Unemployment, Recession and Effective Demand

Unemployment, Recession and Effective Demand

The Contributions of Marx, Keynes and Kalecki

Claudio Sardoni

In the midst of the current world economic crisis, many claim there is a necessity to return to the Marxian and Keynesian traditions in order to better understand the dynamics of market economies. This book is an important step in that direction. It presents a critical examination of the foundations of macroeconomics as developed in the traditions of Marx, Keynes and Kalecki, which are contrasted with the current mainstream. Particular attention is given to the problem of market forms and their relevance for macroeconomics.

Chapter 6: A Critique of Keynes’s Microfoundations

Claudio Sardoni

Subjects: economics and finance, history of economic thought, post-keynesian economics


6.1 INTRODUCTION Keynes’s microfoundations are relevant to his macroeconomic results. In so far as firms produce at increasing marginal costs and push current production to the level at which the expected price equals the marginal cost, there is no reason why, in any current period, the economy should experience full employment and full use of capacity. In so far as the marginal efficiency of capital is a decreasing function of the level of investment, and the rate of interest depends on the liquidity preference and the supply of money, there is no necessary reason why the economy should find its equilibrium at full employment. But Keynes’s microfoundations are subject to criticisms, both about the hypothesis of short-period decreasing returns and the theory of investment. Once Keynes’s assumptions both on short-period returns and the marginal efficiency of capital are changed to incorporate these criticisms, significant analytical difficulties arise. Keynes’s macroeconomic results – the existence of underemployment equilibria in particular – are no longer ensured. This chapter deals with these issues. Section 6.2 looks at Keynes’s approach to the problem of short-period returns in a more detailed way than in the previous chapter. Section 6.3 criticizes the hypothesis of short-period decreasing returns. Section 6.4 looks at Keynes’s theory of investment, which is criticized in section 6.5. The concluding section 6.6 examines the macroeconomic analytical implications of the criticism of Keynes’s microfoundations. 6.2 KEYNES ON SHORT-PERIOD RETURNS Keynes was always convinced that short-period returns are decreasing and, hence, that the short-period marginal cost curve...

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