Interest Rates and Aggregate Demand

Abstract

Keynes argued that even perfectly competitive flexible prices and wages do not transform market economies into homeostatic systems that maintain dynamically stable equilibrium states without direct government intervention. Real world economies have no natural tendency to approach full employment equilibrium. Flexible wages and prices alone do not eliminate the destabilization produced by exogenuous shifts in animal spirits, as is the case with a single market. The demand for factors is dependent on profit expectations and reflects the dynamic relationship between wage rates and the prices of goods. Coordination between prices and wages is essential for the successful performance of all market economies since their ratio determines the real wage (W/p) and profits.

A large portion of our positive activities depend on spontaneous optimism rather than on mathematical expectation, whether moral or hedonistic or economic. Most … of our decisions to do something positive … can only be taken as a result of animal spirits: of a spontaneous urge to action rather than inaction, and not of the outcome of the weighted average of quantitative benefits multiplied by quantitative probabilities. Enterprise only pretends to itself to be mainly actuated by the statements of its own prospectus, however candid and sincere.

John Maynard Keynes, 1936: 161–2

In a world that is always in equilibrium there is no difference between the future and the past, and there is no need of Keynes.

Joan Robinson, 1974: 28

The macroeconomics which has followed the General Theory in time has not followed it in spirit.

Victoria Chick, 1983: v