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328 Miscellanea
mammoth unemployment (though Europe’s opinion leaders refuse to understand
it, blaming other fictitious causes).
2. Teaching how this illness could be cured (a teaching that EMS countries still
refuse to learn).
3. Proving that, if one fails to understand and apply the appropriate cures, this
illness could last for a long time (as EMS countries are learning).
My purpose here is to develop a synthetic model of Keynes’s construction
designed to lay out its essence in readily understandable form. This is not my
first endeavor to do so. But the present version differs from my previous papers,
published throughout my career, starting from my first on “Liquidity Preference.”
The difference springs in part from the fact that the new presentation is meant to
be understandable by a non-technical audience, but in part it reflects my recent
realization, that it is possible to use a model different from the prevailing one,
which stresses the communality between Keynes and the classical theory. In fact,
I will argue that the classical model is but a special case of Keynes’s General
Theory. It applies only to an economy in which wages (and prices) are highly
flexible downward in response to “excess supply,” and financial markets are
unimportant. It should be obvious that this special case is of very little relevance
to the present-day developed economies, and so are the analytical and policy conclusions
that follow from it.
It is my ambition that anyone who accepts the validity of the classical theory
of the demand for money—the foundation for the so-called quantity theory—will,
at the end of this essay, fully understand the scope and nature of Keynesian unemployment,
and come to admire with me the greatness and originality of his contribution.
A reader impatient to know what this paper is all about is invited to
glance at the first paragraph under “Concluding Remarks.”
I The Concept of Equilibrium and the Money Market
I.1 The Classical Model of Market Equilibrium and the Role of Price
Flexibility
Economists model the whole economic system as composed by a series of
markets in each of which the quantity exchanged and its price tend to an equilibrium
or sustainable value. If the market is competitive (i.e. there are no legal
or economic impediments to the entry and exit of buyers and sellers), the market
mechanism generating the equilibrium can de described by the well-known “law”
of demand and supply. The demand is described by a schedule indicating the
quantity that would be bought at different prices. It can be represented graphically
by a curve like DD in figure 15.1, in which the quantity (q) is measured