Book contents
- Frontmatter
- Contents
- Preface
- 1 Introduction
- 2 Capitalist production
- 3 Production possibility set
- 4 Temporary equilibrium
- 5 Stability and motion
- 6 Innovations and financing
- 7 Monetary disequilibrium
- 8 Perspectives into the future
- Appendix I Existence of temporary equilibrium
- Appendix II Increasing returns
- Index
2 - Capitalist production
Published online by Cambridge University Press: 21 May 2010
- Frontmatter
- Contents
- Preface
- 1 Introduction
- 2 Capitalist production
- 3 Production possibility set
- 4 Temporary equilibrium
- 5 Stability and motion
- 6 Innovations and financing
- 7 Monetary disequilibrium
- 8 Perspectives into the future
- Appendix I Existence of temporary equilibrium
- Appendix II Increasing returns
- Index
Summary
It would be convenient to start our visit to general equilibrium theory from its section on the theory of the firm. According to its advanced formulation, it is constructed in a highly rigorous manner which uses the axiomatic method. It seems logically perfect, and recent books on general equilibrium, or microeconomics text books, repeat more or less essentially the same prototype theory of the firm due to Hicks' Value and Capital, though one may notice some technical developments in analysis and exposition.
This conventional theory, however, is only concerned with that part of the firm's behaviour which belongs to its everyday decision-making, or its routine work of production. It establishes the propositions of marginal productivity and examines their implications, leaving out the important financial aspects of the firm's activities, such as how to raise the initial capital of the firm for building up its production possibility set, how to increase its capital for development, or, more generally, how to finance production – all of these are completely ignored. It is obvious, however, that unless a firm has some amount of purchasing power at its beginning, it can do nothing. Its activity entirely depends on the amount of money the entrepreneur can use for his business. The conventional theory lacks such a perspective and, therefore, the budget constraint has no relevance to the theory of the firm. This is a serious misspecification of the model of the firm and it, in the end, has led us to an erroneous observation that the Slutsky equation of the firm has no term of income effect.
- Type
- Chapter
- Information
- Capital and CreditA New Formulation of General Equilibrium Theory, pp. 25 - 51Publisher: Cambridge University PressPrint publication year: 1992