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The New Keynesian view of aggregate demand: some reflections from a Sraffian standpoint

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  • White, Graham
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    Abstract

    The paper contends that the derivation of the aggregate demand curve in the new Keynesian literature is insufficient to provide the theoretical ground for the use to which it is usually put; namely, as a theoretical basis for the claim that long-run wage and price flexibility would push a capitalist economy to the full-employment or "natural" level of output. It is argued that the derivation solely on the basis of the propositions about optimising household consumption expenditures is insufficient to guarantee a decreasing aggregate demand function without circular reasoning. This point is clarified by use of a very simple two-commodity production model of long-run steady states due to Spaventa and Nell. To guarantee a decreasing aggregate demand function, the new Keynesian approach must invoke the kinds of propositions used in more traditional derivations; propositions which themselves are in question on capital-theoretic gr ounds.

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    File URL: http://hdl.handle.net/2123/8876
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    Bibliographic Info

    Paper provided by University of Sydney, School of Economics in its series Working Papers with number 2012-15.

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    Date of creation: Nov 2012
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    Handle: RePEc:syd:wpaper:2123/8876

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    Postal: Sydney, NSW 2006
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    Web page: http://sydney.edu.au/arts/economics
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    1. Giancarlo Corsetti & Paolo Pesenti, 2005. "The simple geometry of transmission and stabilization in closed and open economies," Staff Reports 209, Federal Reserve Bank of New York.
    2. David H. Romer, 2000. "Keynesian Macroeconomics without the LM Curve," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 149-169, Spring.
    3. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
    4. Fane, George, 1985. "A derivation of the IS-LM model from explicit optimizing behavior," Journal of Macroeconomics, Elsevier, vol. 7(4), pages 493-508.
    5. John B. Taylor, 2000. "Teaching Modern Macroeconomics at the Principles Level," American Economic Review, American Economic Association, vol. 90(2), pages 90-94, May.
    6. Antonella Palumbo & Attilio Trezzini, 2003. "Growth without normal capacity utilization," The European Journal of the History of Economic Thought, Taylor & Francis Journals, vol. 10(1), pages 109-135.
    7. T. W. Swan, 1956. "ECONOMIC GROWTH and CAPITAL ACCUMULATION," The Economic Record, The Economic Society of Australia, vol. 32(2), pages 334-361, November.
    8. Kirman, Alan, 1989. "The Intrinsic Limits of Modern Economic Theory: The Emperor Has No Clothes," Economic Journal, Royal Economic Society, vol. 99(395), pages 126-39, Supplemen.
    9. Hodgson, Geoff, 1986. "Behind Methodological Individualism," Cambridge Journal of Economics, Oxford University Press, vol. 10(3), pages 211-24, September.
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