Keynes's Treatise: Aggregate Price Theory for Modern Analysis?
Central European University Working Paper No.10/2000
Posted: 6 Feb 2001
Date Written: Year 2000
The paper explores the theory of aggregate price, profit, and business fluctuations in Keynes's Treatise for its implications for modern macroeconomic analysis. As in the Treatise, profits are first defined within a theory of the aggregate price level as aggregate investment minus saving. Deriving aggregate total revenue and aggregate total cost from this price theory, the paper shows how to construct a version of the Keynesian cross diagram. The cross construction suggests an important qualification for fiscal policy, that total cost does not shift.Then, using a neoclassical definition of profit and the total-cost/total-revenue approach, the paper derives aggregate supply. The derivation of neoclassical aggregate demand is added. Comparative statics of the AS-AD analysis and the central role of profit in the Treatise suggest that a focus on profit might be useful in identifying exogenous technology shocks of real business cycle theory.
Keywords: Price, Revenue, Cost, Cross, Profit, AS-AD, Cycles
JEL Classification: E12, E13, B2, A22
Suggested Citation: Suggested Citation