Why Neither Samuelson’s Neoclassical Synthesis Keynesianism Nor New Keynesianism Theory Is Compatible with Keynes’s General Theory Explanation of the Cause of Unemployment

Abstract

Paul Davidson continues in this chapter, under the title ‘Why Neither Samuelson’s Neoclassical Synthesis Keynesianism Nor New Keynesianism Theory Is Compatible with Keynes’s General Theory’. This chapter demonstrates that the specified presumptions underlying Neoclassical Synthesis Keynesian Theory and New Keynesian Theory are in direct conflict with Keynes’s statements regarding the foundation of his theory of involuntary unemployment. Stickiness of wages, and/or administered prices, is their fundamental cause of involuntary unemployment. Keynes’s essential properties are that (1) all liquid assets have a zero elasticity of production and therefore are nonproducible and (2) the elasticity of substitution between all liquid assets and producible goods and services is zero. Thus, when people put their savings out of current income into the form of liquid assets, these savings find a resting place in nonproducibles even if all wages and prices are perfectly flexible. Consequently, every penny saved is a penny not earned by workers and enterprises that produce goods and services. In other words, in Keynes’s general theory, sticky money wages and/or administered prices are not the fundamental cause of unemployment.