Microeconomic Foundations of Employment and Inflation Theory

Microeconomic Foundations of Employment and Inflation Theory

Microeconomic Foundations of Employment and Inflation Theory

Microeconomic Foundations of Employment and Inflation Theory

Excerpt

The conventional neoclassical theory of the supply decisions of the household and of the firm, the theory we all teach though rarely practice, is well known to be inconsistent with Keynesian models of employment and with post-Keynesian models of inflation. It contains no road from the fall of aggregate demand to the fall of output and employment airily reached by Keynes. Only the esoteric non-neutrality of the particular demand shift at hand would lead us to expect more than pure money price and money wage effects. Inflation has no tendency in the neoclassical theory to stimulate output, there being full employment with or without inflation.

Relentless application of neoclassical principles to either a competitive industry or a pure monopoly shows that output and employment in the corn industry will fall, given the technology and fixed factors, if and only if there is a rise of the product wage—the wage in terms of

This essay is intended to elucidate the general contribution that this volume seeks to make and to indicate some of the similarities and differences of treatment in the individual papers. It does not fully summarize any of the papers, however, and does not necessarily have the concurrence of any other author in whole or in part. The author’s work on the present paper was supported by the Brookings Institution.

By “aggregate demand” I mean (throughout) a schedule in the price-real income (or output) plane. This schedule may be vertical or, under the “Keynes” and “Pigou” effects, negatively sloped. It shows the relation between price level and the output coordinate of intersections of Hicksian IS–LM curves.

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