Involutionary Unemployment: Macroeconomics From a Keynesian Perspective.

• Author: Snowdon, Brian

The classical vision of macroeconomics found its most famous expression in the dictum "supply creates its own demand." This view, popularly known as Say's Law, denies the possibility of general overproduction or underproduction. With the exception of Malthus, Marx, and a few other heretics, this view dominated both classical and early neoclassical contributions to macroeconomic theory. The essential feature of Keynes's contribution was his reversal of Say's Law. In Keynes's model demand creates supply providing an economy has spare capacity.

During the past twenty five years we have witnessed an attempt to discredit and overturn Keynesian economics in all its many forms. New classical macroeconomists inhabit a brave new world characterized by continuously clearing markets, rational expectations and optimising agents who live in permanent equilibrium having exhausted all mutually beneficial trades. In such a world the business cycle is always an equilibrium phenomena generated either by the misperceptions of agents in the face of nominal demand shocks, an approach pioneered by Robert Lucas in the 1970s, or, as a consequence of real supply side forces such as recurrent technological shocks, an approach associated with Finn Kydland and Edward Prescott during the last decade. This latter approach is profoundly shocking to both Keynesians and monetarists alike. The traditional approach which distinguishes between potential and actual output is abandoned since aggregate fluctuations are seen to be the result of shifts in the former. Since the observed business cycle is nothing more than the outcome of Pareto efficient responses to technological shocks policies designed to tame the business cycle are not only out of place but counter productive and welfare reducing. Since the unemployed as well as the employed are in equilibrium throughout the observed fluctuations in economic activity there is no place in such models for one of Keynes's most important "theoretical constructs," namely, involuntary unemployment.

In this new book James Trevithick has done an admirable job in re-examining the contribution of Keynes and in providing a powerful re-statement of the fundamental tenets of Keynesianism. In Trevithick's view, the burial of Keynes and his advocates during the late 1970s was premature to say the least. Of course one would expect nothing less from a fellow of Kings College Cambridge, and Trevithick takes on the mantle of being one of Keynes's...