Ȁȅȅ Partʺ: Economicsalways,” which tend to be associated with the rational-expectations or
New Classical school, and which treat disequilibrium theories with scorn.Ȅ
Why should stickinesses persist and contracts go unrevised, obstruct-
ing exchanges, when rational market participants would adjust prices
promptly and completely to levels at which mutually advantageous trans-
actions could proceed? Equilibrium-always theorists do not see fluctua-
tions in output and employment as reflecting changing degrees of dise-
quilibrium. Ļey suggest, instead, that markets are still clearing, but with
transactors sometimes responding to distorted or misperceived prices. Per-
ceptions of relative prices and relative wages are likely to go awry when
price inflation occurs at an unexpectedly high or unexpectedly low rate. In
the sense that workers and producers are still operating “on their supply
curves,” equilibrium, though distorted, continues to prevail. Even this dis-
tortion would supposedly be absent if people fully expected and allowed
for the underlying changes in monetary policy, as self-interest would lead
them to do to the extent that is cost-effectively possible.
Exaggerated notions of how nearly perfect markets are possess a
strange appeal for some theorists. Anyway, these exaggerations, together
with the exegetical writings of Clower and Leijonhufvud, have given per-
ceptive Keynesians an opportunity to shift their ground gracefully, with an
ironic result: something like the venerable monetary-disequilibrium the-
ory, which Keynesianism had crowded out, now finds itself labelled “Key-
nesian” by leaders in the over-reaction. Ļe very title, “Second Ļoughts
on Keynesian Economies,” of an article by Robert Barro (ȀȈȆȈ), a recanted
disequilibrium theorist, suggests the apparent notion that theories invok-
ing wage and price stickiness are Keynesian.ȅKenneth Arrow (ȀȈȇǿ, p.ȀȃȈ)
casually refers to “Disequilibrium theorists, ... stemming from Keynes.”
Stanley Fischer (in FischerȀȈȇǿ, p.ȁȁȂ) refers to “Keynesian disequilib-
rium analysis.” James Tobin (ȀȈȇǿa, p.ȆȇȈ) refers to “the Keynesian mes-
sage” as dealing with disequilibrium and sluggishness of adjustment.
Frank Hahn (ȀȈȇǿ, p.ȀȂȆ) notes “the present theoretical disillusion-
ment with Keynes” (which, he conjectures, will be reversed). Arthur
Okun’s posthumous book (ȀȈȇȀ) spelling out much of the logic of price
and wage stickiness is widely regarded as Keynesian. In a new textbook,
Hall and Taylor (ȀȈȇȅ, pp.ȀȂ–Ȁȃ,ȂȁȄ) report that
ȄLucasȀȈȆȄandȀȈȇǿ, Lucas and SargentȀȈȆȇ, and WillesȀȈȇǿare examples of writ-
ings to this effect. Comments interpreting such writings pretty much as I do include
ArrowȀȈȇǿ, BuiterȀȈȇǿ, and TobinȀȈȇǿa andȀȈȇǿb.
ȅAlso BarroȀȈȇȃ, esp. chap.ȀȈ.