Equilibrium without Constraints

The notion of equilibrium that emerged in Keynesian thinking with the development of the theory of effective demand differs markedly from the traditional idea of a position reached through markets coordinating maximising activities that are subject to resource constraints. The new approach was compromised by Keynes himself, however, when he declared that the traditional theory held sway at full employment. Later statements of the idea proved clearer, especially in the work of Kalecki and, more recently, the Sraffians. The latter, especially, avoid the neo-classical setting in which modern economics, following Keynes, has placed the theory of effective demand, thereby forcing it to play second-fiddle to scarcity. But scarcity and effective demand are quite different approaches to many of the same subjects, and are difficult to reconcile. Setting the problem of effective demand in the context of prices determined by reproduction makes it possible to see the unique features of a demand equilibrium.