Abstract
In chapter 1, I discussed two variations on Keynes’s ideas that his followers advocate. First, I discussed the followers who, in response to mild criticisms of Keynes’s ideas, claimed that falling wages could eliminate unemployment but that wages would have to fall too far to eliminate it and that this would be “hopelessly disruptive” because of the dramatic decrease in spending this would allegedly cause. I refuted this claim in chapter 1. However, there are also the followers who say falling wages and prices might be able to reduce unemployment but that wages and prices are “sticky” (especially in the downward direction with regard to wages) and therefore will not eliminate unemployment very quickly. Furthermore, I mentioned that in more recent years so-called new Keynesians have spent much effort trying to provide reasons why prices and wages are allegedly inflexible. Finally, I stated that the acceptance of these ideas by Keynes’s followers represents a significant abandonment of the substance of the Keynesian position.
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Notes
John Maynard Keynes, The General Theory of Employment, Interest, and Money (Basingstoke, UK: Palgrave Macmillan, 2007 [1936]), pp. 232, 268, 276, and 303.
Paul A. Samuelson and William D. Nordhaus, Economics, 13th ed. (New York: McGraw-Hill Book Co., 1989), pp. 155–157 and 160–161.
On this point, see ibid., p. 291 and Laurence Ball and David Romer, “Sticky Prices as Coordination Failure,” The American Economic Review vol. 81, no. 3 (June 1991), pp. 539–552. See in particular p. 539 in the latter reference. Also see Laurence Ball, N. Gregory Mankiw, and David Romer, “The New Keynesian Economics and the Output-Inflation Trade-Off,” Brookings Papers on Economic Activity no. 1 (1988), pp. 1–65. See in particular pp. 1–2.
For a typical statement of this theory, see Alan Blinder, Elie R. D. Canetti, David E. Lebow, and Jeremy B. Rudd, Asking About Prices: A New Approach to Understanding Price Stickiness (New York: Russell Sage Foundation, 1998), p. 21.
For a typical exposition, see Roger A. Arnold, Economics, 5th ed. (Cincinnati, OH: South-Western College Publishing, 2001), pp. 563–565.
David Romer, Advanced Macroeconomics (New York: The McGraw-Hill Companies, Inc., 1996), pp. 440–442.
Olivier J. Blanchard and Lawrence H. Summers, “Hysteresis in Unemployment” in David Romer and N. Gregory Mankiw, eds., New Keynesian Economics, vol. 2, Coordination Failures and Rigidities (Cambridge: The MIT Press, 1991), pp. 235–243. See in particular p. 238.
Note thaThere, as in volume one of this work on the business cycle, by inflation I mean an undue increase in the money supply or, equivalently, an increase in the money supply by the government. See Chapter 1 of Brian P. Simpson, Money, Banking, and the Business Cycle, Volume 1: Integrating Theory and Practice (New York: Palgrave Macmillan, 2014) for more on my use of the concept “inflation.”
Brian P. Simpson Markets Don’t Fail! (Lanham, MD: Lexington Books, 2005), pp. 54–55.
George A. Akerlof and Janet L. Yellen, “A Near-Rational Model of the Business Cycle” in David Romer and N. Gregory Mankiw, eds., New Keynesian Economics, vol. 1, Imperfect Competition and Sticky Prices (Cambridge: The MIT Press, 1991), pp. 43–58. The quotation is on p. 44.
David Card and Alan B. Krueger, Myth and Measurement: The New Economics of the Minimum Wage (Princeton, NJ: Princeton University Press, 1995).
See John Kennan, “The Elusive Effects of Minimum Wages,” Journal of Economic Literature vol. 33, no. 4 (December 1995), pp. 1950–1965. See in particular p. 1958.
Also see Daniel S. Hamermesh, “Review Symposium—Myth and Measurement: The New Economics of the Minimum Wage,” Industrial and Labor Relations Review vol. 48, no. 4 (July 1995), pp. 835–838. See in particular pp. 835–837.
George Reisman, Capitalism: A Treatise on Economics (Ottawa, IL: Jameson Books, 1996), p. 231.
Benjamin M. Anderson as quoted in Murray N. Rothbard, America’s Great Depression, 5th ed. (Auburn, AL: Mises Institute, 2000), p. 186.
For the information and quotations on Latin America and the Caribbean, see Heinz Kohler, Economic Systems and Human Welfare: A Global Survey (Cincinnati, OH: South-Western College Publishing, 1997), p. 650.
See Phillip Cagan, “The Monetary Dynamics of Hyperinflation” in Milton Friedman, ed., Studies in the Quantity Theory of Money (Chicago: University of Chicago Press, 1956), pp. 23–91 for some examples.
I originally thought of this idea after reading Andrew S. Caplin and Daniel F. Spulber, “Menu Costs and the Neutrality of Money,” The Quarterly Journal of Economics vol. 102, issue 4 (November 1987), pp. 703–725. They make a similar argument to claim that money has no effect on the economy in the short run. See in particular pp. 711 and 713. I have shown in Simpson, Money, Banking, and the Business Cycle, Volume 1 that this is not true. What it would have been accurate for Caplin and Spulber to say is that the short-run effects of money do not arise due to the inflexibility of prices.
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Simpson, B.P. (2014). Keynesian Business Cycle Theory, Part Deux: Inflexible Prices and Wages. In: Money, Banking, and the Business Cycle. Palgrave Macmillan, New York. https://doi.org/10.1057/9781137336569_3
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