Integrating the Formal, Technical, Mathematical Foundations of Keynes’s D-Z Model of the Theory of Effective Demand Into Keynes’s Decision Theory: Toward a New (and Final?) Interpretation of the General Theory

Abstract

This paper shows how Keynes used the neoclassical marginal productivity theory of one variable input, labor, and one fixed input, capital, to embed expectations of future prices and profits in a micro foundation of the theory of purely competitive firms. Keynes then generalized his technical work by aggregating to the macro level. The paper shows how Keynes, through his elasticity analysis in Chapter 21, was able to effectively incorporate an analysis of uncertainty and risk into the e and ed elasticities in his generalized equation of exchange that demonstrated the special case nature of neoclassical economics. Questions of what Keynes might or should have said are outside the purview of this paper.

Keywords: Macroeconomics, methodology, economic theory

JEL Classification: B23, B41, E12