Price Flexibility and Full Employment : A Common Misconception
Grieve, Roy H (2009) Price Flexibility and Full Employment : A Common Misconception. Discussion paper. University of Strathclyde, Glasgow.
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Abstract
This paper highlights and builds upon Michio Morishima’s sadly neglected thesis that multi-market economies should be envisaged, and modelled, as overdetermined systems, in that the number of conditions to be satisfied for equilibrium exceeds the number of unknowns (equilibrium prices and quantities) to be discovered. This understanding undermines the comfortable supposition (underpinning both New Keynesian and New Classical theoretical approaches) that, even when the economy is not in a position of full employment, a potential equilibrium solution does exist which - if not instantly, at least eventually – will be achieved by market forces. In other words, contrary to the conventional view, observed price and wage stickiness should be considered as contributing to macroeconomic stability rather than inhibiting adjustment to full employment equilibrium. A further casualty of the Morishima perspective is the common textbook rationalisation that the Keynes theory applies only in the short run (with sticky prices) while the classical analysis comes into its own (with flexible prices) in the longer term.
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Item type: Monograph(Discussion paper) ID code: 67805 Dates: DateEvent2009PublishedNotes: Published as a paper within the Discussion Papers in Economics, No. 09-10 (2009) Subjects: Social Sciences > Economic Theory Department: Strathclyde Business School > Economics Depositing user: Pure Administrator Date deposited: 14 May 2019 11:05 Last modified: 09 Apr 2024 04:42 URI: https://strathprints.strath.ac.uk/id/eprint/67805
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