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Microfoundations of macroeconomics. Post-Keynesian contributions on the theory of the firm

Rosaria Rita Canale

MPRA Paper from University Library of Munich, Germany

Abstract: Looking through contributions about microeconomic theory, from classics to modern theory, it is possible to identify various attitudes on the role that firms play in the market. To simplify the existing multiplicity of opinion, two distinct positions can be recognized: 1) the first one considers the theory of the firm, its choices about price and production as ruled by consumer sovereignty, assuming that it is the eagerness to buy that drives the market. The entrepreneur’s and consumer’s interests converge thanks to automatic mechanisms leading to equilibrium. It is well-known that neoclassical economists can be ascribed to this trend of study. 2) the second position, on the other hand, considers the side of production as having a higher incidence in the identification of market equilibrium, as firms are able to set prices and co-ordinate demand behaviour. This turn-round in causality defines a market where the demand-supply relationship does not follow the rules of competitive-marginalist equilibrium, but alternative principles. The aim of this study is to analyse the contribution of Post-Keynesian scholars about this theme in the belief that the fundamental assumptions and conclusions they have drawn represent an alternative to the traditional theory, and are worth being considered carefully. However, in the identification of the theoretical foundations of Post-Keynesian microeconomics theory, one can run into the difficulty of reducing to few unification principles the content of very different contributions, which often stand out for their critical positions vis-à-vis orthodox theory rather than for setting up the parts of a single alternative paradigm . Besides, Post-Keynesians have a strong taste for macroeconomics themes, rather than for microeconomics ones, since they believe that the macro aggregates determine the behaviour of small decision-making units. In fact, looking at this literature, one can find a lot of contributions on this subject: the most reputed (Kalecki 1954, and, for an expansion of this, Asimakopulos 1975 and Cowling 1982) explain the formation of prices and produced quantities as the results of decision-making process of firms as a whole. These theories set themselves out as theories of investment decisions, profit accumulation, and the conflicting nature of income distribution. This point of view, however, is submitted to the criticism of those who argue that Post-Keynesian theory does not possess persuasive microeconomics bases and that, even though it can be maintained that in the process of aggregation the firms behave uniformly in influencing aggregate production and income distribution, it is always necessary to define the rules that allow each unit to take its production choices. Most recently, some scholars have committed themselves to define the rules of such a decision-making process and to clarify the reasons why the interests between consumers and producers in the market do not converge. In so doing, they have tried to provide a microeconomic foundation to the distributive conflict identified at an aggregate level. These different contributions underline various dimensions of the undertaker’s decision-making mechanism. However, I believe that they share some common elements, as they are characterized by a common global vision that brings about a persuasive alternative to the theoretical system of neoclassical microeconomics. The aim of the present study is that of presenting the key elements of the Post-Keynesian global vision on the theory of the firm, and of explaining why price mechanisms prevail over quantity-determining mechanism.

Keywords: Post Keynesian; Theory of the firm (search for similar items in EconPapers)
JEL-codes: B5 B51 D40 (search for similar items in EconPapers)
Date: 2003, Revised 2005
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