Reconstructing Keynesian Economics with Imperfect Competition.

• Author: Froyen, Richard

"This book is unusual." So begins the preface (by Lal Jayawardena) to Robin Marris's reconstruction of the Keynesian economics as a computer simulation model with improved microeconomic foundations. A description of the book by Marris himself is ". . . the work is a mixed-fish medicinal soup intended to cure an otherwise fatal weakness in the Keynesian theory by providing microfoundations of 'imperfect' rather than 'perfect' competition". The comparison to a soup is apt because of the mix of ingredients in the book.

The author lists four aims which are briefly:

* to replace the Achilles heel of the General Theory with an implant from the theory of imperfect competition.

* to construct a computer simulation model based on the revised Keynesian model.

* to apply the model to economic problems of industrialized nations in the 1970s and 1980s.

* to "embellish the narrative with a personal view of the relevant history of thought".

A little theory, a little policy, some numerical simulations, some history--and a little gossip.

To begin with the Achilles heel, Marris sees the problem in Keynes's explanation of why a fall in nominal demand results in a fall in output not just a proportionate fall in price. Explanations within a perfectly competitive framework depend on "price stickiness" which in Marris's view means that the price level is externally constrained to change slowly. His remedy is to have a firm in an imperfectly competitive setting with a flat short-run labor productivity schedule (which he argues is in line with the empirical evidence).

The firm in this market structure sets price as a mark-up on costs--the size of the mark-up depending on the elasticity of the firm's demand curve. If demand changes, then unless the elasticity of demand changes (which in Marris' view it may or may not and we do not know in which direction it would if it did) the firm has no incentive to change price. A fall in demand, for example, then leads to a fall in output with price unchanged. The wage may fall, with a lag, as the labor utilization rate falls, then price will decline.

Marris does not argue that such microeconomic foundations are in the General Theory. At one point, in fact, Keynes is called the world's first non-Keynesian. Marris's point is rather that only in an imperfectly competitive setting does the General Theory make sense and conform to the facts of most modern real-world product markets.

Pursuing his second aim, the author describes a...