Teaching Keynes's business cycle: an extension of Paul Davidson's capital market model

Paul Davidson's intermediate macroeconomics textbook, Post Keynesian Macroeconomic Theory: A Foundation for Successful Economic Policies for the Twenty-First Century, serves as an excellent introduction to the economics of Keynes. It opens with a rejection of Say's law, then works its way through the determinants and effects of consumption, investment, government spending, and trade. In addition, a great deal of time is spent discussing financial markets (domestic and international) and the balance that must be found between the need to provide liquidity and the instability created by "a large number of ignorant individuals." What is not as clear, however, is the nature of what Keynes discussed in chapter 22 of the General Theory: the trade cycle. That said, the ideal tool for addressing this already exists in the book. This article shows that by not ignoring the demand curve in Davidson's capital market model, a much more interesting story can be told. When entrepreneurs' expectations about the growth in demand for the products produced by capital are considered, the logical result is that, as gross investment falls over the expansion, so those expectations are bound to be disappointed. This sets the stage for possibly catastrophic collapses and offers a far more dynamic and Keynes-like story.