The concept of equilibrium: a key theoretical element in Keynes' revolution

Introduction

In part, Keynes' belief that the General Theory (1) would create a revolution in economics was based on his theoretical goal of attacking what he termed the classical model [Keynes, 1982, p. 42]. By classical he meant primarily the neoclassical economists who preceded him or were his contemporaries [Keynes, 1936, p. 3]. The classical model, hereafter the neoclassical orthodoxy, was characterized by perfectly competitive markets with flexible prices leading to self-adjusting, market-clearing, aggregate markets. Combined with the neoclassical extension of Say's Law, this model assured the existence of an equilibrium at full employment. (2)

Keynes' attack on the neoclassical orthodoxy proceeded along two distinct lines [Johnson, Ley, and Care, 2001; Johnson and Cate, 2002]. In his first line of attack, Keynes took the institutional variables of the neoclassical orthodoxy as given and examined the functional relationships embodied in their concept of equilibrium, the loanable funds theory and the quantity theory. Having determined that these functional relationships were not useful given his framework of analysis, Keynes substituted his own short-run functional relationships regarding consumption, saving, investment, the demand for money, and his own concept of equilibrium [Keynes, 1936, Books II, III, and IV].

In the second line of attack, Keynes took the functional relationships as given and examined the institutional variables. He focused on the assumptions of perfectly competitive markets and continuous market-clearing prices, namely the institutional features of the labor and real goods markets. The basis of this line of attack was his perception of price and/or wage rigidity resulting from imperfect competition and market power. (3) Having found the neoclassical assumptions unacceptable given his analytical framework, Keynes substituted his own notions of equilibrium, product prices, and money wages [Keynes, 1936, Book I, Chapter 2, and Book V].

What emerged in the General Theory from Keynes' two lines of attack on the neoclassical orthodoxy was a core comprised of five key theoretical elements. (4) which were generalized into a coherent message regarding involuntary unemployment [Cate and Johnson, 1997]. The message was that a less than full employment equilibrium was not only possible but could well represent the norm in a market-capitalist economy [Keynes, 1936, pp. 250-52].

This paper presents one of the key theoretical elements that constituted the core of the General Theory--Keynes' concept of equilibrium. Keynes' concept of equilibrium differed in its structure, content, and purpose from that of the neoclassical orthodoxy of his day. Keynes' concept of equilibrium, which played a crucial role in both of his lines of attack on the neoclassical orthodoxy, contained four unique features. Each of these features reflected his overriding focus on involuntary unemployment.

Keynes' Concept of Equilibrium and his Purposive Function

The first unique feature of Keynes' concept of equilibrium was that it reflected a purposive function (PF), the ultimate purpose or goal pursued by practitioners of normal science, that differed in its maximand and normative content from both classical and neoclassical economics. The classical PF was concerned with whether a perfectly competitive market-capitalist economy was capable of maximizing total social welfare, measured in material terms (vendable commodities), overtime. As used by classical economists, (5) equilibrium implied that total social welfare was maximized if an ethically acceptable distribution of income existed. Hence, classical equilibrium reflected their primary concern with the issues of economic growth and distribution [Johnson, 1980, 1983].

The neoclassical PF was concerned with how, in a perfectly competitive market-capitalist economy, individual welfare, defined subjectively in terms of utility, would be maximized at any point in time. For neoclassical economists, equilibrium implied individual welfare would be maximized given any distribution of income. As such, neoclassical equilibrium reflected their primary concern with the issue of allocative efficiency [Johnson, 1980, 1983; Johnson and Ley, 1990].

Keynes' PF was concerned with whether an imperfectly competitive market-capitalist economy was capable of maximizing total social welfare, measured in terms of goods and services, in the short-run. However, Keynes' equilibrium was ethically neutral in that it did not imply that total social welfare would be maximized given any distribution of income. The key issue for Keynes in evaluating this question was economic stability, (6) as measured by involuntary unemployment and affected by the distribution of income. As such, Keynes' concept of equilibrium reflected his overriding concern with involuntary unemployment. This aspect of Keynes' equilibrium reflected his challenge to certain institutional variables subsumed under perfect competition in the neoclassical model, and hence, was important in his second line of attack on the neoclassical orthodoxy. In short, Keynes argued that the neoclassical orthodoxy and its concept of equilibrium dealt with the issue of allocative efficiency and was not intended to deal, nor capable of dealing adequately, with the problem of economic stability as measured by involuntary unemployment [Cate and Johnson, 1997; Johnson and Cate, 2002].
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Keynes' PF led to the emergence of a new paradigm, which ultimately resulted in macroeconomics being treated as a separate branch of economics. This paradigmatic shift altered the fundamental transmission mechanism for achieving equilibrium from a paradigm in which the market-capitalist economy was viewed in terms of price adjustments to a paradigm in which price adjustments alone were nearly powerless to bring about or alter the existing equilibrium [Johnson and Cate, 2002; Stanfield, 1974].

The paradigmatic shift caused by the General Theory was so dramatic it was quickly labeled the Keynesian Revolution [Klein, 1949]. (7) For the majority of economists, Keynes' economics became the macroeconomic orthodoxy for much of the next four decades. (8) In fact, at least two writers have compared Keynes' General Theory to Einstein's Theory of Relativity in terms of its revolutionary impact. For example, Skidelsky [1992, p. 487] notes:

"Keynes' identification with Einstein is also too clear to miss.
Keynes was writing a ' General Theory' of employment, in which he
called classical economics a 'special case' and classical economists
'Euclidean geometers' in a non-Euclidean world."

More recently Togati [2001, p. 121] has argued:

"Just like Einstein, Keynes searches for a new image of the world to
oppose that of orthodox economic theory and suggests that a
revolutionary theory is not one that rejects old concepts but one
that redefines them."

Keynes' Concept of Equilibrium and His Theory of Aggregate Demand

The second unique feature of Keynes' equilibrium was that it reflected his belief that the composition of national income determined the level of aggregate demand, which in turn, was the primary determinant of the equilibrium level of national income and employment in the short-run. (9) Thus, Keynes' equilibrium reflected a different direction of causation than that of the neoclassical orthodoxy, creating the possibility of involuntary unemployment in equilibrium. (10)

In the neoclassical model, unemployment was either voluntary, frictional (seasonal), or a short-run disequilibrium phenomenon, which would be eliminated when the economy adjusted to equilibrium [Lindert, 1976, Ch. 2]. This conclusion resulted from the direction of causation in the neoclassical model. The neoclassical direction of causation was from the labor market, which determined the equilibrium level of employment to the real goods market, where, in conjunction with aggregate supply, the equilibrium level of national income was determined. This direction of causation was a result of the classical dichotomy, which Keynes sought to undermine in his first line of attack on the neoclassical orthodoxy [Johnson, Ley, and Cate, 2001; Johnson and Care, 2002]. With the classical dichotomy, the economy was divided into two air tight components--the real and the monetary sectors of the economy. The levels of employment and output were determined by real factors alone, while the general price level was determined strictly by monetary factors. Money was merely a medium of exchange, demanded only for transactions purposes, as such, it was a veil and had no impact in determining output and employment [Ackley, 1978, pp. 114, 118, 124, 146-48].
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The neoclassical direction of causation resulted in the failure of the orthodox definition of equilibrium in the labor market to distinguish between the willingness to work and the ability to work. Therefore, as Keynes noted [Keynes, 1936, p. 5], the problem of involuntary unemployment in equilibrium was simply defined away. Moreover, this line of reasoning led to the conclusion that unemployment was ultimately the fault of the workers themselves. In the case of voluntary unemployment, the problem was the workers lack of an appropriate work ethic. In the case of involuntary unemployment, workers are also responsible, since involuntary unemployment only occurs in disequilibrium as a result of wages failing to fall to their equilibrium, level.

With Keynes' concept of equilibrium, the direction of causation runs in the opposite direction to that of the neoclassical model. The composition of national income determines the level of aggregate demand and the equilibrium level of national income in the real goods market. The equilibrium level of national income, then, determines the equilibrium level of employment, via derived demand in the labor market. With the new direction of causation introduced in the General Theory, Keynes distinguishes between the willingness to work and the ability to work at equilibrium in the labor market. Thus, involuntary unemployment in equilibrium is possible, with or without price and/or wage rigidities. As such, the reversal of the neoclassical direction of causation by Keynes became critical to his argument that the economic system may not operate at full employment in equilibrium. (11)

The reversal in the direction of causation can be visualized in its simplest form in the flow diagram presented in Figure 1. (12) In the upper-loop, the level of aggregate demand determines the equilibrium level of national income via the level of ex ante spending on consumption and investment in the real goods market. The equilibrium level of national income, then, determines by way of the derived demand for labor, the equilibrium level of employment in the labor market. In the lower-loop, the equilibrium level of employment determines earnings, hence, the level of disposable income, which in turn, determines the composition of national income. The composition of national income then determines the level of aggregate demand in the next period. (13)

[FIGURE 1 OMITTED]

Keynes' fundamental message regarding the fact that involuntary unemployment can exist in equilibrium was embodied in the simple yet elegant short-run static model of a closed economic system contained in the General Theory. Consumers decide how to divide their stream of income into two parts--spending on consumption goods and saving. Simultaneously and yet independently of consumers, producers decide how to divide the stream of output into two parts--consumption and investment goods. Three outcomes are possible; ex ante savings can be greater than, equal to, or less than the ex ante investment. If ex ante saving and ex ante investment are equal, then the economic system is in equilibrium. This consistency of decisions, however, does not imply that the economic system is operating at full employment. Full employment is one of an infinite number of possible equilibria. In fact, not only was less than full employment possible, but it could well represent the norm in a market-capitalist economy, particularly if the worldwide depression of the inter-war period persisted. This feature of Keynes' equilibrium was an important component in his first line of attack on the neoclassical orthodoxy.
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Keynes' Concept of Equilibrium and His Ex Post-Ex Ante Analysis

The third unique aspect of Keynes' concept of equilibrium was the ex post-ex ante analysis he employed. While this approach may have been novel to mainstream British economists, it was not the case for Hayek, Wicksell, and Myrdal. Laidler's [1999] masterful survey has emphasized the extensive debate that took place during the inter-war years between the Wicksellians, the Austrians, and the Stockholm School. However, these writers accepted and extended the two key linchpins of the neoclassical orthodoxy--the quantity theory and the loanable funds theory. In addition, these writers focused on allocative efficiency, though their discussions were often couched in terms of intertemporal as opposed to static allocation. (14) Finally, downturns in the trade cycle resulted from disequilibrium in aggregate markets [Laidler, 1999, pp. 29, 32, 34-5, 57-8, and 61-2]. As such, the Wicksellian, the Austrian, and the Stockholm School writers, like all orthodox economists, viewed the collapse of output and employment during the inter-war period as a disequilibrium process, resulting from the divergence between the natural and market rate of interest in their version of the loanable funds theory [Myrdal, tr. 1939], (15) or from price and/or wage stickiness due to market frictions [Laidler, 1999, pp. 40-1, 57-8, 61-4]. (16) In sum, neoclassical economists prior to the General Theory, applied the ex post-ex ante analysis to disequilibrium adjustments, motivated by their concern with intertemporal allocative efficiency. Ironically, Keynes' use of the ex post-ex ante analysis emerged from his rejection of the same loanable funds theory which was pivotal to the neoclassical orthodoxy [Johnson and Cate, 2000, 2002].

According to orthodox doctrine, consumption, saving, and investment were all functions of the rate of interest. In such a model, household decisions regarding consumption and saving, and business decisions regarding investment, depend on the same decision variable. In such a theory, household and business decision makers became one and the same, and the distinction between ex post and ex ante saving and investment becomes trivial in the determination of equilibrium. The rate of interest is determined in the loanable funds market. As long as the interest rate is sufficiently flexible, ex ante saving is automatically converted into ex ante investment. Perfect competition and Say's Law then ensure that the supply of (saving) and demand for (investment) loanable funds are in equilibrium at full employment. Thus, deficiencies in aggregate demand due to excessive ex ante saving or deficient ex ante investment never create involuntary unemployment in equilibrium. Keynes' attack on the loanable funds theory had its origins in A Treatise on Money [Keynes, 1930]. Though he did not employ the ex post-ex ante analysis in the Treatise, Keynes [Keynes, 1930, Vol. I, p. 250] made it clear that:

"... the decisions which determine saving and investment
respectively are taken by two different sets of people influenced by
different sets of motives, each not paying very much attention to
the other."
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Thus, the foundation is laid for the General Theory where the distinction between ex post-ex ante saving and investment is critical in defining the possibility of macroeconomic equilibrium at less than full employment.

The model Keynes developed in the Treatise was designed to explain changes in the general price level. However, two key features are relevant here. First, consumption is a function of income [Keynes, 1930, Vol. I, p. 121]; a result which followed from his basic definitions. However, because of the purpose of the Treatise, Keynes did not develop the concept of a consumption function any further. Second, Keynes treated saving as a function of both income [Keynes, 1930, Vol, I, p. 155] and of the rate of interest in the Treatise [Keynes, 1930, Vol. I, p. 180]. Again, given the purpose of the model in the Treatise, the saving-interest rate connection is emphasized over the saving-income connection [Keynes, 1930, Vol. I, pp. 179-87].

However, in the General Theory, both consumption and saving are stable functions of current disposable income. Thus, Keynes viewed the factors that determined household decisions to consume and save as very different from the factors that determined business investment decisions. As such, macroeconomic equilibrium is defined in terms of relationship between ex ante saving and ex ante investment, and macroeconomic equilibrium is achieved when the sum of ex ante leakages equal to the sum of ex ante injections into the income stream. Thus, Keynes created the possibility that ex ante savings, a leakage from the income stream, might not be converted into an equivalent amount of ex ante investment, an injection into the income stream. Hence, increases in ex ante savings (decreases in ex ante consumption) became a source of deficient aggregate demand, resulting in involuntary employment in equilibrium. Therefore, Keynes removed the interest rate from its central role as the dependent variable that served to coordinate spending and saving decisions in the economy, which assured, via Says Law, full employment in equilibrium [Keynes, 1936, Chapters 6, 7, and 18]. This aspect of Keynes' equilibrium concept, therefore, also played a critical role in his first line of attack on the self-adjusting neoclassical model.

Keynes' Concept of Equilibrium and Market Clearing

The final unique feature of Keynes' concept of equilibrium involved the definition of market-clearing. Market-clearing in the orthodox model occurred with flexible product and resource prices. In such a model, wage and/or price inflexibility resulted in disequilibrium. Such was not the case, however, with Keynes' equilibrium. Not only was macroeconomic equilibrium achieved when the sum of ex ante leakages equal to the sum of ex ante injections into the income stream, but all markets would be cleared even in the face of wage and price rigidities. So again, with Keynes' equilibrium came the concept of involuntary unemployment in equilibrium.

The standard assumptions of the orthodox model lead to three implications regarding the nature of their concept of equilibrium. First, it implied that market equilibrium is uniquely a function of the price toward which the market will gravitate. Second, it implied that in equilibrium all desired trades can be completed at that price. Finally, it presumed that since each individual optimizes at equilibrium, equilibrium is a normative ideal providing the highest attainable level of consumer welfare. While Keynes retained the concept of equilibrium as a situation in which the value of dependant variables would be stable, none of the implications of neoclassical equilibrium were required in his concept of equilibrium.
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The first implication of the neoclassical orthodoxy's concept of equilibrium is that market equilibrium is uniquely a function of the price towards which the market will gravitate. Price and/or wage stickiness creates non-clearing disequilibrium in the orthodox model. However: Keynes' concept of equilibrium allows for market-clearing in the face of price and/or wage rigidity. This is the difference between Keynes' discussion of wage and/or price rigidity and that of Hawtrey, Pigou, and the other neoclassical writers of the inter-war period [Laidler, 1999, p. 16]. For these writers, wage and/or price stickiness resulted from market frictions, such as workers unwillingness to accept wage cuts in the case of wage rigidities. Hence, involuntary unemployment was seen as a problem of disequilibrium [Laidler, 1999, p. 17].

In A Tract on Monetary Reform [Keynes, 1924, pp. 25-30], Keynes mentions labors' success in keeping wages from falling as rapidly as prices during the inter-war deflation. By the time of the General Theory, Keynes introduced the money wage illusion as the motivation for wage rigidity. However, the money wage illusion cannot create wage rigidity unless labor exercises a sufficient degree of market power.

With respect to product prices, Keynes was certainly aware of the work being done on the theory of imperfect competition in the 1930s. He had to be aware of the work of Chamberlin [1933] and Robinson [1933] on monopolistic competition and the resulting perception that imperfect competition may lead to a degree of price rigidity capable of preventing the price mechanism from coordinating behavior in a timely fashion. Moreover, Keynes may have been aware of discussions and working papers on the theory of oligopoly, (17) which provided an even stronger theoretical rationale for the price rigidity in the Keynes' analysis [Reid, 1981[. Keynes appeared to be arguing that market power exercised by big business was employed to maintain a break on falling prices during the deflationary environment of the rapidly spreading depression of the inter-war years. This, of course, is a very different view of the use of market power on the part of big business today, where some see market power employed as a source of profits-push inflation.

The second implication of the neoclassical orthodoxy's concept of equilibrium is that all desired exchanges can be completed at the equilibrium price, a position that resulted from the neoclassical orthodoxy's direction of causation, and (in the labor market) the resulting failure to distinguish between the willingness to work and the ability to work. However, as noted above, given the reversal in the direction of causation in the General Theory and Keynes' concept of equilibrium, even if equilibrium prices are obtained, Keynes did not presume that all desired trades could be completed at these prices. Again, with reference to the labor market, the wage could attain its equilibrium level, but this does not necessarily equate the willingness to work and the ability to work. Hence, while markets cleared in Keynes' equilibrium, they could do so without either full employment or optimization occurring. (18)
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The third implication of the neoclassical orthodoxy's concept of equilibrium is that consumer welfare will be maximized since each consumer optimizes his or her welfare in equilibrium. Therefore, this concept of equilibrium implied a normative ideal whereby individual welfare, measured in terms of utility, would be maximized given any distribution of income. However, as noted above, Keynes' concept of equilibrium was ethically neutral in that it did not imply that total social welfare would be maximized given any distribution of income. Again, this is a result of the fact that market-clearing in Keynes' concept of equilibrium does not imply optimization. For Keynes, macroeconomic equilibrium is merely where the system comes to rest, which is achieved when the opposing theoretical forces in the model are in balance. In the basic model contained in the General Theory, the opposing forces are the decision makers in households that determine the division of their disposable income between planned consumption and saving, and business decision makers who must determine planned investment. When the plans of these opposing forces are in balance, the sum of ex ante leakages will equal the sum of ex ante injections into the income stream. All markets will clear, with or without flexible wages and/or prices, and macroeconomic equilibrium is reached, with or without, full employment.

Because his notion of equilibrium and market-clearing attacks the very idea of the efficiency of market processes, Keynes' concept of equilibrium and its definition of market-clearing represents a significant aspect of his attack on the neoclassical orthodoxy of his day. The General Theory, with his concept of equilibrium and market-clearing, clearly articulated his perceived limitations of efficiency economics. As such, this feature of Keynes' equilibrium is another important component in his second line of attack on the neoclassical model.

Conclusion

The theoretical goal of the General Theory and a major reason Keynes thought the book would create a revolution in economics, was his attack on the so-called classical model. A number of key theoretical elements emerged from Keynes' two lines of attack on the neoclassical orthodoxy of his day, and these elements constituted the theoretical core of the General Theory. This core was generalized into a coherent message that less than full employment in equilibrium was not only possible, but could well represent the norm in a market-capitalist economy. This paper presents Keynes' concept of equilibrium, which was one key theoretical element that constituted the core of the General Theory and was critical in his two lines of attack on the neoclassical model. Keynes' concept of equilibrium differed in structure, content, and purpose from that of the neoclassical orthodoxy. Moreover, there were four unique features of Keynes' notion of equilibrium, and these features all reflect his overriding focus on involuntary unemployment.

Footnotes

(1) This paper is concerned exclusively with the economics of Keynes and not the various divergent views of Keynesian economics or Post-Keynesian economics. The authors are concerned only with what Keynes said or meant and not with what he could have said or should have said [Johnson, 1980, 1983; Blaugh, 1985, 2001, 2003].
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(2) Keynes' classical model was admittedly a straw man. However, with the exception of Malthus and Marx, the prototype classical and neoclassical macroeconomic models, though based on somewhat different analyses, came to the conclusion that full employment would prevail in equilibrium [Johnson and Cate, 2002; Johnson and Ley, 1990; Lindert, 1976].

(3) Keynes also discussed the impact of price rigidity in the money market in the form of the liquidity trap and a rigid rate of interest. How serious the possibility of the liquidity trap really was in Keynes' mind has long been subject to debate. However, it is clear that the trap emerged from Keynes' theory of probability and his theory of expectations rather than imperfect competition and market power [Cate, 1997; Cate and Johnson, 1997, 1998].

(4) The five key theoretical elements of the General Theory include: (1) Keynes' concept of equilibrium; (2) his theory of probability, expectations, and uncertainty; (3) his critique of the loanable funds theory of interest rate determination; (4) his liquidity preference theory of money and interest rate determination; and (5) Keynes' theory of labor supply and market clearing at less than a full employment equilibrium [Cate and Johnson, 1997].

(5) To be sure, some qualifications have to be admitted in the case of Malthus and Marx in light of their measure of value [Johnson, Gramm, and Hoaas, 1989, 1991; Johnson and Ley, 1990].

(6) Today, of course, the term economic stability most commonly refers to both employment stability and the stability of the general price level as reflected in the business cycle.

(7) To be sure, there were those who initially rejected the model contained in the General Theory, such as the Chicago school, the Austrians, and the institutional economists. Moreover, others like Pigou [1936] and Hicks [1937], attempted to treat Keynes' analysis as simply a special case of the neoclassical model.

(8) The analytical framework contained in the General Theory to deal with involuntary unemployment was rapidly extended to deal with cyclical inflation and the issue of economic growth. Harrod [1939, 1948, 1960] and Domar [1946, 1947, 1948, 1952] initiated an entire body of literature on Keynesian growth models and should be credited with founding modern growth theory [Besomi, 1997, p. 231]. Moreover, Hansen, initially skeptical of the Keynesian analysis, turned into a supporter [Haber, 1997], developing the theory of secular stagnation [Hansen, 1938, 1939], a straight forward extension of Keynes' short-run static analysis of the deficiency of aggregate demand. According to Samuelson [1976], Hansen also provided the original insight to the whole class of Keynesian type multiplier accelerator growth models, which are generally associated with the work of Samuelson and Solow [Samuelson, 1939a, 1939b; Solow, 1956[. This, despite the fact that the accelerator principle had been articulated first by Kahn [1931] and later by Harrod [1936], though the latter was concerned with the trade cycle and not the long-run problems of economic growth at the time. Finally, many economists such as Lerner [1936], began to explore the possibilities that seemed to be implied in the General Theory for achieving economic stability through the use of monetary and counter-cyclical fiscal policy.
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(9) Keynes' concept of equilibrium does not deal adequately with the problem of time since he seems to vacillate between the concepts of analytical and calendar time, hence, the attacks on the instantaneous nature of the multiplier analysis. However, his concept of equilibrium established the theoretical existence of an equilibrium at less than full employment. Moreover, his less than full employment equilibrium would continue unless the government intervenes in the operation of the economic system by undertaking certain public works, thereby, increasing aggregate demand. Finally, despite his somewhat unclear treatment of time, it is clear that Keynes was never concerned with the long-run in the analytical sense of that term.

(10) Though not relating Keynes' direction of causation to his concept of equilibrium, others such as Thirlwall have certainly recognized the importance of Keynes' direction of causation as opposed to the neoclassical view. In fact, Thirlwall refers to the fact that output and employment are ultimately determined in the real goods market as opposed to the labor market as one of the "... central messages of Keynes' vision" [Thirlwall, 1993, pp. 335-337].

(11) Employing the Pigouvian Real Balance or Wealth Effect, Patinkin and others have shown that Keynes' direction of causation does not necessarily lead to a less than full employment equilibrium. However, it must be pointed out that the Pigou Effect was not articulated until 1946. Moreover, with Keynes' view that the general price level tended to be rigid downward, the Pigou Effect would not have been relevant to Keynes. Finally, the empirical evidence suggests that while the Pigou Effect is an interesting theoretical substitute for the self-correcting mechanism of Say's Laws, its actual effect would be too small to move the economic system to a full employment equilibrium by itself. [Mayer, 1959; Tanner, 1970].

(12) For a more analytically rigorous framework of the impact of the change in the direction of causation introduced in the General Theory, see Johnson, Ley, Hoaas, and Thour, 1986.

(13) This simple flow diagram can easily be expanded to incorporate the role of market power and aggregate supply in the real goods market and the supply of labor in the labor market. Additionally, Keynes' theory of expectations, money demand, interest rate determination, and the level of ex ante investment can be easily included in the diagram.

(14) For example, Hayek's complaint was net with the focus on allocative efficiency, nor with the assumed norms of the competitive market model, but rather with the Marshallian comparatively static, partial equilibrium version of the neoclassical orthodoxy. After all, Hayek was an exponent of the Walrasian general equilibrium analysis [Laidler, pp. 3132, 36], and the Austrians, in general, focused on maximizing individual behavior and the incentives conveyed by market prices [Laidler, pp. 14, 32].

(15) For example, Wicksell's aim was to extend the quantity theory of money and connect it to the loanable funds theory by way of the relationship between the natural and the market rate of interest in defining monetary equilibrium [Laidler, p. 28].
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(16) While some of these writers advocated public expenditures, they did so while still adhering to the neoclassical paradigm, which provided no rationale for this type of government intervention in the economy [Johnson and Cate, 2002].

(17) The discussions and working papers on oligopoly eventually lead to the publications by Kahn [1937], Hall and Hitch [1939], and Sweezy [1939].

(18) While Keynes was aware of the effects of interdependence between markets, his discussion was presented in terms of the interdependencies between markets that had cleared in the face of price and wage rigidity. Thus, if there is an excess supply of labor relative to full employment in some markets, not only did involuntary unemployment exist in those markets in equilibrium, but the demand for a range of products will be less than they might have otherwise been, further discouraging employment opportunities elsewhere. This interdependence appears to be one of the insights upon which the multiplier analysis was developed.

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L. E. JOHNSON, * ROBERT D. LEY, * AND THOMAS CATE **

* Bemidji State University--U.S.A., **Northern Kentucky University--U.S.A. The authors would like to thank Cynthia Benzing, John Cochran, Francesco Saraceno, and Rabindra Chakraborty for their helpful suggestions.
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