History vs. equilibrium one more time: how Keynes’s General Theory foundered on the rocks of comparative statics

Abstract

Keynes’s message, that full employment was an unlikely outcome for a capitalist economy, did not survive scrutiny in a comparative-statics framework. But this was the fault of the framework, not the message. The main criticisms leveled at the idea of an underemployment equilibrium were that, as the money wage rate fell, the Keynes effect would lead to an expansion of investment demand (Modigliani) and that the real-balance effect would lead to an expansion of consumption demand (Haberler and Pigou). Neither of these criticisms survives when real-time changes in the money wage replace static comparisons of equilibria with different money wages. The lesson is that dynamic adjustment is key to understanding the workings of a capitalist economy.