Why Keynes's Work Was a "General Theory"

"The revolutionary impact of Keynesian Economics on contemporary thought stemmed in the main, we have argued, from Keynes' reversal of the conventional ranking of price and quantity velocities. In the Keynesian model price velocities are not infinite; it is sometimes said that the implications of the model result from the assumption that money wages are 'rigid.' This usage can be misleading. Income-constrained processes result not only when price-level velocity is zero, but whenever it is short of infinite." -- Axel Leijonhufvud, Keynesian Economics and the Economics of Keynes, p. 67

In other words, the classical theory of markets, as we still present it to students today, posits that when faced with a disequilibrium price, the market will make infinitely fast price adjustments, so that no quantity adjustments will ever occur. That, certainly, is a very special theory: in reality, price adjustments can never be infinitely rapid, so there will always be some quantity adjustments as well: Keynes has, indeed, put forward a more general theory, in which the case of infinitely fast price adjustments is correctly understood a special case. As Leijonhuvud notes, many modern "Keynesians" have ignored this fundamental aspect of Keynes' work, attempting to fob off "price rigidities" on labor unions, minimum wage laws, long-term contracts, and so on, so that they can still employ micro-models that include infinitely fast price adjustments whenever such barriers are not present. They have thrown out the baby and kept only the bathwater.

A note to Austrians: No disciple of Mises' analysis of the market process should differ from Keynes in this regard: instead, they ought to acknowledge that, whatever the differences in policy implications, Keynes and Mises were very similar in their critiques of the "equilibrium always," achieved solely by means of price adjustments, school of economics.

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