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 8: The Problem of Market Forms in Modern Macroeconomics

Claudio Sardoni

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


8.1 INTRODUCTION Current mainstream macroeconomic models are very often based on an assumption of imperfect, or monopolistic competition, both in goods markets and in the labour market. In particular, New Keynesian macroeconomics is characterized by this assumption on market forms. From this point of view, therefore, modern macroeconomics can be put in relation to the Kaleckian approach expounded in the previous chapters. The present chapter briefly looks at the current mainstream in macroeconomics in order to better illustrate and understand this relationship. The object of the present chapter is not to offer an exhaustive survey of the literature on macroeconomic models with monopolistic competition.1 Here, we concentrate only on some aspects of these models. In particular, the chapter concentrates on those features of macroeconomic models with monopolistic competition that Solow (1998) regards as most interesting and with a ‘Keynesian flavour’. Solow regards macroeconomic models based on the hypothesis of monopolistic competition as an alternative to the New Classical Macroeconomics. Such models are able to provide different and more satisfactory analyses of the economy’s behaviour at the micro and macro levels. First, non-perfectly competitive models can explain the existence of excess supply, or excess capacity. In fact, in imperfect competition firms would be generally ready to produce more at the existing current price if there were additional demand for their goods. As a consequence, in such a context, an increase in aggregate demand has a multiplier effect. Second, models based on monopolistic competition can explain price rigidity or stickiness, which...

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