The ‘theoretical developments initiated by Haberler but named for Pigou’ do not provide sufficient grounds for rejecting ‘Keynes’s key theoretical proposition’

Abstract

This paper examines a claim made in the introduction to Milton Friedman’s Presidential Address to the American Economic Association and that is now taken for granted in orthodox economics. According to Friedman, ‘the theoretical developments initiated by Haberler but named for Pigou’ provide sufficient grounds for rejecting Keynes’s ‘key theoretical proposition’ and the economics of Keynes in its entirety. The problem with this claim is that it turns out, given the scrutiny that it clearly deserves, to be false. The ‘theoretical developments initiated by Haberler but named for Pigou’ do not provide sufficient grounds for rejecting Keynes’s ‘key theoretical proposition’, and thus the economics of Keynes as a whole. There is no legitimate rationale for believing, in other words, even ‘in a world of flexible prices’, that the system will tend naturally toward ‘a position of equilibrium at full employment’.