Wage and Price Stickiness in Macroeconomics: Historical Perspective

Abstract

There is more to the history of macroeconomics than a series of bilateral conflicts between competing schools of thought, but such debates have been a significant part of the story. Most recently the competing schools have worn the labels ‘New-classical’ and ‘New-Keynesian’, and the major issue between them has been the role of money wage- and price-stickiness in generating those more or less regular fluctuations in economic activity which we refer to as ‘the business cycle’. For New-classicals, output and employment fluctuations are either responses to shocks to tastes and technology, or to unanticipated shifts in aggregate demand, typically stemming from money supply changes. In either cases though, prices give signals to which quantities respond, and variations in real magnitudes take place precisely because prices change. New-Keynesians emphasise demand-side shocks but, in their view, quantities vary, not because prices vary, but because they do not.

This lecture was delivered in November 1991 and published in booklet form by City University Business School, Dept of Banking and Finance. It draws upon a broader study of the development of macroeconomics which Professor Laidler has been carrying out with the financial aid of the Lynde and Harry Bradley Foundation, whose support is gratefully acknowledged. Professor Laidler is indebted to Mr Toni Gravelle for assistance in the research on which this lecture is based, to Tom Humphrey, John Swithin, Geoffrey Wood and members of the University of Western Ontario, Economic History/History of Economic Thought Workshop, the Economics Dept seminar of Kwansei Gakuin University, as well as the York University History of Economic Thought Workshop for many helpful comments.