Abstract
It is a common practice in mainstream neoclassical economics to bypass awkward problems by assuming they are transient, basically temporary failure of the price mechanism in the ‘short run’ that gets resolved in the ‘long run’. Depending on the context this might mean different things, for example, slow speed of adjustment to equilibrium like in some older theories of frictional unemployment or in some modern search theories of unemployment. It might mean deficient learning in the short run that gets remedied in the long run, that is, people are wiser in the long run (even if dead!). It was captured by Milton Friedman’s famous quip against money illusion, ‘you cannot fool all the people all the time’. This view became an obsession with later Chicago monetarists who argued that money is neutral in the long run as enough information becomes available; continuous market clearing ‘rational expectations’ is only a short step from it on the assumption that the market most efficiently processes all the available information implying that market generated prices provide the best guidance.
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References
*This is a thoroughly revised and extended version of ‘A simple model of path dependent growth and effective demand’, in N. Salvadori, C. Gehrke (eds), Keynes, Sraffa and the Criticism of Neoclassical Theory, New York and London: Routledge, 2011. The paper is also extended to bring into focus Kalecki’s path-breaking contributions to the range of issues discussed here.
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Bhaduri, A. (2015). Effective Demand and Path Dependence in Short- and Long-Run Growth. In: Toporowski, J., Mamica, Ł. (eds) Michał Kalecki in the 21st Century. Palgrave Studies in the History of Economic Thought Series. Palgrave Macmillan, London. https://doi.org/10.1057/9781137428288_5
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DOI: https://doi.org/10.1057/9781137428288_5
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