OK for my Keynes, Krugman, and the Crisis class–we still have registrations rolling in, don’t be shy!–I have just assigned Chapters 1-3, and some selections from Chapter 12, to give about a 50-page excerpt from the General Theory to convey Keynes’ diagnosis of how the “classical” economists went wrong.
Now to make sure I know exactly what Keynes is doing–so that I can “dumb it down” for the layperson–let me ask the resident Keynesians for some clarifications, all related to Chapter 3:
* What is the unit of aggregate supply price and aggregate demand? In money?
* Is the aggregate supply price referring to the unit price, or the total proceeds? Keynes defines the aggregate supply price as the “expectation of proceeds which will just make it worth the while of the entrepreneurs to give that employment.” So does that mean total proceeds, or proceeds per unit of output?
* Related to this, are the functions Z=psi(N) and D=f(N) upward sloping? [UPDATE: It’s not psi, but I can’t remember my Greek letters…] (And what is the Y axis here–money?) So Keynes is saying that in the general case, D starts above Z, but has a lower slope, so that when N is really low, D is above Z, but eventually they intersect as N increases?
* Keynes says that when N is below the equilibrium point, then D is above Z, and so entrepreneurs have an incentive to hire more workers. But why? It sounds intuitive at first, but I’m not so sure it is. In particular, Keynes says that when N is such that D and Z intersect, the entrepreneurs profit has been maximized. But it seems to me the profit is zero at that point? (In a standard micro model, it’s fine for the producers to maximize profit at the point of zero-profit, because they’d earn negative profits at different levels of output. But that’s not what happens here. If N went below the intersection point, then wouldn’t aggregate profits go up?)
* Later on, when discussing the implications of the classical view, where D=Z at all levels of N, Keynes says “the forces of competition between entrepreneurs may be expected to push [N] to this maximum value.” But why? If Z and D overlap each other for all N, and Keynes has earlier argued that at the intersection point, aggregate profits are maximized, then why would entrepreneurs have an incentive to move N one way or the other, if Say’s Law holds?