W. H. Hutt on Keynesianism and the microfoundations of monetary theory

In his book Keynesianism: Retrospect and Prospect (1963), followed by a revised and expanded version The Keynesian Episode: A Reassessment (1979), W. H. Hutt spelled out a version of “classical” macroeconomics ahead of its time. He cogently criticized the then-dominant Keynesian paradigm for its inconsistency with standard Marshallian price theory and monetary theory. He argued that unemployment is a symptom of mispricing of labor, and used Say’s Law to explain how such mispricing (not deficiency of aggregate demand) generates a recession in output. He opposed the Keynesian case (and, less persuasively, Leland Yeager’s monetarist case) for monetary expansion in a recession, arguing that market forces—if allowed to work unimpeded—will correct such mispricing and restore output, whereas monetary expansion will erode the purchasing power of money without permanently correcting the mispricing of labor.