Price Flexibility and Full Employment: A Common Misconception

Roy H Grieve

Research output: Working paperDiscussion paper

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.
LanguageEnglish
Place of PublicationGlasgow
PublisherUniversity of Strathclyde
Pages1-29
Number of pages29
Volume09
Publication statusPublished - 2009

Fingerprint

Full employment
Price flexibility
Price stickiness
Market economy
Rationalization
Casualties
Wage stickiness
John Maynard Keynes
New Keynesian
Textbooks
Equilibrium price
Sticky prices
Short-run
Market forces
Macroeconomic stability
Equilibrium solution

Keywords

  • price flexibility
  • general equilibrium (macro) models
  • walras' law and say's law
  • over-determined systems

Cite this

Grieve, R. H. (2009). Price Flexibility and Full Employment: A Common Misconception . (10 ed.) (pp. 1-29). Glasgow: University of Strathclyde.
Grieve, Roy H. / Price Flexibility and Full Employment : A Common Misconception . 10. ed. Glasgow : University of Strathclyde, 2009. pp. 1-29
@techreport{6ebfdc364a83454a82f9211a2efb902b,
title = "Price Flexibility and Full Employment: A Common Misconception",
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.",
keywords = "price flexibility, general equilibrium (macro) models, walras' law and say's law, over-determined systems",
author = "Grieve, {Roy H}",
note = "Published as a paper within the Discussion Papers in Economics, No. 09-10 (2009)",
year = "2009",
language = "English",
volume = "09",
pages = "1--29",
publisher = "University of Strathclyde",
edition = "10",
type = "WorkingPaper",
institution = "University of Strathclyde",

}

Grieve, RH 2009 'Price Flexibility and Full Employment: A Common Misconception ' 10 edn, University of Strathclyde, Glasgow, pp. 1-29.

Price Flexibility and Full Employment : A Common Misconception . / Grieve, Roy H.

10. ed. Glasgow : University of Strathclyde, 2009. p. 1-29.

Research output: Working paperDiscussion paper

TY - UNPB

T1 - Price Flexibility and Full Employment

T2 - A Common Misconception

AU - Grieve, Roy H

N1 - Published as a paper within the Discussion Papers in Economics, No. 09-10 (2009)

PY - 2009

Y1 - 2009

N2 - 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.

AB - 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.

KW - price flexibility

KW - general equilibrium (macro) models

KW - walras' law and say's law

KW - over-determined systems

M3 - Discussion paper

VL - 09

SP - 1

EP - 29

BT - Price Flexibility and Full Employment

PB - University of Strathclyde

CY - Glasgow

ER -

Grieve RH. Price Flexibility and Full Employment: A Common Misconception . 10 ed. Glasgow: University of Strathclyde. 2009, p. 1-29.