Prosperity and Depression.pdf

494 Recent Developments in Trade Cycle Theory Part IIISecondly, we have the large group of economists who believe thatrigid prices and wages exert· a stabilising rather than a de-stabilisinginfluence on output. To this group belong Mr. KEYNES and his followersand Professors HANSEN and HICKS. 1Professors PIGOU,:! SCHUMPETER and H. S. ELLIS3 may be mentionedas holding a more qualified intermediate position with leaningstowards the first group.The strong argument of·the first school of thought is that (involuntary)unemployment 4 and flexible wages and prices are incompatiblewith each other. So long as there is unemployment under a regime ofperfect price flexibility,. wages and prices would fall until everybodywho wants to work at the prevailing rate has found employment. Thisproposition is incontrovertible, but it does not mean very much, unlessit can also be shown that this point of full employment will be reachedat a reasonable level of real wages. This second proposition is not soevident as the first, in fact it is not evident at all, but it is probably inmost cases tacitly implied by those who state or criticise the first proposition.Mr. KEYNES and still more his popularisers like Dr. LERNER are,for that matter, very optimistic when they assume that real wages willnot have to fall when money wages are reduced, because prices must1 In the case of Professor Hicks, one is left in doubt whether he wants merelyto say that rigid prices tend to stabilize the price level or whether he is thinkingalso of output. Probably he means both, regarding a stable price level as acondition for stable output. But he attempts to give something like a proofonly for the first proposition, that rigid prices stabilise the price level.2 See his Industria/Fluctuations (1929), Theory of Unemployment (1934)and Equilibrium. and Employment (1941).3 See his well-balanced and impressive paper "Monetary Policy and Investment,"passim (American Economic Review, Vol. XXX, Supplement, March1940). See also William Fellner, "The Technological Argument of the StagnationThesis" in Quarterly Journal of Economics, Vol. 55, August 1941.4 We shall only consider involuntary unemployment, but defined in the traditionalsense according to which· a worker is involuntarily unemployed, if hewants to work and would accept work at the prevailing money wage rate butcannot find it. (The elements of this definition are best discussed in Pigou'sTheory of Unemployment. For Mr. Keynes' rather unusual definition, see above,pages 237-8.) Voluntary Unemployment, that is, cases where people do notwork because they do not care for it at the prevailing wage (even if they wouldwork if the wage were higher) are usually not counted as unemployment.