Seventy-Five Years Later
Edited by Thomas Cate
Chapter 1: On Keynes’s Seminal Innovation and Related Essential Features: Revisiting the Notion of Equilibrium in The General Theory
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...
You are not authenticated to view the full text of this chapter or article.
Elgaronline requires a subscription or purchase to access the full text of books or journals. Please login through your library system or with your personal username and password on the homepage.
Non-subscribers can freely search the site, view abstracts/ extracts and download selected front matter and introductory chapters for personal use.
Your library may not have purchased all subject areas. If you are authenticated and think you should have access to this title, please contact your librarian.