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Effective demand versus profit maximization in aggregate demand/supply analysis: a dynamic perspective

Author

Listed:
  • A. BHADURI

    (Jawaharlal Nehru University)

  • K. LASKI

    (Johannes Kepler Universitat)

  • M. RIESE

    (Johannes Kepler Universitat)

Abstract

Today many textbooks use the aggregate demand/aggregate supply analysis to convey the basics of Keynesian analysis of aggregate demand in conjunction with the profit maximisation postulate as characterising the aggregate supply side. However, this construction suffers from logical inconsistency, as the assumption of profit maximisation constraining firms through rising marginal costs of the ‘supply side’ is not easy to reconcile with the Keynesian postulate of output constrained by aggregate demand. This work follows a prominent line of reasoning to abandon the conventional AD curve altogether and replace it with a construct which seeks to remedy the inconsistency. This is achieved by assigning the central role to profit maximisation on the supply side, while the role of effective demand in the output determination is pushed to the background.

Suggested Citation

  • A. Bhaduri & K. Laski & M. Riese, 1999. "Effective demand versus profit maximization in aggregate demand/supply analysis: a dynamic perspective," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 52(210), pages 281-293.
    • Handle: RePEc:psl:bnlaqr:1999:33
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    References listed on IDEAS

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    1. Dalziel, Paul, 1993. "Classical and Keynesian Unemployment in a Simple Disequilibrium AS-AD Framework," Australian Economic Papers, Wiley Blackwell, vol. 32(60), pages 40-52, June.
    2. Allen, Ralph C & Stone, Jack H, 1993. "The New Aggregate Demand Models: A Critical Perspective," Australian Economic Papers, Wiley Blackwell, vol. 32(61), pages 248-257, December.
    3. Tobin, James, 1972. "Inflation and Unemployment," American Economic Review, American Economic Association, vol. 62(1), pages 1-18, March.
    4. Perry, L J, 1991. "A Comment on Aggregate Demand," Australian Economic Papers, Wiley Blackwell, vol. 30(57), pages 278-286, December.
    5. Rao, B Bhaskara, 1991. "What Is the Matter with Aggregate Demand and Aggregate Supply?," Australian Economic Papers, Wiley Blackwell, vol. 30(57), pages 264-277, December.
    6. John Conlisk, 1996. "Why Bounded Rationality?," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 669-700, June.
    7. Amit Bhaduri & Kazimierz Laski & M. Riese, 1994. "Fallacies in Aggregate Demand/Supply Analyses," wiiw Working Papers 4, The Vienna Institute for International Economic Studies, wiiw.
    8. Simon, Herbert A, 1979. "Rational Decision Making in Business Organizations," American Economic Review, American Economic Association, vol. 69(4), pages 493-513, September.
    9. Rabin, Alan & Birch, Dan, 1982. "A clarification of the IS curve and the aggregate demand curve," Journal of Macroeconomics, Elsevier, vol. 4(2), pages 233-238.
    10. David Colander, 1995. "The Stories We Tell: A Reconsideration of AS/AD Analysis," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 169-188, Summer.
    11. Hall, P H & Treadgold, M L, 1982. "Aggregate Demand Curves: A Guide to Use and Abuse," Australian Economic Papers, Wiley Blackwell, vol. 21(38), pages 37-48, June.
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    Cited by:

    1. Amitava Krishna Dutt & Peter Skott, 2006. "Keynesian Theory and the AD-AS Framework: A Reconsideration," Contributions to Economic Analysis, in: Quantitative and Empirical Analysis of Nonlinear Dynamic Macromodels, pages 149-172, Emerald Group Publishing Limited.
    2. Harald Badinger & Ingrid Kubin, 2008. "As‐Ad Revisited: Overshooting Adjustment Dynamics Under Naïve Expectations," Metroeconomica, Wiley Blackwell, vol. 59(4), pages 574-593, November.
    3. Kazimierz Laski & Herbert Walther, 2013. "Kalecki’s Profit Equation after 80 Years," wiiw Working Papers 100, The Vienna Institute for International Economic Studies, wiiw.
    4. Kazimierz Laski, 2000. "Three Ways to ... High Unemployment," wiiw Working Papers 12, The Vienna Institute for International Economic Studies, wiiw.
    5. Kazimierz Laski & Roman Römisch, 2001. "Growth and Savings in USA and Japan," wiiw Working Papers 16, The Vienna Institute for International Economic Studies, wiiw.
    6. Martin Riese, 2016. "Kazimierz Laski (1921-2015): ein engagierter Kaleckianer," Wirtschaft und Gesellschaft - WuG, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik, vol. 42(1), pages 119-129.

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    More about this item

    Keywords

    Austria; Analysis; Supply and demand; Keynesian economics;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory

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