Chapter 1: On Keynes’s Seminal Innovation and Related Essential Features: Revisiting the Notion of Equilibrium in The General Theory
Angel Asensio INTRODUCTION While econometrics has been a powerful instrument of the mainstream academic domination, it is becoming a major source of its weakening, as clearly attested in the exploding literature on ‘time varying’ relations, ‘shifting’/’switching’ regimes and structural change. This involves heavy methodological consequences (Hendry 2002; Kurmann 2005; Hinich et al. 2006), especially as concerns the predictive capacity of agents. Edmund Phelps, winner of the 2006 Nobel Prize, accordingly could claim that ‘. . . if an economy possesses dynamism, so that fresh uncertainties incessantly flow from its innovative activities and its structure is ever-changing, the concept of rational-expectations equilibrium does not apply and a model of such an economy that imposes this concept cannot represent at all well the mechanism of such an economy’s fluctuation’ (Phelps 2007, p. 548).1 According to Kregel (1976) and Chick (1983), The General Theory provides a method of thinking about such an intrinsically dynamic, continuously changing, uncertain economy. The method rests on taking expectations as given, in spite of the fact that they are subject to endogenous change. Therefore, in ‘the static model of a dynamic process’ (in Chick’s words), expectations influence the individual economic decisions and thereby, the aggregate solution, while the aggregate solution influence over expectations is provisionally ignored. Neutralizing the feedback effects of the system on expectations makes it possible to draw a temporary solution, the motion of which can be analytically assessed as a function of the state of expectations.2 Keynes’s ‘static model’ is essential to the study of any dynamic...
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