Markup Pricing and the Aggregate Supply Relationship

Abstract

Neoclassical theory is based on the assumption that all individual economic agents are rational utility-maximizers. Agents are not assumed to have perfect information. But they are assumed to be able to form objective probability distributions of all unknown future states of the world. If they can do this they must simply select the alternative with the highest expected outcome to maximize utility.1 The binding constraint on economic agents stems from the ultimate fact that resources are scarce relative to wants. “Scarcity” is the central problem of economics.

If ten men are to be set to dig a hole instead of nine, they will be furnished with ten cheaper spades instead of nine more expensive ones: or perhaps if there is no room for him to dig comfortably, the tenth man will be furnished with a bucket and sent to fetch beer for the other nine.

Sir Dennis Robertson, 1931: 226

The outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yields have to be made. Our knowledge of the factors which will govern the yield of an investment someyears hence is usually very slight and often negligible. … In fact those who seriously attempt to make any such estimate are often so much in the minority that their behavior does not govern the market. … If human nature felt no temptation to take a chance, no satisfaction (profit apart) in constructing a factory, a railway, a mine or a farm, there might not be much investment merely as the result of cold calculation.

John Maynard Keynes, 1936: 149–50

The firm is dealing throughout in terms of sums of money. It has no object in the world except to end up with more money than it started with. That is the essential characteristic of an entrepreneur economy.

John Maynard Keynes, XXIX, 89