Keynes Without Nominal Rigidities

Abstract

The principal aim of this essay is to restate John Maynard Keynes's (1936) view of the economy as tending towards an equilibrium which will in general fall short of full employment. The approach outlined here, in sharp contrast to what has become standard theory, does not depend on nominal rigidities. The goods market adjusts prices according to excess demand as determined by the IS schedule; competitive price-taking producers adjust output on the basis of marginal profitability as determined by a comparison of price and marginal cost; and the labor market adjusts labor supply on the basis of a comparison of workers' marginal rates of substitution of goods for leisure and the real wage.