RECENT DEVELOPMENTS IN THE THEORY OF EMPLOYMENT
| Published date | 01 February 1978 |
| Date | 01 February 1978 |
| DOI | http://doi.org/10.1111/j.1467-9485.1978.tb01190.x |
| Author | James Trevithick |
Scottish Journal
of
Political Economy,
Vol.
25,
No.
1.
February
1978
Review
Section
RECENT DEVELOPMENTS
IN
THE
THEORY
OF
EMPLOYMENT
JAMES
TREVITHICK*
EDMOND
MUINVAUD,
The Theory
of
Un-
employment Reconsidered.
Basil Blackwell,
1977.
€5.00.
R.
J.
BARRO and
H.
I.
GROSSMAN,
Money.
Employment and Inflation.
Cambridge Uni-
versity
Press,
1976.
t5.90.
Virtually from the very day of the
publication of Keynes’s
General Theory
there has been
more
or
less
continual
controversy surrounding the relation
be-
tween the Keynesian diagnosis
of
the
sources of unemployment and orthodox
microeconomic theory which assumes that
money wages and prices are flexible in
both
an
upward and
a
downward direction.
After an intense debate of considerable
mathematical complexity, there emerged
in
the
1950s
what has come to
be
known as
the neoclassical synthesis. According to
this view, involuntary unemployment
can
only
be
a
long
run
phenomenon if money
wages and prices are downwardly rigid.
Falling money wages and prices will
eventually establish full employment for,
even though such balanced deflation will in
itself do nothing to alter the
real
wage rate,
it will
sud
in stimulating demand
as
a
result of the operation of the real balance
effect. (This argument in no way depends
upon the putative existence of liquidity
traps
or
vertical investment schedules.)
The Keynesian response to the neo-
classical synthesis has varied. On the one
hand it
is
frequently argued, on the basis
of much empirical evidence, that money
wages and prices do not respond, in
a
downward direction at least, to the pressure
of market forces, and in particular to the
pressure of excess supply: money wages are
*
King’s College, Cambridge.
determined by Trade Union dictat and
prices by some conventional mark-up over
prime costs.
In
other words, however
exalted its position in the world of pure
neo-classical theory, the real balance effect
is
dismissed by this group of Keynesians
for being of little or no
practical
importance
in relation to the actual experience of
advanced industrial economies.
On
the
other hand
a
less
common response among
Keynesians is to argue that, even if balanced
deflation occurred as
a
consequence of
general excess supply, far from stimulating
activity in the way that the neoclassical
synthesis suggests, such
a
process would
set many
a
firm
on the road to bankruptcy
and many
a
worker
on
the well-trodden
path to the dole queue
[see
Minsky
(1975)l.
Friedman’s seemingly unshakable con-
fidence in the functioning of market forces
as
a
mechanism for establishing full
employment is based on his acceptance of
the real balance effect on the one hand and
on his faith in the Walrasian system of
general equilibrium on the other. While
admitting that the real balance effect may
be
of limited practical use in nudging the
economy towards full employment, Fried-
man
(1974)
holds that this effect finally
disposes of Keynes’s claim that market
forces
can
do nothing to pull the economy
out of
a
depression. Hence “there is
no
fundamental ‘flaw in the price system’ that
makes unemployment the natural outcome
of
a
fully operative market mechanism”.’
By way of contrast, Friedman’s faith in the
practical relevance of the Walrasian system
is very much stronger. Indeed when he
defined the natural unemployment rate in
his celebrated address to the American
1
Friedman
(1974),
p.
16.
107
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