Neo-Keynesian Disequilibrium Theory in a Monetary Economy

(1. 1) Presentation Most concepts of conventional (or neo-classical) economics hold rigorously only in general equilibrium, which precludes the study of Keynesian or Marxian Economics, or a satisfactory integration with macro-economic theory since all of these are essentially concerned with disequilibrium states, where transactions take place at non-Walrasian prices. It is our purpose in this paper to present concepts and tools permitting study of the functioning and properties of a decentralized monetary economy3 at disequilibrium prices, in line with the work of Clower [9] [10] and Leijonhufvud [30] [31].4 The usual concept of demand is no longer valid as soon as we do not assume instantaneous adjustment of prices to their equilibrium values; if economic agents behave rationally, it must be replaced by a new concept, that of effective demand, introduced by Clower [9] taking into account quantity constraints as well as prices (the prototype of which is the consumption function). Further, interaction between individuals on the different markets gives rise not only to price adjustments (as in the standard Walrasian model), but to quantity adjustments very similar to the traditional dynamic multiplier, as described by Leijonhufvud [30] (the " income constrained process "). A number of authors have successfully used this approach to describe macro-economic phenomena within the framework of simple equilibrium models (Barro-Grossman [2] [3], Glustoff [15], Grossman [21] [22], Solow-Stiglitz [36]). However, these simplified formulations can handle no more than one or two goods in disequilibrium, and we would like here to reformulate the above concepts in the usual framework of General Equilibrium analysis.5 So in what follows we shall study a general exchange economy " A la Debreu " with money in disequilibrium (production can be incorporated in the analysis without difficulty: Benassy [4] [7]). In this framework we shall formalize the effective demand concept, define Keynesian equilibria and prove their existence. We shall also prove an important result of Keynesian analysis: at non-Walrasian prices, multiplier effects associated with the monetary structure of exchange are responsible for the " inefficiency " of many Keynesian