Involuntary unemployment, money wages and inflation. A reconsideration of Keynes’s General Theory.

Based on the belief that Keynes’s principle of effective demand is relevant to explain persistent unemployment, this paper explains why this principle is neglected in standard macroeconomics and how to remedy this state of affairs. It makes two basic claims. First, the main reason for this neglect is that Keynes lost his generality battle against classical theory --based on his multiple equilibria argument referring to various levels of employment-- because he had in mind Pigou as main opponent rather than general equilibrium theory underlying standard macro, that provides alternative accounts of both cyclical and persistent unemployment. Second, based on the ‘Ulysses’s journey home’ metaphor for understanding Keynes’s General Theory, this paper suggests that his generality claim should be cast in terms of various inflation rates rather than in various levels of employment. By making reference to this variable, it appears that while Keynes’s theory covers the general case of stable moderate inflation, standard theory only applies to the special case of high and rising inflation.