Effective Demand and Prices of Production: An Evolutionary Approach

In this paper I develop an innovative evolutionary framework to integrate Keynes’ short-run principle of effective demand and the formation of long-run prices of production in Classical Political Economy. At the intersection of Keynes, Marx, and Kalecki, my evolutionary framework integrates effective demand, functional income distribution, profit rate equalization, technological diffusion, and the gravitation towards prices of production. My approach bridges two gaps at once: the absence of the short-run principle of effective demand in Classical Political Economy; and the absence of technological diffusion, profit rate equalization, and the formation of long-run prices of production in Keynes and Kalecki. To formalize the feedback effects between individual decisions taken at the micro level and the unintended social outcomes at the macro level I develop a simple model using replicator dynamics from evolutionary Game Theory. My approach offers a better understanding of how effective demand determines the rate of exploitation, the equalization of profit rates, and the convergence of market prices towards prices of production.