Keynes Seminar 21 January 2009 Mark Hayes Robinson College, Cambridge General Theory Reading Group 5: Aggregate Demand I: The Model www.postkeynesian.net © PKSG 2009

The Model of Aggregate Demand A reminder: effective demand and income The nature of the multiplier The hierarchy of liquidity

Effective Demand and Income Effective demand ~ factor income “I found I could get all that was required by the conceptions of effective demand and income which were identical for factors but income of entrepreneurs at any time depended on outcome of prediction undertaken at various previous periods under influence of effective demand.” (C.W. XIV, p. 180)

The nature of the multiplier ‘the logical theory of the multiplier … holds good, continuously, without time lag, at all moments of time’ (GT, p. 122)

The nature of the multiplier Y= C + I for , if if

The nature of the multiplier “It might be, of course, that individuals were so tête montée in their decisions as to how much they themselves would save and invest respectively, that there would be no point of price equilibrium at which transactions could take place. In this case our terms would cease to be applicable, since output would no longer have a definite market value, prices would find no resting-place between zero and infinity”. (GT, p. 64)

The hierarchy of liquidity

The hierarchy of liquidity

The hierarchy of liquidity ‘Everyone is aware that the accumulation of wealth is held in check, and the rate of interest so far sustained, by the preference which the great mass of humanity have for present over deferred gratifications, or, in other words, by their unwillingness to “wait” ’. Alfred Marshall, quoted on GT p. 242

The hierarchy of liquidity ‘That the world after several millennia of steady individual saving, is so poor as it is in accumulated capital-assets, is to be explained, in my opinion, neither by the improvident propensities of mankind, nor even by the destruction of war, but by the high liquidity-premiums formerly attaching to the ownership of land and now attaching to money’. (GT p. 242)

The hierarchy of liquidity

The hierarchy of liquidity q – the prospective yield in terms of itself c – the carrying-costs in terms of itself l – the liquidity-premium in terms of itself a – the appreciation in terms of money total prospective return = q - c + l + a

The hierarchy of liquidity

The Model of Aggregate Demand Equilibrium at a point in time The multiplier as a condition of price equilibrium at a point in time The investment decision as a forward-looking portfolio decision at a point in time Static but not timeless: ‘kaleidostatics’

Next time: Geoff Harcourt Jesus College, Cambridge Keynes, Joan Robinson and The General Theory 28 January 2009