Malinvaud’s and Keynes’s unemployment typologies: do they coincide?

Abstract

Malinvaud’s reconsideration of the theory of unemployment emphasises the distinction between classical and Keynesian unemployment equilibria, associating the former with excessive real wages and the latter with deficient effective demand. This distinction suggests a close proximity with the one established by Keynes between voluntary and involuntary unemployment. However, Malinvaud’s typology concerns two mutually exclusive regimes, whereas Keynes’s typology concerns two coexisting unemployment categories. Besides, the former rests on the implicit view of price rigidity as the troublemaker and of price flexibility as the ultimate policy target, whereas the latter follows from the opposition between refusal to cooperate and inability to coordinate, and points to different policy strategies.

Keywords:

• Classical vs. Keynesian unemployment
• voluntary vs. involuntary unemployment
• fixprice equilibria

JEL CLASSIFICATION:

• B22
• B31
• E12

Acknowledgements

The author wants to thank two anonymous referees who, by their detailed and relevant comments, led him to make explicit part of what he had left implicit in the former version of the paper.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Let me stress that this statement concerns the ex post relationship between the two models and that I am not suggesting that Malinvaud’s model, or indeed its forerunners (Barro and Grossman 1971; Bénassy 1977), were aimed at offering an alternative to the IS-LM model. As made clear by Barro and Grossman, their model was designed to integrate Patinkin’s (1956) analysis of the spillover from the output market to the labour market and Clower’s (1965) analysis of the reverse spillover.

2 Kahn (1976) concluded his appraisal of Malinvaud’s book by the harsh statement: “On the fundamental difference between Keynesian and classical theory – the relationship between saving and investment – he has nothing to say” (386). This statement is a fair judgment, if we want to assess the aptitude of Malinvaud’s model to render the core of the General Theory. However, it misses the point if we are interested in the aptitude of the model to clarify some basic elements of Keynes’s magnum opus.

3 The extent to which “non-Walrasian” general equilibrium theory is adequate to translate Keynes’s theoretical approach and is truly non-Walrasian was discussed in Dos Santos Ferreira (2021). Recent and fairly complete reviews of the theory itself are provided by Backhouse and Boianovsky (2013) and Béraud (2020). See also Plassard, Renault, and Rubin (2021). A critical position with respect to the use of price and wage rigidities but also to that of static vs. dynamic analysis when restoring the General Theory has been convincingly sustained by Marglin (2021, ch. 6 and 7 in particular).

4 I have addressed the first of these questions in Dos Santos Ferreira (2014), where the reader can find a model extended to financial markets, formalising Keynes’s General Theory. Here, I will confine my discussion to the simple world of Malinvaud (1977) where investment is at best purely autonomous. The introduction of an investment function in Malinvaud (1977) slightly modifies the characterization of the two unemployment regimes.

5 See d’Autume (1980) and Hildenbrand and Hildenbrand (1978). In Sampson and Sedgwick (1977), current profits are immediately distributed but “spending propensities differ between recipients of wages and profits” (206), so that income distribution effects are again present, with similar consequences.

6 This is an expositional facility, allowing to take directly any individual agent as a representative agent, while opening the way to a difference of status at equilibrium, for instance when rationing is obtained by a queueing scheme. Bénassy (1977, 522) introduces aggregated agents, which makes it trickier to distinguish the partial rationing of all and the total rationing of some.

7 The curves in Figure 1 are computed on the basis of the following parameter values : α = 0.75, γ = 0.6, λ = 0.15 and µ = 0.5.

8 The curves in Figure 2 are computed on the basis of the parameter values used for Figure 1, except µ, which takes now all values in the interval [0,1.2].

9 Bénassy (1977) circumvents the issue by calling the regimes of classical and Keynesian unemployment ‘stagflation’ and ‘deflation’, respectively, but only to conform with Malinvaud’s terminology, once this has been released (see for instance Bénassy 2002, 29).

10 Keynes’s collective handling of the opposition between voluntariness and involuntariness has been played down even by historians (see e.g. De Vroey 2004, ch. 2 and 6 in particular, and also 2016, ch.1).

11 See also Kahn (1976).

12 As suggested by an anonymous referee, this definition makes voluntary any type of fixprice equilibrium unemployment, if only because it is price stickiness (the “slow response to change” and, if I may add, to market imbalance) that is responsible for the “inability of a unit of labour” to accept the reward conducive to its hiring.

13 See Rivot (2001) for the New Keynesian theories of the labour market, in particular the insider-outsider and efficiency wage theories.

14 The standard reference is Blanchard and Kiyotaki (1987), who use the Dixit and Stiglitz (1977) general equilibrium monopolistically competitive model. The assumed constant elasticity of substitution between products conveniently leads to a constant degree of competition, taken as given by Keynes (1936, 45). Monopolistic price setting was already introduced by Bénassy (1977) as a natural extension of the model we are considering, but in the context of perceived (subjective) demand and supply curves. Bénassy has since moved to the now standard use of objective demand and supply curves as the basis for monopolistic price setting (see Bénassy 2002, ch.4).

15 Notice that, by setting a price higher than its marginal cost, the firm is voluntarily rationing itself as a supplier in the output market. This results in some closeness between the cases of fixed and monopolistic prices. In the Preface to the second edition of his book, Malinvaud acknowledges this closeness, by the “observation that the reasons explaining price rigidities have a good deal in common with those explaining imperfect competition” (Malinvaud 1977/1985, IX). A major difference remains nonetheless: price rigidities appear essentially as a frictional phenomenon while imperfect competition, in spite of the adjective, applies to a perfect world of interacting agents who rationally exploit their market power.

16 By setting a wage higher than the marginal labour disutility, the monopoly union voluntarily rations the labour supply under its control.

17 The first fundamental postulate is represented by decreasing curves because of assumed decreasing marginal productivity. The second fundamental postulate is represented by increasing curves because of assumed increasing marginal labour disutility.

18 Keynes’s full employment equilibrium essentially corresponds to Friedman-Phelps equilibrium at the natural rate of unemployment.

19 I am here taking µ = 0.48.

20 Here, I am just taking equilibrium employment as the employment that satisfies the principle of effective demand and the first fundamental postulate, but not the second. The reasons for associating this employment with an equilibrium concept and for calling involuntary the excess of the corresponding unemployment over its full employment level are to be found beyond the frontiers of the present model, essentially in the failure of the real interest rate to perform correctly its coordinating role.

21 Fixprice equilibria are here transposed to an imperfectly competitive economy, not considered in Malinvaud (1977). Under perfect competition, the curves representing the first and second fundamental postulates are the competitive output demand and labour supply curves, respectively.

22 Another (flexprice) equilibrium regime would result from excessive effective demand, source of overemployment and inflation, but such a case is only touched upon in the General Theory.

23 The decrease in the unemployment rate is due to the increase in effective output demand and corresponding labour demand when unemployment is of the Keynesian type, and to the decrease of effective labour supply when it is of the classical type. A proportional reduction of prices and wages leads to a decrease of the effective labour supply in the classical unemployment regime because of the income distribution effect present in Malinvaud’s version of the model and absent in Bénassy’s one.

24 In Figure 4, such policies, by reducing unions’ bargaining power, would trigger a downward shift of the curve representing the second fundamental postulate, thus changing the composition of unemployment in the sense of less voluntary unemployment but more involuntary unemployment.