Underemployment with flexible prices in a simplified model of Keynes’s "shifting equilibrium" - Developments on the "static model of a dynamic process"

The competitive equilibrium in the General Theory is defined as "shifting" in the sense that, due to fundamental uncertainty, agents' decisions at any point in time depend on their subjective views of the future, so that equilibrium has no "natural" position, anchored in reliable knowledge of future consequences. This is also what makes it intrinsically dynamic, since the system evolves in function of the change in subjective views induced by its own evolution. In her Macroeconomics After Keynes, Victoria Chick pointed out that the method of the General Theory consists in treating the views about the future as given at a point in time, which makes it possible to study the equilibrium resulting from individual decisions using a static model of the shifting equilibrium. The present contribution extends a previous tribute to Victoria Chick in which the transformations required to move from standard macroeconomic models to the shifting equilibrium model were presented, but in which the behaviour functions were formulated in too general a way for the analytical treatment to go much beyond examining the sign of the relationships between explained and explanatory variables. In the linear version proposed here, whose development leaves behind the perspective of transforming standard models to take its roots directly in the General Theory, the functions are specified in such a way as to allow detailed analysis of the causal relationships and corresponding "mechanisms". Although, from a strictly formal point of view, the model seems to share common features with IS-LM - AS-AD type constructions, it provides radically different insights depending on the theoretical framework used to examine its properties.