Disequilibrium-Pricing Versus Inconsistent Preferences in Unemployment Theory

Abstract

Apart from the voluminous literature on pragmatic issues of employment policy written after the appearance of J. M. Keynes's General Theory, relatively few authors have probed the conceptual foundations of unemployment theories. The object of this essay is to review or reinterpret the main analytical systems that have been used in attempts to explain unemployment, to discuss their relevance to reality, and to suggest an alternative model.Consistency as an Optimum Property of Classical General Equilibrium Systems. Classical general equilibrium theory, in particular Pareto's system, may be interpreted in two ways: either in the sense that once the equilibrium values of the variables are realized, the economic system will remain stationary as long as the parameters of the equations remain unchanged; or, and this applies to Pareto more than to Walras, in the sense that the equilibrium values, in a certain competitive framework, represent an “optimum” situation, any deviation from which involves a welfare-loss.The set of equilibrium prices and quantities is the solution of a system of equations implicitly assumed to be consistent. The equilibrium values are in fact those that render mutually compatible the results of the maximizing behaviour of individuals, given the psychological and technological parameters and the initial distribution of assets. In order to yield an equilibrium solution, a system of equations must be consistent. But, although consistency is necessary for an optimum solution, it is not sufficient.