The Keynesian Gospel According to Modigliani

• Published in: The American Economist (New York, N.Y. 1960) Vol. 47; no. 1; pp. 3 - 24
• Main Author: Modigliani, Franco
• Format: Journal Article
• Language: English
• Published: Los Angeles, CA Omicron Delta Epsilon 01-04-2003; SAGE Publications; Sage Publications, Inc; SAGE PUBLICATIONS, INC
• Subjects: Economic aspects; Economic models; Economic theory; Europe; Excess demand; Full employment; GNP; Gross National Product; Illnesses; Interest rates; Keynesian economics; Keynesian theory; Keynesianism; Market equilibrium; Market prices; Money demand; Money markets; Money supply; Price flexibility; Prices; Studies; Supply; Supply and demand; Unemployment; Europe
• ISSN: 0569-4345; 2328-1235
• DOI: 10.1177/056943450304700101

The purpose of this essay is to try to explain Keynes's path-breaking contribution to the understanding and cure of mass unemployment, the most serious shortcoming of a market economy. A novel approach is used that stresses the communality between pre-Keynesian models - "the classics" - and that of Keynes. They basically share the formulation of the demand and supply of money; the only real difference is in modeling the labor market - the response of nominal wages to unemployment. The classical model turns out to be a special case of the Keynesian general model, in which wages are assumed (counterfactually) to decline promptly in the face of unemployment. But the difference between rigidity and perfect flexibility turns out to make an enormous difference for the "monetary mechanism" - the mechanism that ensures the clearing of the money market-and the understanding of unemployment.