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Economic theory of exchange often appears to imply that demand changes induce instant wage and price adjustments to maintain full resource use. .But unemployment, queues, rationing, and idle resources refute any such implication. And macroeconomic theory does not explain why demand decreases cause unemployment rather than immediate wage and price adjustments in labor and nonhuman resources. Instead, administered prices, monopolies, minimum wage laws, union restrictions, and ânaturalâ inflexibilities of wages and prices are invoked. This paper attempts to show that economic theory is capable of being formulated-consistently with each person acting as an individual utility, or wealth, maximizer without constraints imposed by competitors, and without conventions or taboos about wages or priceas to imply shortages, surpluses, unemployment, queues, idle resources, and nonprice rationing with price stability. The theory implies massive correlated ffuduations in employment of both labor and capital in response to aggregate demand decreascs-in a context of open market, individual utility maximizing behavior. The theory is general in that it applies to nonhuman goods as well as to human services. Though my primary motivation to explain âunemployedâ resources arose from labor market behavior, the analysis is best exposited initially without special reference to labor m r e
Economic Inquiry – Wiley
Published: Jun 1, 1969
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