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D and Z in Rope - Will the Real Keynes Please Stand Up?
Abstract
Keynes's principle of effective demand constitutes a pillar for Post Keynesian theories. But Keynes's presentation remains difficult to interpret, mainly because the aggregate demand function is based on entrepreneurs' expectations. The problem is, then, to demonstrate how these entrepreneurs (whose only concern is making profits) are led to generate the effective demand (which partially results from the consumers' and investors' behaviour). Previous studies by authors such as Weintraub and Davidson highlight the trial-and-error procedure here involved. But since their analyses are not built on a precise accounting of monetary flows, they fail to demonstrate formally the coherence of the whole adjustment process. The aim of this article is to provide such a formal demonstration. We thus concentrate on verifying how the General Theory constitutes a coherent framework to analyse temporary equilibriums (at the end of every elementary period) and short-term dynamics (towards the stationary equilibrium) which bring entrepreneurs towards the stationary equilibrium. Our analysis rests on a distinction between the aggregate demand and the global expenditure functions. We also distinguish between two modes of price setting—ex ante price setting by entrepreneurs, and ex post price setting by the market.
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In chapter 20 (and 21) of the GT, Keynes presented a complete microeconomic foundation for his macroeconomic analysis. Unfortunately, Keynes’ analysis was overlooked. This led to the mistaken belief that Keynes’ supply side analysis was confused and/or erroneous. Without such microfoundations, Keynes was judged as having failed to incorporate an analysis of rising prices/inflation within his model. This article demonstrates that this is not the case.
The mainstream view of Keynes's principle of effective demand is that it states something about quantities—and about quantities only. The principle is held to determine the levels of output and employment in a world not governed by Say's law. This paper argues that the principle of effective demand goes beyond this to explain not only 'real' activity levels but also the aggregate price level. A variant of the post-Keynesian D/Z-model is brought together with Marxian reproduction schemes to derive this result.
John Maynard Keynes wrote The General Theory (1936) in order to show that Say’s Law, where (aggregate) supply created its own (aggregate) demand, was not applicable to a monetary, production economy. In a Say’s Law world, the aggregate demand function would be coincident with the aggregate supply function so that ‘effective demand, instead of having a unique equilibrium value, in an infinite range of values all equally admissible; and the amount of employment is indeterminate except in so far as the marginal disutility of labour sets an upper limit’ (Keynes, 1936, p. 26). In other words, Say’s Law assumes there is no barrier to the economy obtaining, in the long run, a full employment output level.
The article presents the concepts of notional and effective demand for labor within the usual real wage and employment space. Its purpose is to compare various employment models within a single and familiar heuristic framework, taking into account both the profit maximization hypothesis and the effective demand principle. This framework retains the assumption of decreasing returns but adds the impact of income distribution on effective demand through consumption demand.
The author is grateful to Paul Davidson and E. Roy Weintraub for helpful comments on earlier drafts of this paper.
[eng] supply and demand model used in chapter 3 of « The General Theory » for presentation of this principle.. The aggregate supply and demand are based on a method of aggregation which reflects the wïll of ]. M. Keynes to define a disaggregated frame for his employment theory. The adjustment between aggregate supply and demand which determines the actual value of employment is not a mechanical adjustment. It is instead a hypothetical and subjective adjustment conducted in terms of the expectations of producers. This presentation shows without ambiguity the specificity of the keynesian theory : the explicit introduction of a price system reflects the wïll of J. M. Keynes to put an end to the division of economies between the theory of value and the theory of money ; the relation between the effective demand and the value of employment leads to the definition of unvoluntary unemployment. However, the analysis of unemployment concerns only the situation of unemployment equilibrium in the presentation of chapter 3 of « The General Theory ». An extension of this analysis require an extension of this model whose microeconomic foundations must be revised. A double extension may be considered : the first uses the concept of aggregate demand and analyses the effects of errors in short-term expectations on employment ; the second takes the price rigidity into consideration and broadens the concept of keynesian unemployment. [fre] Les présentations courantes du principe de la demande effective contribuent à diffuser l'image d'un « keynésianisme hydraulique » et purement macroéconomique dont la spécificité par rapport à la théorie antérieure est parfois difficile à déterminer. Cette image diffère d'une façon importante de celle qui résulte de l'analyse microéconômique du schéma d'offre et de demande globales utilisé dans le chapitre 3 de la a Théorie Générale » pour présenter ce principe.. En effet, le choix du mode d'agrégation sur lequel se fonde ce schéma reflète la volonté de J. M. .Keynes de définir un cadre désagrégé pour la théorie de l'emploi. De plus, en mettant l'accent sur les ajustements hypothétiques et subjectifs entre l'offre et la demande globales qui sont conduits en terme d'anticipations des producteurs, ce schéma écarte la conception d'une détermination mécanique de l'emploi. Enfin, ce schéma permet de rendre compte des efforts déployés par J. M. Keynes pour se soustraire à l'influence de ses prédécesseurs. Ces efforts se traduisent par l'intégration explicite d'un système de prix dans son analyse globale de l'emploi, ce qui reflète le soucis de J. M. Keynes de réconcilier la théorie de la valeur et la théorie de la monnaie, et par la définition du chômage involontaire qui ne devient claire que si on l'analyse à la lumière du schéma d'offre et de demande globales.. L'analyse du chômage définie dans ce cadre est cependant limitée à la situation d'équilibre de sous-emploi. Son extension nécessite celle du schéma d'offre et de demande globales dont les fondements microéconomiques doivent être réalisés. Une double extension est envisagée : l'une conduit à exploiter le concept de demande globale et à rendre compte de l'incidence des erreurs d'anticipations de courte période, l'autre consiste à tenir compte de la rigidité des prix et à spécifier le concept de chômage keynésien.
This reassessment of J. M. Keynes's The General Theory of Employment, Interest and Money results from the author's experience in using Keynes's book as the core of her macroeconomics courses for undergraduates. It is intended to encourage others to bring the General Theory back into mainstream teaching, because it "gives a far richer understanding of the structure of macroeconomic interactions and methods of analysing them than much of what has been written since."
The General Theory of Employment, Interest, and Money / John Maynard Keynes Note: The University of Adelaide Library eBooks @ Adelaide.
This paper endeavours to reinterpret one of the most fundamental concepts of macroeconomics: the Keynesian investment multiplier. The multiplier is not interpreted as a dynamic process (or quantity reaction of output) nor as a logical relation (or ratio) between income and investment expenditure, but as an equilibrium condition that prescribes the proportionality between the two 'departments' of the economy (the consumption-goods and the investment-goods sector) necessary for 'completely successful reproduction'. The Marxian concept of reproduction schemes is combined with Keynes's 'fundamental psychological law' (which states that the marginal propensity to consume is positive and less than unity) to derive this result. This 'structural' view of the multiplier is then used to analyse questions relating to economic growth, capital accumulation and structural change.
The American Post Keynesians – those who attach importance to the capital ‘P’ and the absence of a hyphen between ‘post’ and ‘Keynesian’– claim to be Keynes' most literal interpreters or the ‘truest’ Keynesians (Holt et al. 199822.
Holt , R. P.F. ,
Rosser , J. B. Jr. and
Wray , L. R. 1998. Paul Davidson's Economics Jerome Levy Economics Institute Working Paper no. 251. Blithewood, NY (www.levy.org) View all references: 17). This paper compares the Post Keynesian interpretation of the Principle of Effective Demand, i.e. the D/Z-model, with Keynes' own presentation in chapter 3 of the General Theory– and finds substantial differences. A re-interpretation of the D/Z-model is offered that would bring it into line with chapter 3.
This paper addresses the effects on employment and the price level of a range of factors including capital accumulation, technical progress and money wage changes by formalising the aggregate supply and demand framework posited by Keynes in his General Theory. We find that labour-augmenting technical progress reduces the equilibrium level of employment, thus lending support to Hansen's notion of technological unemployment. We also find that capital accumulation and capital-augmenting technical progress raise the level of employment whereas, as argued by Keynes and several subsequent authors, money wage cuts have an ambiguous effect on the level of employment. We discuss a number of results as well as some aspects related to the adjustment of aggregate demand to aggregate supply in the long run. We conclude that Keynes's aggregate supply and demand framework provides a robust explanation of the mechanism through which increases in potential output lead over time to equiproportional increases in the level of aggregate demand and that the mechanism of adjustment to increases in the labour force in Keynes's theory differs markedly from that in classical theory.
Keynes's principle of effective demand constitutes a pillar for Post Keynesian theories. But Keynes's presentation remains difficult to interpret, mainly because the aggregate demand function is based on entrepreneurs' expectations. The problem is, then, to demonstrate how these entrepreneurs (whose only concern is making profits) are led to generate the effective demand (which partially results from the consumers' and investors' behaviour). Previous studies by authors such as Weintraub and Davidson highlight the trial-and-error procedure here involved. But since their analyses are not built on a precise accounting of monetary flows, they fail to demonstrate formally the coherence of the whole adjustment process. The aim of this article is to provide such a formal demonstration. We thus concentrate on verifying how the General Theory constitutes a coherent framework to analyse temporary equilibriums (at the end of every elementary period) and short-term dynamics (towards the stationary equilibrium) which bring entrepreneurs towards the stationary equilibrium. Our analysis rests on a distinction between the aggregate demand and the global expenditure functions. We also distinguish between two modes of price setting—ex ante price setting by entrepreneurs, and ex post price setting by the market.
Keynes's principle of effective demand constitutes a pillar for Post Keynesian theories. But Keynes's presentation remains difficult to interpret, mainly because the aggregate demand function is based on entrepreneurs' expectations. The problem is, then, to demonstrate how these entrepreneurs (whose only concern is making profits) are led to generate the effective demand (which partially results from the consumers' and investors' behaviour). Previous studies by authors such as Weintraub and Davidson highlight the trial-and-error procedure here involved. But since their analyses are not built on a precise accounting of monetary flows, they fail to demonstrate formally the coherence of the whole adjustment process. The aim of this article is to provide such a formal demonstration. We thus concentrate on verifying how the General Theory constitutes a coherent framework to analyse temporary equilibriums (at the end of every elementary period) and short-term dynamics (towards the stationary equilibrium) which bring entrepreneurs towards the stationary equilibrium. Our analysis rests on a distinction between the aggregate demand and the global expenditure functions. We also distinguish between two modes of price setting—ex ante price setting by entrepreneurs, and ex post price setting by the market.
Keynes was adamant that the assumption of homogeneous output and capital in macroeconomic theory is inadmissable. His aggregate
supply or Z function is a generalisation of Marshall's ordinary supply function to take account of heterogeneous output, and is an essential
element of the principle of effective demand. The ‘linear Z curve’ controversy can be attributed to Keynes's desire to demonstrate how his general monetary theory of value and output
encompasses the special case of Classical theory, including the marginal productivity theorem. The infamous second footnote
on pages 55–6 of The General Theory can thereby be fully resolved.
Keynes's principle of effective demand constitutes a pillar for Post Keynesian theories. But Keynes's presentation remains difficult to interpret, mainly because the aggregate demand function is based on entrepreneurs' expectations. The problem is, then, to demonstrate how these entrepreneurs (whose only concern is making profits) are led to generate the effective demand (which partially results from the consumers' and investors' behaviour). Previous studies by authors such as Weintraub and Davidson highlight the trial-and-error procedure here involved. But since their analyses are not built on a precise accounting of monetary flows, they fail to demonstrate formally the coherence of the whole adjustment process. The aim of this article is to provide such a formal demonstration. We thus concentrate on verifying how the General Theory constitutes a coherent framework to analyse temporary equilibriums (at the end of every elementary period) and short-term dynamics (towards the stationary equilibrium) which bring entrepreneurs towards the stationary equilibrium. Our analysis rests on a distinction between the aggregate demand and the global expenditure functions. We also distinguish between two modes of price setting—ex ante price setting by entrepreneurs, and ex post price setting by the market.
This paper presents a model of Keynesian aggregate supply behavior. In the model, production takes time, which introduces a lag between the incurrence of costs and the receipt of revenues. Aggregate supply is determined by expectations of aggregate demand, and actual aggregate demand depends on actual aggregate supply. Expectations of lower future nominal wages can reduce employment because of the 'cash flow' effect, whereby lower future nominal wages cause lower future prices, thus rendering firms unable to recover costs fully. This effect represents a supply-side obstacle to using nominal wage deflation to restore full employment, and it complements traditional demand-side debt-deflation effects. Copyright 1997 by Blackwell Publishers Ltd and The Victoria University of Manchester
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