ABSTRACT
Modigliani once pointed out that it was possible to find the basis for two quite different theoretical explanations of persistent unemployment in Keynes’ General Theory of Employment, Interest and Money. The first theory revolved around Keynes’ concept of liquidity preference and the effect of interest rates on the willingness or desire of the public to hold money balances. The second theory revolved around money-wage rates and their failure to behave in the classical fashion of equating supply and demand. Keynes clearly recognized that if money-wage rates and prices were classically flexible, it was a logical necessity of his theory that once the minimum level of interest rates was reached, continued unemployment would force down money-wage rates with no clear stopping point short of zero. One can accept Keynes’ concept of liquidity preference as an important contribution to theory.
