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15
THE KEYNESIAN GOSPEL ACCORDING TO MODIGLIANI
Franco Modigliani
Introduction
My purpose in 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. My ambition is to do so in a way that is understandable
to a reader with little economics background, provided he is prepared
to do a little hard work. I hope to achieve this result by using a novel approach
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.
As I will try to demonstrate in the following pages, Keynes’s contribution can
be summarized as follows: before his work, mass unemployment (in developed
countries) was considered a random and transitory aberration of the system. Like
catching a cold—sometimes it’s light, sometimes it’s a serious problem, but
there is no certain remedy, though if you are patient, “it will go away.” Instead
Keynes in the General Theory develops a radically different interpretation of
unemployment.
1. Offering a systematic explanation of this illness, proving that it is not a random
accident, but a physiological response to certain disturbances and in particular,
an insufficient real money supply. This explanation, I hold, applies to Europe’s
Reprinted with permission from The American Economist 47, no. 1 (Spring 2003), 3–24.