A Post-Walrasian Explanation of Wage and Price Inflexibility and a Keynesian Unemployment Equilibrium System

The issue of wage- and price-level flexibility has been at the heart of macroeconomic debates over the past fifty years, and it continues to be central to modern theoretical macro debates. As the in-vogue macro models have shifted from assumptions of instantaneous flexibility of prices to assumptions of fixed prices and wages, and back again, so too have the younger economists’ general acceptance of different macro models. The early Keynesian models were built on a foundation, and acceptance, of relatively fixed wages and prices, and within that foundation the Keynesian models found general support among then young economists, with older economists for the most part sticking with their earlier Classical views. Then, when economists tried to develop micro foundations for that wage- and price-level flexibility, and did not find reasonably good explanations for it, the young economists abandoned those Keynesian models and switched to more Classical models. Keynesian economists, who in the interim had become old economists, dismissed the Classical models as irrelevant game-playing.