A Macrodynamic Model for a Monetary Production Economy: beyond short-period equilibrium of Keynes´s General Theory

This article presents a dynamic model for determining the level of output, employment, capital stock, real wage, investment, marginal capital efficiency and the capital-output/capacity utilization relationship. Thus, initially, the article develops the short-period solution of the model, in which the capital stock is kept constant. In short-period equilibrium, the endogenous variables are the level of production, the level of employment, the real wage rate, and the general price level. In short-period equilibrium there is no mechanism that can ensure that all workers who wish to work at market wages will be able to find employment. Subsequently, the model is extended to consider the effects of the investment made in each short-period on the capital stock of the subsequent period and, therefore, on the initial conditions of the subsequent short-period. After presenting the structure of the extended model, it is calculated its steady-state solution. It is show that both employment and capacity utilization are below the full employment levels in the steady state. Finally, a new extension of the model it is presented in which monetary wages are not constant, but react to prevailing conditions in the labour market, being flexible. It will be shown that wage flexibility is incapable of creating a convergence to an equilibrium position with full employment because of the negligible effect such flexibility has on firms planned investment.