An Old Keynesian Counterattacks


James Tobin

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Discussion Paper

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Both New Classical and New Keynesian macroeconomic theorists misunderstand and distort old Keynesian economics, alleging that its diagnoses and prescriptions depend on the indefensible assumption that money wages and prices are “rigid.” Here it is argued that all Keynesian macro requires is that labor and product markets are not instantaneously and continuously cleared by perfectly flexible prices. Assuming imperfect flexibility, not necessarily rigidity, suffices to open the door for involuntary unemployment. Moreover, once the economy is displaced from full employment, it is far from clear that economy-wide movements of money wages and prices will, in the absence of Keynesian demand policies, restore equilibrium. The real balance effect is too feeble, and may be overcome by debt burdens. The processes of deflation and disinflation can be inherently destabilizing. These problems, stressed by Irving Fisher as well as by Keynes and Keynesians, are ignored in “new” macroeconomics.

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