Inflation, Unemployment, and Economic Welfare: Reply
fixed money wage assumption along with a flexible commodity price is often used to characterize the complete Keynesian model. This asymmetry means that firms are on their demand schedules for labor, as implied by equation (1) of my article, p. 631, but that labor is not on its supply schedule except when the system is in a full employment position. Alternatively, it could just as well be assumed that both the commodity price and the money wage are inflexible during the period of analysis under consideration; then firms are not on their demand schedules for labor nor are laborers on their supply schedules when the system is at less than full employment positions. This assumption is implicit in all of the pure quantity adjustment type Keynesian models (i.e., where both prices and wages are assumed fixed), and it is therefore implicit that the real wage is assumed fixed. Gordon Tullock suggests that under these circumstances my argument that anticipated inflation keeps the system closer to a full employment position would not follow. I will show that under these circumstances the argument still holds, and therefore is not the consequence of the asymmetric assumption about the fixity of the money wage and the perfect flexibility of the price level. This follows from the kind of period analysis which Axel Leijonhufvud (pp. 36-39 and ch. 2) has emphasized in his interpretation of Keynes: The standard 'Keynes and the Classics' analysis places great stress on the restrictive nature of the 'wage rigidity' assumption. But this strong assumption is not necessary in order to explain system behavior of the Keynesian kind. It is sufficient just to give up the equally strong assumption of instantaneous price adjustments (p. 37). My contention, p. 631, that anticipated inflation moves the system closer to a full employment position does not depend on the rigid money wage assumption, as Tullock asserts, but rather on the effects which anticipated inflation has on the demand for real monev balances. Consider once again the model of my article, but now assume that the price level as well as the money wage are inflexible. Using the same notation and equation numbers, the model now consists of equations (4) and (6), pp. 632-33; equation (1) no longer holds since firms are not on their demand schedules for labor. Assuming the anticipated rate of inflation p to be given, the model is
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