MACROECONOMICS: AN APPRAISAL OF THE NON-MARKET-CLEARING PARADIGM Second Thoughts on Keynesian Economics By robert J, barro* My view in the early 1970's of Keynesian, The contracting approach may rationalize on-market-clearing-type models was that some departures of real wages from the the soundness of their theoretical structure marginal product of labor and or the margi hinged on an as yet absent theory of the nal value of worker time, but it does not imply stickiness of wages or prices. The application that levels of employment would differ signif- of contracting theory to macro analysis icantly from the(efficient)values that would seemed promising in this respect. The have been attained under flexible wages presence of employee risk aversion or of Rather than rationalizing the non-market transaction costs associated with marl clearing model as a useful "as if"approach arrangements-which could include elements contracting analysis suggests that-despite of capital that were specific to employment or the possible existence of"sticky"wages-the other aspects of production and exchange continuous market-clearing model may pro- seemed to motivate some long-term, implicit vide a satisfactory framework for the analysis or explicit agreements about wages or prices. of employment and output. Notably, the In particular, a sluggish adjustment of wages approach suggests that such market features to current economic conditions could be as sticky wages or the apparent non-price rationalized by this approach quantity rationing associated Further consideration of the contracting would be of secondary interest in analyses of model suggests that its rationale for sticky business cycles. Since the prevailing wage wages and prices--as far as it goes--does not need not represent the marginal product of xplain the key features of Keynesian analysis labor, the presence of"excess labor supply"at ith regard to the determination of employ- this wage need not signal involuntary unem ment and output. For example, long-term ployment in any economic sense labor agreements do not imply a failure of The conclusions derived from the contract employment to increase when all parties to ing model can be generalized by observing the agreements perceive that they could be that the key assumption of Keynesian analysis made better off by such a change. The so- is the inefficiency of some aspects of private called involuntary unemployment of Keynes- sector activity in comparison to corresponding everyone perceives accurately that the margi- central feature is, of course, the underlying nal product of labor exceeds the marginal basis for the policy activism that typifies value that potential workers place on their Keynesian thinking. In some simpledisequi time -is not compatible with efficient labor librium"macro models, relative private sector agreements. Even in contracts that specify, ex inefficiency is represented by sticky wages or ante, the value of nominal wages over some prices, in contrast to the flexibility of such interval of time, it would be mutually advan- government policy instruments as the money tageous for workers and firms to determine supply, taxes, or expenditures. Technical limi levels of employment in an efficient manner. tations of the private market in the coordina tion of production and exchange--as reflected *University of Rochester. I have benefited from c ge-price stickiness and the associated ments by Herschel Grossman, Bob Hall, and Ben Mccal determination of employment and output ional Science Foundation has supported through a non-price rationing process-are this research remedied through tI ordinate