Price flexibility and full employment: barking up the wrong (neoclassical) tree

Roy Grieve (roygrieve@btinternet.com)

No 1601, Working Papers from University of Strathclyde Business School, Department of Economics

Abstract: This paper (a revised version of Strathclyde Paper 2004-07) questions the thesis (again in fashion) that price flexibility ensures full employment. (See most standard macro textbooks.) We make the point that explanation of unemployment in terms of price/wage stickiness typified much pre-Keynesian analysis, but not Keynes’s theory of involuntary unemployment. Under uncertainty - an essential aspect of the Keynes conception - no set of prices consistent with full employment may actually exist: if so, price inflexibility is not the critical obstacle to the attainment of full employment. Finally, with respect to current use of the AD/AS model, we note that once-rejected ideas have returned to the mainstream and that the strong arguments against attribution of necessarily beneficent effects to price and wage flexibility, which ought to be well-known, seem now to be forgotten.

Keywords: price adjustment - the rate of iterest; wages; the price level; classical and Keynesian perspectives; "counting equations and unknowns"; the ADAS model (search for similar items in EconPapers)
JEL-codes: B13 B22 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2016-03
New Economics Papers: this item is included in nep-hpe and nep-pke
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