4 - An extended Keynesian model

Summary

Introduction

Chapter 2 provided data showing one of the most outstanding, yet largely unacknowledged, ‘stylized facts’ of modern capitalist development; over the past century, long periods of high unemployment have alternated with periods of low unemployment. A point stressed in chapter 3 is that neoclassical unemployment analysis is unable to explain these shifts because of its reliance on a very particular kind of equilibrium framework, in which aggregate demand is assumed to adjust automatically to an exogenously determined ‘supply side’. This and the next two chapters develop an analytical framework that can explain these alternating unemployment episodes. This chapter focuses on the implications of reversing the neoclassical direction of adjustment. A model of demand-determined growth is outlined in which AD plays a causal role in determining the macroeconomic variables. Our attention is on demand-determined processes under conditions of full employment in order to highlight an extended Keynesian role for AD, that of generating adjustments on the supply side of the economy under full employment conditions. These adjustments act to bring real AD and full employment output into balance. The traditional Keynesian theory of AD explaining periods of high unemployment is treated only briefly at the end of the chapter.

Rapid growth and low unemployment: an extended Keynesian perspective

Table 4.1 shows average annual rates of growth for labour productivity and several components of GDP, and average rates of unemployment and inflation in the G7 economies for 1960–73 and 1974–98.