Edited by Sheila Dow, Jesper Jespersen and Geoff Tily
Chapter 11: A ‘static model of a dynamic process’: underemployment equilibrium with flexible wages and prices
John Maynard Keynes’s invaluable contribution to economic theory was to conceive a method to analyse a system whose future is fundamentally uncertain. Subjective views regarding the future play a crucial role in Keynes’s General Theory because, owing to ontological uncertainty and limited cognitive capacity, ‘there is no scientific basis on which to form any calculable probability whatever’ (Keynes  1973, p. 114). The position of the system at any point in time, accordingly, results from the forces involved in the decision the individuals have made in accordance with their subjective views: ‘Or, perhaps, we might make our line of division between the theory of stationary equilibrium and the theory of shifting equilibrium—meaning by the latter the theory of a system in which changing views about the future are capable of influencing the present situation’ (ibid., p. 293). In such a context, expectations may be unfulfilled unpredictably, although they may be fulfilled sometimes (by chance rather than by an objective knowledge). This is the reason why, although the system that emerges from private and public decisions tends to some equilibrium position at any point in time, the equilibrium is subject to endogenous change in the subjective views regarding the future. Equilibrium in this sense is intrinsically dynamic, which raises difficulties compared with the orthodox definition of equilibrium. In Macroeconomics after Keynes, Victoria Chick pinpointed the essence of the method Keynes utilised to build his ‘shifting equilibrium’ theory (Chick 1983). The method consists basically in taking the views about the future – along with other variables such as wages and the capital stock – as given at a point in time. This allows one to analyse the aggregate outcome of the individual decisions at any point in time, by means of a static – though ‘shifting’ – equilibrium model (Chick 1983, chs 2 and 13). Hence the dynamics of the system can be analysed as the change in equilibrium produced over time by the effect of the changing views about the future and other explanatory variables. This was the subject of Victoria Chick’s insightful presentation of The General Theory in terms of a static model of a dynamic process (see also Kregel 1976).
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