Marshallian varient of classical economics

[Paul Davidson <PB108928%UTKVM1.BITNET@xxxxxxxxxxxxxxxxx>]

FROM:  Paul Davidson
"      Economics Department
"      523 Stokely Management Center  (615) 974-4221
Dear Jamie: By a Marshallin varient of classcal economics I meant to distinguis
h the microeconomics of Keynes from Walrasian microeconomics.
 Although Keynes denied what he labelled the second postulate of    classical
analtsis, and although he argued (P. 8 of the GT) that the "supply of labour
is not a function of real wages as its sole variable" this does not mean that
he rejected a supply curve of labor! Keynes notes (p. 11) that the classical
economists confused their (incorrect) belief that labor was able to determine
its real wage, with the (correct) proposition  that "labour is always in
a  position to determine what real wage shall correspond to FULL employment,i.
e., the MAXIMUM quantity of employment which is compatible with a given
real wage". In other words, labor can determine how much hours of work it is
willing to supply for any given real wage. Now that is, whether you like  it
or not, a Marshallian flow-supply price function, or labor supply curve.
Alough this supply curve need not be solely in terms of real wages, if the othe
r independent variables of this supply curve are given, then one can still
derive the labor supply curve uniquely in real wage vs. employment space.
      What is different about Keynes's Marshallian varient of demand and supply
for labor is that the marginal product curve is NOT the demand curve for labor!
(See the JPKE,  Falll 1983, vol .6, pp. 105-18 for an article entitled "The mar
ginal product curve is not the demand curve for labor and Lucas's supply functi
on is not the supply curve for labor in the real world".)
   Using Chapter 19 0f the GT, Sidney Weintraub in his 1957 AER article and
1958 book derived the demand curve for labor from a family of effective demand
points -- each point associated with a given MONEY wage -- and as Keynes
states (p. 17 GT), given organization (i.e., market degree of competition),
technique, equipment, etc. ,(once employment is determined by  the point of
effective demand), the real wage will be related to the marginal productivity
of labor, i.e., the marginal productivity of labor curve is the real wage rate
determining equation. Since Keynes assumed that "industry is normally working
subject to decreasing returns:, then "the real wage...has a unique (inverse)
correlation with the volume of employment". Of course, as Keynes readily admitt
ed in his debate with Dunlop and Tarshis, there is no need for countercyclical
real wages if we introduce monopoly elements and other than diminishing
returns conditions.
      As I said Sidney Weintraub was able to take these Marshallian Microfounda
tions of Keynes's GT and develop Marshallia demand and supply curves for
the labor market. ( I have attempted to simplify Sidney's diagrammatics in Chap
ter 11 of POST KEYNESIAN MACROECONOMIC THEORY -- a chapter entitled "The
demand and supply of labour" where a demand curve for labor can be derived from
varying the money wage (see Chapter 19 of the GT) and deriving the point of
effective demand (i.e., the intersection of the aggregate supply and demand cur
ves) for each given wage rate.  Given the equilibrium level of employment
one can use the marginal productivity relationship to determine the real wage
associated with that point of effective demand and given the aforesaid
labor supply, workers are then in a position (p. 12 GT) to determine the
maximum quantity of labor supply they will offer under the specified
productivity and effective demand conditions.
  What about the capital market? In Appendix to Ch. 14 notes and ch. 17 of
the GT, Keynes develops Marshallian demand and supply schedule analysis to expl
ain the "capital goods market.  In it Keynes notes (p.186n.1) that the
"equality between the stock of capital-goods offered and the stock demanded
will be brought about by the PRICES of capital goods, not the rate of
interest". How this is developed into Marshallian demand and supply curves
I first developed in ECONOMETRICA in 1967, then in MONEY AND THE REAL WORLD
in 1972 (ch.4) and finally in Chapter 4 of PKMT. Accordingly, Keynes
did not reject either a Marshallian intepretation of labor demand and supply or
 capital goods demand AND SUPPLY.  The rate of interest was, as Keynes insisted
the money rate of interest in a money economy (see ch. 17 p. 222)--
     Keynes insisted in his correspondence with Robertson that the aggregate
supply curve was simple our old friend the aggregation of Marshallian
supply curves: and his novelty was to show that aggregate demand, although
derived from Marshallian microdemand curves, did not have the same determinants
as the Marshallian supply function. He did not liberate himself from
Marshall's supply and demand toolbox; he adopted these tools to show that
the classical analysis had misused  (misinterpeted) these tools in an economy
where money matters. Keynes escaped the restrictive additional axioms
necessary to generate Says Law in a Marshallian system -- he did not throw
away the Marshallian baby with the bathwater.

Have a good day!____Paul Davidson
))))_ fax # (615) 974-1686