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(Nie, Sr adawa te ee anette dikes SOR MPC TNT Saar e nes tet, Aiea seit CE MOSN ELE as te 78 SberAcws sii € CSM eaeny geil aty Pereniepyie zi Athyn Hts SEP ePIRL Ds es 7 Verscennyatue moe eae yee Hq ekg dedpiiees teetts RAEI St ccearve ott feseaeie ly ante Peavey | wines taueazeys pie eigte panna aadeates Fave el AG satu SP sree, iH Uris Mow a aah Natthdcs Fectah rat tst preyprezte als! rigse rata Neve she agence eh or GMAT TAN Nee Re re eT eer at Pretemrraap er tity Sy eae Sess nd Sane ae tgsat Ror aE TRe fed Bh eee a ena Vouyer ary | Ma letareryiadel pe erent rt ye arenes Pree By Trey cyars: i eteterecoretreaealetaeier eh ae WATE aa sue 1 a att Bynein tine levees met Pps Ss te tare blrey TOs det nay aga Shiyt repay Hecrs Ae aiteeths ‘ ae vn Seine Mead ii Foyt yates ere veopaenrn get % ie Ce Oe olycone t HS vtogh ee evearanbagy Cory so vee ep yk avavere Rreises helt y te) GT eRt Ace ne comunry yy Yaya tures aan sere tg G Sri Weave grey Joe severe! peg ea eps ete Rite 1 Sitico mats van Tey oly ve ta wet Pease ialiterr Hineayeat 4) Me bee mete Lech Pad Ten da eee ds 24 ote a atti Sele R RD AS Ke aan Fevudse pone be APNG Dog 78, 0044 and TR Uabeianh wee a Rey araatt mea ga vevete ive jepyay trhielinte roeb ata? are ea sf ghee a 2 he Pept ant FEE 2°. 27 pve reret ae Fagen yl 8 ave vs tae poral rabete te te aur ropa ent deal vraptastesetwrweyouty Tht apaney squhopia reas ene Dieiemtnart terres DEE baal sete ; unten rotate tarandss ie a ae peta bli cat Geis ot id sisi separate Seiten iris Sin Agent Were tie rire nen area eT 4 as tbat da iat na ies ah es Setatero-yyeree apates Ldn hats yi te i} De arareatees sete Sai as 2a lee aerate UNIVERSITY OF ILLINOIS LIBRARY AT URGANA-CHAMPAIGN BOOKSTACKS Digitized by the Internet Archive In 2011 with funding from University of Illinois Urbana-Champaign http://www.archive.org/details/moneyflexiblepri37well Faculty Working Papers College of Commerce and Business Administration University of Illinois at Urbana-Champaign Rt 04 FACULTY WORKING PAPERS College of Commerce and Business Administration University of Illinois at Urbana-Champaign January 7, 1972 Money, Flexible Prices, and Employment Paul Wells University of Illinois #37 'd ‘ : a 1 ay h b Pakportatobed\ eadeheat ; ‘ Fe a s_| CA mk See | iene Mor a CLM Tes Meer ING Re ae ae 2) TC Meg \ 1 cae =. Se | fl r, t . wey 4 if 1) ra ; Nat ‘ ha pS , r & a ; = < y ir pale) tem wn kn j ‘ ; = ; ae Aes , u 1 be i a eae e ' , s i ui ( MONEY, FLEXIBLE PRICES, AND EMPLOYMENT By Paul Wells In a highly valuable article published some 28 years ago, Modigliani reached the rather thundering eouewoeten that in Kyenes's General Theory "... the consistency of economic equilibrium with the presence of involuntary unemployment... is due entirely to the assumption of ‘rigid wages'" [7, p.265]. Now it would not be an exaggeration to say that with this one sweeping conclusion Modigliani effectively jeopardized the entire Keynesian Revolution in economic theory. He jeopardized the revolution by apparently demonstrating for the first time Hoe crucialiy and how uneasily Keynes's system, in all its uniqueness and all its power, rested on nothing more than a single institutionally valid but theoretically unsatisfactory postulate--the postulate of rigid money wagese Modigliani produced his extremely damaging result by showing that in a regime of flexible money wages and prices, the economy would move automatically to a position of full employment irrespective of whether one utilized the Keynesian paraphenalia (liquidity preference, consumption function, aggregate demand, etc.) or the more familiar classical paraphenalia (money velocities, “rational” economic behavior, flexible real wages, etc.). He then completed his case by demonstrating that if indeed money wages were rigid, both the Keynesian and classical modes of analysis are equally " ptmauons 23 \gonedekeno> oft a4? vageat Leyeasd a teseyn’ nk es “hte ie Stent pip tn! ‘26 p neksanunas ei? oF ) cena E vaonew yonom bipts +0 828 hu7204 orttnasatuaeny acyontela i BREOY es ome Bectetaia, eee gideutny tte a ) 0% paises anomel anew (a soteutowss add bow 2b metas e! nariya xi hementy me bin ‘yhietowas wort anes ? ‘gukdton np bedesa) 179604 adt Lo bas aeoriuwpbau a2t L Mbasizeaoen) Suid biiav \yilenotaus2sand ePeere ao nats gaeolag bre ‘gep6w anon ald xe’ ip ‘wahoo s ‘BE ‘tend as keortyor end bes tou ane sacidartw 0 avidgoque rit ane WA! oh i in 2 A Wi iaa ers peerage ana. anus ence Tem eh tue doe Pao f sey wl ‘ Wy iv, iN ; i Wh satnotanes-aatenewts avis ahd bedeaa inetiptbe ca ly « edavomnyors gmons aedutovet he’ womeRetd, ens ad hw meek a “Bes tbsngost ylavedotte nnttpdoor pateyssiacn pagan oi synesn akmonoae ‘al doaau leven ma reonyon ox: 7 Pa be! e ars 7 A Al i hme a ee on 3 ae laying bare the assumptions and exposing the innerworkings of his argument, Keynes's objections to the classical theory of employment are then reviewed in Section II. With this _done, Section III investigates the efficacy of money wage cuts afresh with the aid of Keynes's own much neglected short run model of The General Theory; the model of aggregate supply and demand developed in Chapter 3 of his book. Finally, Section IV completes the case against flexible prices with a brief discussion supporting Keynes's theoretically fun- damental but largely ignored observation that sticky money wages are an essential property of money. I. Modigliani's Model of the Labor Market The Modigliani analysis of the labor market assumes competitive behavior, a flexible money wage rate W, and a flexible price per unit of output P. His model consists of the ual three equations; one being a labor demand function, another a labor supply function, and the third a market clearing equation. Letting Ng denote the demand and Ne the supply of labor, the equations of his system are: (1) Na = F(W/P), F' <0. (2) N, = G(W/P), Gt > 0. (3) No = Nye npnisaowsenat oa prtaccrs. bas. "pokrgmane. mH oxed 8 vee “4 ‘pont iwataests odd of ne }aoetdte 2 nomyar jonomugas eh Aglw “a2 natsoee AD bowolves nad wae yoda ok sana \easion 26, yoso dias: ans ‘sednglseaved EBL nokgoez a dante: (bedoet pen sisee nwo aveaityan 1 bis ait. . at Agel a3 yiqave aroyraeih to feton pid H opt Leyonge oxi? to re pon it eare hood aid ro € ‘wedge nd heqeleveb & ore | *§ Wale wooly | efdines) J2di lags oes and sayeiqmos Vi aed ne i i sade yilsoisenonls # ‘eoryes phissoqaue noleausath 2 —— yous ladies ro kiavawede barongt- gtapsel gud ota | : p? ee : eigenen zo ytseaonq, Latinease th 238 a oe ; bi fosisM sede wd Yo Lebom ating tigtoolt > i oi 3 ye “A eoaweus tovxen sodel aid 26 ateyisae ins dfpibom ad? op ‘bru W GIe. epew venom aldixe lt 2 »wokvaded evidt edekanod Lebow anit 4 tudtuo Bo dint aq anda: oidhs yaksoad’s boca sodsl «2 onhed any jane ti ate oanarid tae od -patzaeto Saxe w breastd ou Dew gril aS vious aoded’: 6 Teka sit? Mas bith byiemeb eis etonep: piimnsdoad)-« | ' an ; ) 2938 Ma2e ea ihe ‘to snotia po shoal, ie a ' i j i Teal Wore be ome ae : } ; Ag ee f Walt ‘ UE Re 5 pyietain)) hay Le aa iy Aire MOR Ke ii ; ue AR abt if f , ‘7 poy. as Although equation (3) is familiar to all, it will still be useful to lay out in some detail the vast network of assumptions this simple expression cloakse Specifically, _to assert equation (3) is to assert the following set of statements. If: (3a) No > Nas that |dw/wl > |aP/P] so that d(w/P) <0. Once then dW < 0 and dP < 0, with the provision it is assumed that the real wage rate will fall as a consequence of a decrease in the money wage rate, equations (1) and (2) guarantee that d(N. - N,) d < 0. (3b) N, < Ny, then dW > 0, with the provision that. lc (dW/W) > (dP/P) so that d(W/P) > 0. Equations (1) and (2) then guarantee that d(N, ~ NS) < 0. (3c) Ne = Nye all be equal to zero. then dW, dP, d(wW/P), and a(n. - Ny? will - As we know, the above three equations suffice to determine @ unique full employment equilibrium in the labor market. If an aggregate production function is added to this set of equations, then the full employment real output of the system is determined as well. Once the levels of employment and real output have been established in this manner, then Modigliani was able to show that it made no difference whether one utilized the Keynesian "IS-LM" paraphenalia or the classical eben, Rca) volaeenate, niamte, a2nd ane aeketvexa ada MG tw 0) FO, Gis, O > ib finds ‘eM ie am BoOAD 0 - ab hale Jat? On aa 4 Wi\we| tang Ho tat iflw 76% oguw sant ln Rill Bamiaes at ah “aga werent on ts Perrrcry: 8 Ya ‘oanmypoanes a Prac me - gift aid eesnsi00p (8) bie C2), nobsnape jeden et ’ ‘gna agtetvast ond aad, 0 s Mb neds git > it 0 id (awe dente be (aan) < ewawe ahigtsaupa 09 > i = St a te srowton ‘deny, ‘acts { Lando hoe, mh due wat Man Party" egnwaaue add (8) hima ee es ib baw eatmreiot ot end Atha euosailes wna ovat wot! ow ell | ye AWE 7 ‘ we ‘aA Moa fail Wy de a 90! dee Bays 1 A 0 “ala l yy “Wane; ts ND ait Gh oe Pecical of feups od ffs Pein Li Line Ap =: ia Le a Md Soli NAS! or i a a i oa se ' Wr Jil | ONT A i t \ a 5 we 5 aw "M = kY¥" paraphenalia to determine the remaining variables of the system such as the price of output, the money wage rate, national income, consumption, saving and investment, . and the rate of interest. The reason the paraphenalia employed to solve for the equilibrium values of the remaining variables makes no difference is because once the above three equations are accepted, full employment and capacity output rule, and they rule come what maye In other words, equations (1) through (3) together with an aggregate production function determine the employment and real output of the system independently of whatever set of equations is used to solve for the remaining variables of the model. II. Keynes's Critique of the Classical Model of Full Employment ‘It was precisely this three equation model of full ee and the classical mode of thinking this model so perfectly exemplifies, which Keynes sought to overthrow and replace with a theory capable of explaining the actual levels of employment and real output of the economy. Keynes catalogued his objections to the classical system of thought in Chapter 2 of The General Theory, developed his own theory in Chapters 3 through 21, and took time out in Chapter 19 to argue that a reduction in money wages would have no direct effect on the actual level of employment. In his Chapter 2 Keynes accepted the first or labor demand function of the classical triad. He then went on ag i i iy ) An ae a pokdwtany , yadniaaes od sntrinaan (0? saganbagend ee Pes ‘att, aeatee. ne ane add co pie meraye 3 i re eal if i) HN apearenter rie gnlese vapkeeoepen: stot enn l aah if : eeitdn tiny y pnicienes: ort te) “aautay rmsd ip odd Mad ahotssupe ebaat B¥ots one wane ‘eausoed ek: panda tsth on — “bee ‘pm hus | tuqsve vdtoogs? | bree sinmiayet ais” ‘thet i pesgens 4 ‘figuends cae nqokteupe abaow asdto. mt. aon shehdied aD 3) aciimasasb neLIonye nok DHIbEI HI6peIHHS Ate Vishe ‘uote t Rue 3 yisnobasgebn? mG ee etd xo dindtye tase brs snemgoks o Bt > panto odd ae ov how od. aaa al andssaiye ‘Se dea revert . _ an, ES nae a shai oat? ko satis f ae iN : Ahl agnte Se, | 7 | y 4/4 “tin or) ebos taokuents ata to suphanid : a ' denver a Vi 3 Snomyoleatt riws 0 dsbom notsaupe aera agdt ykeoloesg Gow git} ‘Leboi ain. ponkte tes 2o wba feataxato, any bre ae yor worutssevo. od dipifos aemnyak Holie meth qqane cttontas , i" £puso. ae piitinta Lan hy otdaqes yaad CT cash montane aymenaas ant? OS dudien, fgeu weie, dreoyotqan to ak 18 . Ted] senyor stanuedtd 2G: REIS tenia ts aid of arash publ. be re ~_— ney, eke boqeiovab mae daxanes eo; iB ‘ " ie. | £. yatiatlo ah sialon oni Hoo}: bes ed dusts Ri ie aaa : t r Ch ee ‘ = i rp fi er Sberth of avert been aagaw venom int aoliouben » ae " i ones | _adivonigeek gm to Seve Lmde ed x sndsi) yo Sauk’, ade peageage worivor $ anege (pe daw ts +a ste bua et h “Vs Poe iP bi ; i a= ST ey Fy ; ee ag I : he hie? ty to reject the second or labor supply postulate. However, Keynes was extremely careful to make it clear that he rejected this postulate for practical rather than theoretical reasons. In view of the fact that Keynes produced no compelling objections to this postulate, we shall accept equation (2) as it stands. Finally, and most importantly, Keynes rejected the third postulate of the classical system as being theoretically unsound. It was Keynes's outright rejection of this postulate-- the classical vision of the workings of the market mechanism-= that enabled him to escape from the full employment fixpoint prison of classical theory. And it was this escape that made it possible for Keynes to develop his own more general theory of employment. Keynes identified in Chapter 2 what he thought to be the fatal weakness of the classical market clearing equation. To grasp what he had in mind, we refer back to (3a) which states that if involuntary unemployment obtains, then the money wage rate will fall. So far so good, for if money wages are assumed to be flexible, then they must fall whenever | labor is involuntarily unemployed. This may not be realistic, but it is logical, and we are here interested in logic, not | realism. Continuing on with (3a), this postulate assumes > that when the money wage rate falls, the price of output may or may not fall. But if the price of output does fall, then it is assumed that the percentage drop in price will be less than the percentage fall in the money wage rate. However, to assume this much is to say nothing more than that the real wage rate will fall with every fall in the money wage _paevaiol indetictaog wine hota 49 packon outs batooten 96 arts asta ‘te otem, cs tomers. fone ‘ew mt Me: patoasot Inotswxoact | nats nerigea Kaptiagaa 308 anh " i‘ OK anotsso[do prittanmas | ony balou anys ‘tera toad ‘odd te wok eptnwoe 34'2% (5) Me ery aypada ited tw ade tusveg) a cad pains end basaater eenyer i eldnasiogmt eon bas oe C ybseottonsans yer heel ns mad eye {abivesia. oat Ro eva e-atelujaog slit to mokspetes ddpasane etnamye% enw 3% ii me taste torr $49 to wentxaow ong to hake ty faoteania snot dtranyoiqies Liet et mon% aqBDEm oF weber berdene | obs darts eqanee aida saw St be eyrone! ‘teotanalo: te . “yxoeds terenee sen nwo eid goleveb oF evo 30% aids me sneuyol ay _~ } nd on aiiguods on dacw & ngage? at bebe tdoabh enya a Joxase ieohewst> orld to. ‘enanatsow ietet | a: ar \gintie tae) ad wooed a9%03, ow , baler £ nd bag ot gaciw Soaks ents iret 1a HII9 treayasquan vastawtovds AL ‘ged Vi ‘yonom 24 0% ‘boop 08 14% oe “whier nt iy 93a% ogew sevenarde Lat voitesises od don yom wit seve l qsteeu yrkagdausownd at taunm yous eorit yotdheol’ od oF bomann ‘exh Jou .at pot a a botaersats e710 ere ow baw jtaateok aha geome ads ‘s2afussoq sing fet) Gtkw ae pn aane> wot ey yom Jie 4 a 29) ebtag | Git? estan. ein) nae YAnion | ‘ent fon 36 neds ~i let weob sUqs0e ‘te opaq erry ae ee ahha doa yea 30. vaoel ad LLtw notag ‘at era agsdaso7eg ane | gant amana ed re, bw, epew yom ait rit ott opnansoneg | ' ots, edt nad: asem yatddon yee od wl toum) anety pay new Yenom and: al tie Aliant wan Hie mney irs) ay rate. Given a falling real wage rate, then equations (1) and (2) promise that the economy will move smartly to full employment. Keynes questioned the validity of the classical line of thought by asking whether a reduction in money wages would in fact cause real wages to fall. I believe the point Keynes was attempting to make is that although it may be legitimate to postulate flexible money wages and prices in a monetary economy, + it is less than legitimate to continue on in this vein and make the additional assumption that a falling money wage rate will be followed by a smaller percentage drop in the price of output. The reason this procedure can be judged unsound is because it produces by assumption rather than by analysis the desired conclusion that real wages are flexible with respect oo changes in money wages; and this is far too cheap a way to come by so important a conclusion. As Keynes saw it "There may exist no expedient by which labour as a whole can reduce its real wage to a given figure by making revised money bargains with entrepreneurs. This will be our contention. We shall endeavor to show that primarily it is certain other forces which determine the general level of real wages. The attempt to elucidate this problem will be one of our main themes. We shall argue that there has been a fundamental misunderstanding of how in this respect the economy in which we live actually works" [5, p.13]. j es ~ { entt taptsaats et? Ro othe ae r benobealp ee bLuow eepew yecon ad notiouaes 4 rridali, onitala’s ya 3 itd os asaya tited edd ga biog is he oe none aes. wade OM edamitivel cs yee Ps Apucnaite hart y at 9xein’ ‘od “Ngaedanon 8 fe heater baw’ wnpew noe ‘pnetpie £3 | wo ane: tah Ao aun kahton: 99” btants Bat Herta | eeee ab ae hy ‘yonem ‘patncer ip Sand ior suewvade fangketpbs: ort edad oak gous sisacunsieiaiti qolieme 6 ve powotdoe ‘od naar ) bepbut, ot aa wivhasord’ et noawet ont sq30e ‘to! ya writ awit Rodsqmua aes aeoubong 4h oxusced et oT ie ordixel? ae hepew ives. dans obaul 30> béaieab ons | Nie “ssa A une tautones a | Yana xogad oR a en ‘e per ‘ps a8 miedst AS ttw vd die dead on dele wn Losi we £h iw atat. exyonsiqesai ake ‘nano rr b ty vilaswaag, Inds wetta stall sotaabne ‘tkena} awe “snokines 094 tewal terendy ont wit taagae Henne ‘aao36) ieitte mksd “Thy ine hoy wits epebroury od anes ge ge saa | ery exsitt sees Dod ‘hela a | smentosld: nbest wo. % ~~ : doeqaai atte it wot’ Be pathiesarehoyett 3 iasanae | : fEEoa 2] resto yiceuaos’ evel on’ ek eh ~8 a III. A Keynesian Analysis of Money Wage Reductions Although Chapter 2 identified the difficulties afflicting _the classical theory of employment, it was not until Keynes had erected a considerable theoretical structure of his own that he was able, in Chapter 19, to answer the two part question: "(1) Does a reduction in money-wages have a direct tendency, cet. par., to increase employment, ‘cet. par.' being taken to mean that the propensity to consume, the schedule of the marginal efficiency of capital and the rate of interest are the same as before for the community as a whole? And (2) does a reduction in money-wages have a certain or probable tendency to affect employment in a particular direction through its certain or probable repercussions on these three Peetoret® [5% p.260]. As we know, Keynes concluded that flexible money wages and prices do not imply flexible pee edes and so he answered both of these questions in the negative. Indeed, he went so far as to write that "To suppose a flexible wage policy is a right and proper adjunct of a system which on the whole is one of laissez-faire, is the opposite of the truth" [5, p.269]. The fact that today many economists do indeed believe that a system of flexible money wages and prices would suffice to produce full employment suggests that Keynes's analysis of this question has enjoyed much less success than it deserves. Since it is our contention that his argument is correct, we shall now attempt to clarify Keynes's position by recasting his treatment of this problem in terms of the if lng Pins at ne i ie a oh a Ce ’ a a ei Cae ton ae a a ioe 4 iW ‘ 4: hi Wcities " i , i i pa [as t anottouben ose eam v0 , aeclaan a leoneeit A r Maes us) aa pmisokivis so toiuolyy iy ont paint § nae guests “ponte {Sera gon aku #2 cow oft sowatt & ever abpaweyanon wh | nobtsutiox ds aaod Uf ye is tet ‘x65 »dua" insimyosigels. stadapne! oY ee Pree =) i), ? ery 1 OMS EAG'D of Veled ago ond pets esioen oF nosed | ede anit bets tadiqas. te yorsitink te teebosam sid XO. ied : . “S -aty yJtoumnes sy vo! er0red as ‘oe, gts kd $ “a ‘teeta 2 ever eatisiv-yorom nd agttsubed’ 6 ego. ts) br.’ aaluaksueg ‘6 at themyoi gue soothe oy yonsbnay olde i ‘ e- adshanusiegss exdedorq 30 teddee a2e iguondd “psbistano> womged sor of ah [088.4 12 2} “tesodsiet seats 8 -aihdixet? tga gon ob aeztaq bos ssnsw vento siesnees Pe lb vasoitasup eaets, 20 dod borsivens ‘od on brit ‘ego of” Yer? atiiw ” ve 182 on anew on ,besbat: ov . | peers negorq'bius 4dphs 6 at) vation: wesy, aletnse a aad ak 2le3~gomnlns 40 40R) az exLori mite co) “eto Lat nosed “4 ah ae te pate: ie milaued ait %o pt bae ad eveliod peep? a cata Lhonboas Methia yabos: feta ioe ely: . blow sented. bre wemyew ‘Yanion atdixeld Xo motaee Fy . nl emeryon tins ‘eteopollt Jnemyor qe tw soubdsiy od" ‘ “ede aagnoue daa? doum boyotuie tant sio Lineup” ‘ibd ie 7 sagen dnisawors bd Jedd notsriet noo! hal aa sted oa 34 . nots Laog tt Ween aarp of | domotae ean mires i % Oey » ? ed x 1 a Rats if ny ah hee ri model of aggregate supply and demand developed in Chapter a of The General Theory.* To develop Keynes's model we need the following assumptions: he tS PUN, K,? is the aggregate production function, where N denotes the amount of labor employed, and Ky the given short run stock of capital equipment. It is supposed that F is linear homogeneous with Fy positive and Pun negative. 2. Perfect competition prevails in the commodity market. 3- , # tou doatss. aa . eG “auttvaaes to. tt ‘atedy gnats tiiw amat, ein bs:tbino evistasqnos aaba - ahbupe F20R° fankg ten ws dyode digou iio kd Subo7 ye ed | atta ek daos igntpxem au Fao, @onte \.suqsue to oan a We sede Be. +3uboxq Ssatezed en? yd bebivtb oon *noy x "ona Heaoa akmonponosska ‘ehiwalso® ci a r ‘ ae ey % " A ey suqdve aaa vs nogtaupe aha he “enbata tibial antiga | 18 =i, reece as raat obnongpeo zac H palsnegamcags sas cnioky | me i ae Pi ay VA ¥ + " | ogee * s 7 + vata ‘ a ia ar : pe i “atzA emt a gins, tated os nf bog ; Ce eva ie ree ‘4 f ia mI , ‘ a\ } Mane 5 wihe ] 1to ae T} nat Sti Ce iy Nh, Sia oe cr aggregate must receive from the sale of output if they are to continue production apace. Using the symbol ae to denote these required receipts allows us to write Keynes's aggregate . supply function as follows. Since F, is positive and F,,, is negative, ¥,(Wy)> the graph N of the aggregate supply function belonging to Was has been drawn concave to the abscissa in Figure l. It is to be noted that the function Ys does not state the actual receipts firms will in fact receive from the sale of output, it merely states the receipts required to sustain any given level of production up to Keo the full employment output of the system. To determine the actual receipts firms earn from the sale of output, an aggregate demand function is needed. The aggregate demand function, Y is defined to be a’ a relation between real output, X, and the sum of consumer spending, C, and investment spending, I, measured in dollar terms. We begin by supposing that comsumption in real terms, c, is a constant proportion, b, of real output. That is (7) C= DK, O < b <. Te Multiplying the left hand side of (7) by the price of output and the right hand side by its equilibrium equivalent of e236 xertd 2 tugetue ‘he atna esd, moa ak monn e A atorteab oF ¥ fodmye ed? padey senege mobi ws | % odeenapes e* ganyen stay ot ™ paca) adqtesox, bendaponts a “sawol to ‘ad! foktandy x | ie ern yt ie a 3 : ae “a “ 1 re Serene eu : 7 i i Be a 8) Wk i ae ie Fi : } oe aon ey | gas, atid ofWhy ¥ .avisapen ak ot bas svitieod Fis we aed asd «Wot paipnofed nolsoew? viene eteperees 3 sk samp) at seatonds ead of ar - etede ton eeob, aT nokvaaut od,seds Beton died 9 oles eid morse svisoe. Jos? ah Litw. awatt fagisoer 4 - ahedeua as beslupes atqtaves ody: aogeta, yioaem, oh ru * dasmyosgne: Liu os.. «yt ad qu io tapubo%sq, ta Tavel | ear waqteser Loutos odd. aaimisseh oT amazaye odd ou . “sobsen basmeh agaperavas me, adnqsue Ro plan ad 1 03 “_ ed: ot ‘beatteb at ray. aokyent® basa ‘S2nQ0300e 6 ont “ retuenos to mae end bem xX sdugaue keer asowded mals Ye _ wilob at boaunoom 4h yentbnoga, Anondeewed bom P35 i: anret teers. nb mI GMAMHOD, ait pateoaqua va nbewd ow sak dent stugtuc' Lines x0 rg scotia: sn038n03 4 be a . rf iwi heed apy a a | ae ; ve , mh ens duqtve Xo enkig ons ya in to obte beret Her ond : he sSomteclipe aubad3i lupe agt, Xd ate, + baa ee oft b la Figure 1 wl2— marginal cost, yields the consumption function in money terms. (8) Pe s C = b(W,/F yx = bY .« As for investment spending, it will be assumed that real investment is given at some level ie? Even so, investment spending in dollar terms will vary with the level of output as marginal cost and price vary with output. Thus (9) Is Pi, = (Wi /Fyige The aggregate demand function is then (10) Ya = (W,/Fy) Ci, + bX). in Eiaure ay ¥yOWy)> the graph of the aggregate demand function belonging to Was has been drawn concave to the abscissa too. | Again, this curvature is due to the fact that the price of output rises along with the level of output. Equations (6) and (10) together with the condition that supply equals demand determine the equilibrium value of national ‘income ¥ to be (W,/F,) Ci,/(1 = b)], and real output X to be (45/(2 - b)J. Figure 1 illustrates this conclusion and shows it to be a typical Keynesian equilibrium of less than full employment; a position in which the commodity market is both in equilibrium and cleared while the labor market, though in equilibrium, is not cleared. yenem Ht notioauy : va mr au Pi i ap H i ms, ai i { he ' aes hin iy ; . , ee ‘nee tae pire bemunne oe ita ES vpaxtaoge sono 8 BA. ae oe gon neva ig at fovel amie an qa hp ad nahh 2 | fowat ‘oats Ady vasy, thw aed na theb ak pitas FY | or musth stuqawe ita tw way potsg, ‘bn 9905 Fenagtie ” Cah ak Oe eee at Pee edd ad eobroauy hrotinh @d60e30Rlh | - ! ig ~ i ; i i . oe , : We | ne P wo 00 | ambi qynge7008 att id | gery ay aly Ww) oe yt 0nd spetoads one at 2VADGOD, Hoalabs, navi nat hale Rs 8 pat i = Lou} ' ay to sonia ‘ould sash) 220%, ‘ond @a Pty sy ad. qua gave a gf SI | piloqgtnt be ewe, wrt ie bye: paote apt 4 aadd nobdniroy wih rib wedtiiogga (Qi) ba ¥a) anc isaiye | a ‘ (ie ye ny * ny Kenotian Yo oulay oun bpm ond “onamoseh b leu 4 | aoe ae ea, & auqsia Leon hae: Pie nytt Ngett on ad bit - aL Ceti one a9 kauLanee anid | ‘ngage & sett aan kid L qe iT mesa went tte aa be pes nobeosgon tastes en it 904 eid teed be ve toxzem 4 tbownos nets doedw ak amtanang Paki mY, ar a fai i oes aan ; “texan aodai eas otkdy bosoalo. fom a r v vue 0, Wo fy Pera vr 4) enn aTas The question now before us is whether the involuntary unemployment associated with the less than capacity level of production X is due, as Modigliani and many others have “asserted, to the rigid money wage rate W,, or whether it is due simply to a lack of effective demand as Keynes would argue. The answer to this question can be found by postulating a once over reduction in the money wage rate and observing the effect this reduction has on the equilibrium level of activity. In terms of both equation (6) and the diagram, it is clear that a reduction in the money wage rate from Wy to We will produce a downward shift in the aggregate supply function from ¥ (Wy) to ¥ CW) as shown in Figure l. From equation (6) it is calculated that the extent of the shift belonging to any given level of output is = Wie (3:7) ) AY. = (1/F,)XAW, where dW = Wi bs Now if the aggregate demand function were to remain in position, then output and employment would rise with every fall in the money wage rate. However, the aggregate demand function does not, cannot, remain in place. The reduction in the money wage rate, and the concomitant fall in the equilibrium price of output from (Wi/Fy) to (Wo/Py) > reduces the flow of income belonging to any given level of output, and so constricts the quantity of finance available to fuel the economy's spending. Inspection of equation (10) shows that the downward shift in the spending function, Yasdtutownd ects nenidary vk eo dnoted wor, (pokseoup teves vsiiiaqso Keds wees’ ont ‘ee Ui vesetpoaes jee avin pasdto yitsa Dns tngblptbor ani ‘gape at © ots a@2.3h ganitecdw 30 vt s0% oQaw yao ‘bipta od 09 rt: . DLinow, beyond 28 bracts avisooite $e, sentinge ad ute a purdadnsene: ne bavot a rin no kaugaip eit oF. sown ne wah, . guitvabedo ons soe enew yore ont: 4 noitaubs a ove ; _ to Level mubIatL dupe: ory ao ae. aotssuben ett 35 ve ae toes ek ob ymepe Tb ont bra 12) nolssuipe y doo to emriad an iM ot all Gost ota2, ene yenomn ons ah notzoubes & 6 tad + ¥iqaue sdapexoes and mk datde biewawob . epube2g Th “goat ‘nt eiptt at rwode en (Ww) ,¥ od 4 ,W),% most i ahha ans to dnadxe ead tare base lusiee at af ca) ae Perey ta ee ae at shade to Laval nevig yas oF & os” ad i ™ wh eerie maa Ld ah nlsmas 09 e1s¥ | ne Giened s icaiicliin add! th vot yee ittw oaks bisow sremvo dq brs sugsue. nets neobad bnemab edSpo7DEs out | fovewot erry opsw ar se a ti i gottsubes ont «e086 hq at vchwmer yzonnats., don teob ht nee 7S ortd nk Sie dinner | aitt bad yaa aga 4 i og (tha od Cth wort sugaie, 30. wok '< te faved movin you od prionoted amcoak: Bo 9008 ost | ‘ptdst ines sonst Xo ye tsaaup, cata aaphutends'@ 18 ie (Of) nokjaupe 26: edgzadqant senzbagaea? ine - ide bya unk elpein: md ae etal be arty from Y,(W,) to ¥5 OWS) as displayed in Figure 1, will be (12) AY, = (1/FY) Ci, + bX) AW. While equation (11) gives the downward shift in the aggregate supply function belonging to X to be (1/F)) Xow, equation (12) states the the corresponding shift in the demand function to be (1/F,)(i, + bX)AW. In view of the fact that X equals io. bX), it is clear that a reduction in the money wage rate will shift the two functions by equal amounts as our diagram showSe From this analysis it follows that a reduction in the money wage rate will have no direct effect on the equilibrium level of output or the volume of employment. Such a reduction would serve elanie to deflate the monetary variables of the economy while leaving the real variables unchanged. This proves Keynes's contention that involuntary unemployment is not due to rigid wages. Rather, involuntary unemployment is due, as The General Theory taught us, to a lack of effective demand. In order for the level of activity to rise, real spending must increase. A change in the numeraire or money wage rate will not by itself generate any direct increase in the volume of real spending. After demonstrating that involuntary unemployment does not depend on rigid wages and that flexible money wages do not imply flexible real wages, Keynes went on, in Chapter 19, to discuss the possible indirect effects that a falling money wage rate might have on real spending and the level of activity. & y i nunca ue abt op ) ne . Waitin TET a Ay inv Way ur ty i a anf (iam iy 1 RAL ext int TRIN ‘hsnniwo nat eave UE) worsaupe ette 1 + ptalygnt) asad! Teg patonntiol orasanh Yoarwe Lae eto al veine pttbnoqaes 7 iets aii ‘anata (61) nade ‘aa + ea): a on) notdonut't Naot wh Ie Ra. *ogh) aleupe x sats ia ¥ ‘ens oO way ni’ notdoubers # Sats “taupe va maaan ied side anee $ftw ata DRAW {orton i es mM ay a aaworle rexpete uo aed u ot Ui? ‘edt bess pares | & aad avbttoy! ay wleytane anes + see | ote }: te ‘potisubes, ‘ Ska! > eel % anustorr eee el ‘sugars te jeer ae deltas, ypedenom ony ote tteb ont ‘ykqmts ove f Y My end sbebnectonu relits toy haar od piivest whee , 4 is ype Sa nemo Lqmeny yassnolowes jas rigkinedaes conn _ Peron eget yeadaictownd 3 isotsea agen bhpha 97 ub 3 S wydsperio ro hat é ot yi) itp ged: eaete® ade ns 9 i “eo worn a san yrs koe yy bane vals to anbag ne “xion yo saaduambs pity at poses A’ sonaizond saum § st 19d en: pdiwad%d am sah ‘ite wanton atoeoneed al pha! ates "mkt bee} 40 pawtod. 4 | nN eeab demlayateoetl iesmitows Hae ce 4 + Nua Rh i oe Been wauieot, necanal bled bau aden! bajcalciadbes “(ee ‘neagad ad id tool seaey hl aMSHe Ck a v ystiea gnstken e tach wsaette! Jontsped etahonen . youn to ipl od Avant bara an ie BL a After investigating the uncertain impact such reductions might have via the redistribution of real income, the rise in real money balances, the reduction in wage costs relative to those abroad, the effect on entrepreneurial expectations, the increased burden of business debt, etc., Keynes concluded that on balance there is "see no ground for the belief that a flexible wage policy is capable of maintaining full employment" [5, pe267]. Not too many years after The General Theory was published, the Pigou effect? was adduced to dispose once and for all ".ee. the Keynesian contention that underemployment. equilibrium does not depend on the assumption of wage rigidity" [2, p.119]. Unfortunately for this point of view, Kalecki [4], in an early response to Pigou's work, made it clear that the Pigou effect cannot be used to resuscitate the case for flexible money wages and prices. He did this by pointing out that a deflation of the magnitude required for the Pigou effect to take hold would so disorder the economy as to produce not full employment but social chaos--a state of affairs which neither the classical nor Keynesian systems of thought is Capable of analyzing. “ IV. Sticky Money Wages are an Essential Property of Money In addition to the analysis given above in support of the contention that “There may exist no expedient by which labour as a whole can reduce its real wage to a given figure | rai (ano ldasoeqne Lh tavenhageaton: Co doette And | hues, 08 bebufones aire i iate (adap aanntaed Ye andi bo teassad | sand Rolted ade Sn bie AB bn’ wah ‘et Waedd wonated | beatae naw 1 eyeith tazensy os: sigh pee Yin ‘ood “a mitaa Lt tape sawmyat gee ioban tory Nor abdnos: Ristabayan ' ; sferig S) “eathiens nga Yo he bees oils Ho | basqeb fon. poet. ody $69 “nak ab! ona. paxOw at uope4 ‘of atangss2 @ | Sagi apokdanbwn pea pie od doatke ‘wegka edt “tek be upins abudzngan one ho nasa jae | ese rae aut my il ‘Vodikey tens) ia ata de drone at vod wie spect, Eee sap navio. ® a9. open “fama aot an mt yy a ng Mi ay tee 1 ana. ie wee: (ti ents ead pg eg atu vay ovis lo> agnes: opew “at! nody supe | and, ‘vasonatea 7 tut peenestacray wo ‘etdaqa> Pe yotiog: spew old. | wlVOSeg. 2] wii) (hee 20% bev. wore onetie ks ‘be peoupps: “aw “anova | ihe il 4 ) ah (83 base er stent tes Pir bcieg eit nok! ytadere 4 pidkzot xo ened wid bietiosvess Od boa od Sons Bi & tant suo otitddsod ya! atte bh oH jabotay’ ‘ian’ supe Ey son Sanbrtg oF 96 yinonoge ot cohatd Ub ox ihivom: brod ay ‘dort exbarté Ree natn pine ticindts auton: fed tng Oat a1) attipledd? Yo anaes wbicayer. ol feadeabata’ ond 3 ta aM 4 an “ Ait . ik yaederd) Letiaeent ‘be, erry dessa ‘tem er a «3 4 aap uf Wy i 4 i a | ‘ roti was : | \ i A vero ball mt ut aN Patil i a ee by making revised money bargains with entrepreneurs," Keynes developed in Chapter 17 of The General Theory a far deeper and theoretically more significant explanation of why freely flexible money wages and prices cannot help produce full employment in a money using economye In this badly neglected chapter,> Keynes advanced the wholly new and difficult to accept proposition that sticky money wages (and hence sticky costs and prices) are an essential property of money. The extraordinary view he put forward in this chapter was that Money could not function either as a medium of exchange or a store of value if wage rates, costs of production, and prices were to rise and falleefrequently and unpredictably--in response to the randomly intermittent appearances and disappearances of excess supplies of labor, commodities, and finance that characterize modern economic systems. Since the utility of money “eee is solely derived from its exchange value’ [5 “peest). the services money provide can be rendered "... only if there is sufficient stability in its purchasing power in buying | the goods that it represents" [6, p.383]. Accordingly, throughgoing wage and price flexibility of the type envisaged by many present day economists would destroy a money's purchasing power, and so render it useless to both the buyers and sellers of goods and services and to the lenders and borrowers fo finance. In Lerner's words “Any money which was completely cured of wage and price rigidity would not be able to survive as money" [6, p.385]. The reason a money cannot long survive if its value pander m eriidamnaosson coc (daneossd ( yanas sivas . yeqesd 26> % yageoT Lésenap ac to TE sagaaaD net peqok visor xv to noksenal aah siuoddinede, sxc feeds oeatd 1 bist aoliboag aieit tpanee avataq ‘bas xepiu venom, 3 cs _padoaipan \ehbed, aka Ax, eemeoTe Salers xenon » ahd rs | od diuottRtb os bea want xAdorte: oft peonavbs aeayert a biz ylotts ported: pes) 2epay. ene oka Jars: rmtsteogeta § ont xenon do y2ae9oRs Letgnosos fal ae (asaiag & at pute ais yerqena eins at aswaoR sg 90 wa ty Xe = 39 OpAE AID ho putbom a 86 yottia. ‘nedvone® jon sabe om ~ . -sestie pres mongers to ageoo. ,aodin. men a9 sutay >) 99 ‘wsnoasds tmmy Ldeae dbo agen ‘one vbthauperas sitar ba Oia om | sade tasqqneth bee avons veaage Ines intaas te xiaahans) - geda, dobansvs bis brie ,sotsibomns dein! 20. ssktague te veal iow ents: gente .omad nya gimonos fevsbom astz043 os ig “VE LES ag) yeh Meuley apasdoxne erk mone bovizep (lates at onan x9 : susttt 3s ytie cant benobass at ned Sbiys34, yonom #89. | ‘hi ALY nk sewed poseadousd edt A. yak idate soo tole tipnlpzesia ~Ceataa el’ nig eo 258%) i dady ebpe sah 4 bound tyne: eqy? §a2 to ASE RaRROLA: asiiag Bete eyey saitini. ayenun & “yonse ab biwow sata dmc ag, ‘Yeb anohend ¥ sasyuc ott god od iagekepu +4 bao oa bra greeod & bas mreboak, net oat: ive woQky Tee tit AbGoe: te oie | “bein yariom nat babe oaeersed ai: - soonant: Pi | gon bivow viabiees dating: bee apew to harass yisaotqn one: hiht cone eee a | ve Ww a By 1, aps is subject to frequent random variations is that such fluctuations would destroy its general acceptability. Why this is so can be seen if we remember that in order of an _ object to function as money, it must, at base, be capable of discharging claims on demand without imposing a capital loss on either party to a transaction. Thus, sellers will accept money in return for the goods they supply only if the dollars they receive have approximately the same value as the dollars they spent producing output; only if the value of the dollars they earn match the value of the dollars they have spent. Viewed this way, the probability of unpredictable upward movements in the value of money would erode its acceptability simply because such downward turns in prices would make it nigh impossible for even the best managed of firms to cover their recently incurred operating costs out of current receipts. The resulting inability to relate or establish a correspondence between the money value of just suffered operating costs and the money value of eadtonus receipts would thereby expose buyers and sellers to random capital losses. The possibility of suffering random capital losses which a system of flexible prices entails would therefore make it extremely hazardous for the public to conduct their ‘economic activities in ter~s of money; in terms of a money that is unstable at any price.level. Rather than tolerate such a dangerously vagarious money, the public would search for and find, or if necessary invent, a less speculative surer standard of value and medium of exchange. Slowly ~ due, tet ab saotoatane bast we ete bas , : Tay eidsces me raed +6 ein Py exer Sl obtonw a ie tedigeo ®, pikeoqnt duds bu Dasa De. entat Pale aR - ttaw ‘suetton yauiT co 2 2 eg ‘aenld te. ; ‘edit an yao yinque yous aboop act Oe ates in venom 3 | de a8 outey, titighall facts ylesmtxergas ovad evisoo4 a sda to oulsy ort ue ‘yao Fiugsvo, entoubesg, Aeon vend ; ved yet anstiob ands 36 outey- ant. Haden aa ‘yedt-® | pldsaatbosgru 10° yo Rhbdadorg oe: eae ‘abeta bewslV ” adh. shore bluow Ms woe 29 ouley add ak etaemevor - pe nl annus buswmwob diotra saunded eiqete vs binds Ro bepstien teed add navn aa otdteaodat Mipka dt oatem | Si ateoy paiverege boaawand visage akedd aevod. ce c * y oy "$0 edits of VIET kook poktiuass, ont ‘peaglews | gnaw peut bo aulsy Yoaon erty noowsed sonebacgie sen, Ps an “anexsu> 2o. au ley venom mt ‘bos, ‘Aaeo> Relderego £ | mobasy ad, eyed tes bine sis, suoqRD seeped bteow aig | tatiged mobos patron tue to ‘yd Uitdtenog sd? htawaot. | exotoreds nee abisgne seola oldinely te Sa ll - aon ¢ “doaseg. bLuow abidug. ons vero ) swore ae : i} nt ih evista Luaeige enol 6 | oteved, maeopaet, e Py eiagte seabennice to eutban bic 7 ~18- or quickly, a stable money would be found that would enable the public to conduct their economic affairs in some rational fashion in the face of the ordinary day to day risks and uncertainties inherent in life. The possibility of sudden upward movements in the price level would have an equally destructive effect on the acceptability of money. The practice of specifying in money terms the prices Of goods and services in advance of their delivery, and in advance of their payment, would expose sellers to the possibility of suffering capital losses. For example, a fall in the purchasing power of money between the time wage rates are agreed upon and labor services delivered, and the time wages are received and income spent, would break the link between the value the market places on labor services at the time wages are determined and the value labor actually receives for its services. In these circumstances, the practice of quoting wage rates in straight money terms would soon be abandoned. More generally, suppliers of goods and services will quote | prices, accept payment, and incur obligations in terms of money only if there is some close correspondence between the . value of money at the time obligations are made and the time they are satisfied; between the time income is earned ebay Polad is received and spent, between the time debts are run up and debts are repaid. In addition, a money whose value could fall by several percent in the course of a week, and then could fall again, or perhaps rise, depending on the current balance between aggregate supply and demand, would be of little use to | ietdaem bhuow. tas, ad b | _ feitsaas> vonions. hk: ehtalke “suanonae aden amen ef we oH, ys nt hod apna wd set ahh tnpasdal ae ‘baw nen ¥ Poem orld nk Atcomoyen baswat eosin 0, ‘absndienea st a oaths, aynaounaned titseps a8 aver: b etitantcioon od o i xeon mk yanetsvege 4G saldoead ont eogdsg ait aiid | a baie diay than mtent one Oe Arok Lom: enone bluow., tae phowead eaten entpetive dl yah 3 oO aonb at nozivses bing a Le shed do 4 er a _setanexe so% ew oak? od? poeused enon ‘oft be sbeaeyhie eenivien seein Aa, vaneae, aint. Oi ioe tobi 238, 1! sew: poleensuim, aed " eae doaes, wus tt, ent sansa batsow in ATS sodml to: ‘aoosid gekian ‘babs bontianaee, ots sega ip | aeasvaen. J cr) ie ‘oda ouley. 283, ‘saviooes yi seusas. petite ‘SWheN oat ‘eseonnaemubek® suey At, sipknade fd, | nodes Sew ) a “etow sredigava. yl ba nee | 2a aed ab anpirnys tse. cue bine Fomaieng | aqeo0e) ¢ 9 i, ‘edd, noseetod ‘adebtag qhoxto? asokd wine aa abot fa eats oi itd, bea wrtioet wae edoszopelie pape wit. +. ysnom, te “fet, facian he) Bah doertid. + neouded, (Bornesaen one \ eae ane oma eis ae mG rt Ro: wnkasewt end Ussnctionas: ‘od Hook. “Btwlow aig ed) yanvoi | a tii denlyaee reap eboop ae ein hexavoe an iie®. bLwo avon apo, venom e aaa aakegs 450% ‘piven ‘rst, bits Petal an aire neeuted: son tng, soni, ata (ee onal ed seu elagat to ed gain " ybawnat borrowers and lenders alike. Businesses would cease borrowing money to finance capital spending simply because in such circumstances they would not be able to calculate either the direct money costs of their prospective capital projects or the expected yield their spending might return. The link between current capital outlays and prospective yields is highly tenuous under the best of conditions, but if the value of money were subject to erratic change, this already fragile nexus would disappear altogether. Furthermore, few businesses would be willing to issue debt and commit themselves to making fixed money payments whose real value would be a random variable. As for lenders, they would find that stocks, bonds, savings accounts, pension funds, and just plain cash balances would no longer.be satisfactory stores of value. In a world where the value of money could flex up and down, money would not be borrowed, lent, or stored=<-it would not be used. Instead of promoting full employment, overall wage and price flexibility would simply destroy the utility of money. It has been argued, however, that a flex price system in which all money wages and all prices rise and fall by equal percentage amounts would not impair the utility of money. But surely, no economist who has studied the behavior of individual prices could accept this contention for the obvious reason that it is not possible for all prices to flex simultaneously by equal percentage amounts in any real economy. Lerner saw this clearly when he wrote “Unless we are “ pntwoxaes sano biuow ssewontous b 7 Move ae, nounced vhgade mt ketkaas. ; lens stort ey tush a, ea ‘abd od 208 pévoh yods esonss ti ais a i) ddnstoxq ta33qao evidasaneag. aided to Bg209 ono, i im woLL anit sues, Anip.tae pn! teseae ates bieay bea oe a “vlde2a ‘ah surety. evisoegao3g, bite. ayative ‘I8atgas ‘aneaaue a asian to. pulsv. ond. ta dud yehoks thao, 30 sa0d est santos ee i edken ostosst, eoseatn aint, rope, pitea2e. o sout | _ om noceentavt wet pxonaedstu% | 7 siedtepedta teegea | OO pitta. as ‘gavGoamens Hhuniep bre dob ouaed od pakte tat moboes & ed, aikd onlay sae, peortw ‘panwmY eg xerast be ppakvse shbnod: apo anilt beet bldow Yeas. napbael, oo biol. seons ied hase mista sent. fin yepout aotaneg | " 4 ‘sedi, Btaow., i) sitet i seuley. +t) paente ‘yaodoata ides odd, 9 fem bhtew \eeciom, t ae sopaoesb a wef LEEW VARMA IOVE 464 goad ine-sotteutad ead des rontay er eqadanq Sqsoxsenbided atberg end monstuvsely Agua: 2. noltsintsnos 8. Patel bnste, gor Lit atedd ad aietex vad vale: taco saddam: om Beet | | yasdenon on slices Joa thiw. yinbesae9 ‘yout 29b30 ve bien ast ob oF thtnw eetup Iisheetatin noed- asd, taaw a ee wey zie | Te bg ERBBeq 7 nohioau oF onto <202 sebio ai sede ak bony ved ow *4 } Re eulaw ory opuaiiaxs te ints boom 6 bate, ouley te, bs song a hades “Yertois to noses nk ysotre od youn elorn! & as ee anze3 out afdage enet ie aon oi! 98, tuQaire. ‘eo outs a (ae nay eke honmeeo: that ane spew, yntion: eee i arid 20. aestogmos sued tophdi & wt atar—agnK Yocom" ont. oo #IWOD nods sac brs anbatbonao>: 19 asda ‘etaqveon elethaw «ht. *aeohaqitavzam dimes tect ery bode lon Puckid pods exenom bie staal nt whe one 2apew ane pho’ casey +e shaw Huqsve. Seieea, soiadlcegqua om ba el eslnde tl ‘edd ph awsed paiteta.tadadto ro wait iwtattea, ot iw nok sia ae watvbroapeeg: mk @ | seoieve yoatenom edt Ro audenaaun odd) ws tects : ted bade ed ae yoda satchel cone “ anonsebnon eaedy HaaW 1a holding, wage contracts will be set in terms of money, costs calculated, prices determined, short and long term commitments made, and economic plans drawn up all on the assumption that _a@ generally acceptable money obtains. We can now better understand Keynes's observation that “To suppose a flexible wage policy is a right and proper adjunct of a system which on the whole is one of laissez-faire, is the opposite of the truth." For some decades our monetary system has been secure from the threat of downward wage and price flexibility, and this has been all to the good. What is not all to the good is the fact that society still remains exposed to the equal danger of rapid upward movements in money wages and prices. Most recently the economy has suffered a six year long inflation arising from the federal government's war spending program. This unhappy experience suggests afresh that if society is to be protected from inflation, means will have to be found to limit both the federal government's willingness and ability to fund and wage large scale socially destructive programs such as the licentious war in Southeast Asia. This will not be easy. ik ) os au hey Peis 2 eotiog wah uate aft 8 p20: 2 erty + mozeyn' 8 te 4 - atanenmisvoe Iwaober aay va poterse otaentat : a) Sa ons deonte adeoppue sone rieqxe vaasdaw abi bbe “EE arisen (oiksta CAL mone ‘bedoetoxq od od ‘ek OA atanonitiavoe kexabod ihe daa i ihe =e eo Footnotes le The legitimacy of this postulate will be questioned in Section IV below. '2e It is worth emphasizing that the model developed in this section is based on Keynes's General Theory rather than on the now popular IS-LM mechanism Modigliani employed in his 1944 paper. My ‘reasons for not using the IS-LM doctrine are that it bears no significant relation to Keynes's work, and, more iafoecantiy, it seems to me to be an internally inconsistent and therefore unhelpful theory of aggregate economic behavior. 3. In a previously published paper [10], the author demonstrated that the rate of investment spending cannot be determined analytically within the confines of a single commodity model. Hence our simple assumption is also the most sensible assumption that can be made. 4. See [8] for.a discussion of the Pigou effect. 5. Aside from Lerner [6], Davidson [1], Robinson [9], and Kaldor [3], few economists have taken much interest in this highly important chapter of The General Theory. To account for this lack of attention, Davidson has observed that "Keynes anticipated those ‘modern classicists' who aver that a flexible wage and price structure would automatically assure full-employment. Keynes' argument on this is simply devestating--which may explain why so many have chosen to Signor dt". [25 p.301). benoitaaup i ‘tai seein si thn ade’ | ated VE. ob 3 a 1 bacofevss Labon end dents potetesdgns AoW ye on node yao faxened, ateaayex ne: be aind pty beyotans tne tipibon na.tnestoem Mama aataqog. wou edd yl 82 edd pateu Jon 20% “enganes we “39984 aed al aamyer% od motse lon netting iz on, axsed at sada O38 | - yitaaaeene a6. ad az om od amooe dh tits zogme 20m etspewes 40 yaomds subqtedais onoteuads bap nei oe ee Le bah bli sno kvaddes sorts, ond “tort seaag Betis tds vleusivesg ry ae “ r ‘gonns2 gatbaeqe Shem zevat to Aiea ‘eds ta borsatt ie “ptuaie « s te aentino> outs ‘mbdditw yiteottytens beat | ads oets an! mobsqnuans olqnte: rita) encel | sfebem eres eben od. ‘n08) dats nokiqauecs oidtenea “4 isootte voRes. ort 3° | aotauan 6 tet ted, ee) a in onsihtolk sas noabived, “183 hntraad main obkad fe! i pe Seoaaent doum oasted evar t sgnthonggs vit de rte a bevsetdo: eed nckbivag snosno:%a Pc) ton ae 0% ‘ain : Awan ai ich | neve ontw tadatointsts niteboint saody bedequouine hownaeck i" on i . iy } ei i sing tap pet its : vient ek iad | ne y deans ‘alayon ei a} iy 4 ies dca fi oF ) pmons ovat yee on ihe nthiom ys i Nid =P References 1. Davidson, Paul, "A Keynesian View of the Relationship Between Accumulation, Money, and the Money Wage Rate," Economic Journal, June 1969, pp. 300=23. 2. Johnson, H.Ge, "Monetary Theory and Keynesian Economics," Chapter V in Johnson's Money, Trade, and Economic Growth, Cambridge, Harvard University Press, 1962. This chapter. was first published as an article in the Pakistan Economic Journal, Jan. 1958, pps 56-70. 3. Kaldor, Ne, "Keynes' Theory of the Own Rates of Interest," Chapter 2 in Kaldor's Essays on Economic Stability and Growth, London, Ge Duckworth, 1960. 4. “Kelecki, M., “Professor Pigou on ‘The Classical Stationary State,' A Comment,” Economic Journal, April 1944, ppe 131-2. -Se Keynes, JeM.e, The General Theory of Employment, Interest and Money, London, Macmillan, 1949. ; 6. Lerner, A.P., Essays in Economic Anal er London, Macmillan, 1953. 7. Modigliani, F., "Liquidity Preference and the Theory of Interest and Money," Econometrica, Feb. 1944, pp. 45-88. Reprinted as Chapter 11 in Readings in Monetary Theory, ed. by F.A. Lutz and L.W. Mintz, Philadelphia, The Blakiston Coe, 1951. 8. Pigou: A.Ce, “The Classical Stationary State," Economic Seaat. Dec. 1943, ppe 342=51. oi | | ie “ AES=008. aa 18085 snus « japtmonsd aateence3 ne yxoen? \yxetenom, enue racediiat : Mt ‘ " eildwpa® 2dmono2s ‘bos, vebeat Kedah !moznHiot ad es 2sw 2atgerio tat -Saer «82037 lia baa baawaah veel taaaeel. > pdmogons anne ond ng ainisze ns 2a. retiscieall i Sa) i ea tase tating oOFna2 ogg «S28 # dearest a aoteh awo arid, 26 > yee *eonyen” galt er0bLar ce rf | Eaabingtd ‘eat’ no weptd aoazetoxa" volt qbivetox ny | — iLaga «hecalae — * ydossinno> A. yadade peer 40 a \anomvosasa 30 vaoedt Lezened ad? ae. (2enyer | ee -eaeL nell imoe™ obaos LYSnoM bas 2293 aobaod rskexdenn pupecad aa avaasd 129A ¢reqzed | ca ie «£2eL ensitte yresets add bas ipsa vétbtup.a™ wt siete Lip thom rn oBB-2> qq pbPCL .dot patazemonoos "yong bes. nel be ccna? castenol a2 spnsbeed at it edged? es & ce | nosetaet@ « ont sama ily aiid oad bate stu hay an x i =~24— 9- Robinson, J., "Own Rates of Interest," Economic Journal, Sept. 1961, pp. 596-600. 10. Wells, P., “Output and the Demand for Capital Goods _ in the Short Run," The Southern Economic Journal, Oct. 1965, pp. 146-52. oimonoss ' *deeneoat ro 09 ue . ; iO 4 i, Hl L'a ay rors Ag i [Py eae by i 1) ie ’ nr 2 a a | # | Vy ‘ } é Th ek Oe Viaic Ay i) ¥ i by 4 : ‘ My af r 0) ie ia + ait ha ¥ nt i : 4 ' i dj . t ie ie a 7 ‘a i tan i .. “ ut , iP. 7 } t as r) i ta’; ie . f “ Jai : ae BV Ys i 7 a 7 il a, ie rr a ‘ a0 eh i i} s nt ' ; i } my ig '! i an my j 1 : if if ' : 4 ih ik es ah inl i Vi iy ; v 7 Mi i i) ae $1} a i A ' ahs A : "i i? = Hon " ' | be it t ' ' ‘ rs y , 7 : A 1 4 4 | mt ¥ i q : \ ‘ ; } 7 ipa ' as The = e i : a j i A a * { ia | ? i t } : = LU i : ’ ay : , SS = + i ‘ 8 2 i : } = fi + - a a } } 7 * i) id 1 At MU a tis = i j > - : ft : 7 ae - a 7 f ate " 4 - a 7 adit ; ‘ nt P ; | ne wo met} ite \ a mM any | a a Lied Ge Le Pere Dec taaauen soak TW hreeter eo YL SEE Cid crate dash Ebb ran tie RHEE ated eWacitalanutatintrya PAPA et Sbsaahs Kar F ILLINOIS-URBANA iy ae ae ay : ui pee 3.0112 06 Matyce tert ea TET Nie Wiel Ry Ah Pearce Sper tebe hi aN Appa MRA AE, Crinunercest on Vibes eee AT. pis aa Pr ieee Tony Rasher ere Aeaseeniin Mane? 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