capacity and unemployment will cause both the productive capacity installed to shrink and ‘discouraged’ workers to leave the labour market. Unemployment may thus disappear through an entirely different road than those envisaged by believers in the self-adjusting properties of the economic system.

Keywords: deflation; money-wage flexibility; statics and dynamics; AD curve. (search for similar items in EconPapers)
JEL-codes: B20 E12 E31 (search for similar items in EconPapers)
Pages: 35
Date: 2005-08
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