Price Flexibility and Full Employment : Losing the Plot?

Grieve, Roy (2004) Price Flexibility and Full Employment : Losing the Plot? Discussion paper. University of Strathclyde, Glasgow.

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    This paper, from a historical perspective, questions the thesis (again in fashion) that price flexibility ensures full employment. The point is made that explanation of unemployment in terms of wage/price stickiness typified pre-Keynesian accounts, but not Keynes’s theory of involuntary unemployment. Under uncertainty, no set of prices consistent with full employment may actually exist: if so, price flexibility is not the critical factor. Finally, with respect to current use of the “AD/AS model”, we note that the strong arguments against attribution of necessarily beneficient effects to price and wage flexibility, which ought to be well-known, seem now to be forgotten.