Tuesday, July 21, 2009

Unsent Letter

Others have already commented on the three articles on the breakdown of macroeconomics and financial economics in the July 18-24 issue of The Economist.
SIR - You write:
"[Macroeconomists'] framework reflected an uneasy truce between the intellectual heirs of Keynes, who accept that economies can fall short of their potential, and purists who hold that supply must always equal demand. The models the epitomise this synthesis ... incorporate imperfections in labour markets ('sticky' wages, for instance, which allow unemployment to rise)..."
But the idea that persistent unemployment is the result of wages sticky downward is a pre-Keynesian idea. Keynes explicitly rejected this explanation of the cause of unemployment:
"...the Classical Theory has been accustomed to rest the supposedly self-adjusting character of the economic system on an assumed fluidity of money-wages; and, when there is rigidity, to lay on this rigidity the blame of maladjustment... My difference from this theory is primarily a difference of analysis." (John Maynard Keynes, The General Theory of Employment, Interest and Money, "Chapter 19. Changes in Money Wages"
Apparently neither saltwater nor freshwater macroeconomists follow Keynes.

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