Towards a unified economic theory: A classical-keynesian General Equilibrium model

The paper presents a judicious way to unify main conceptual assumptions of the Neo-Ricardian, Keynesian and Neo-Classical economic theories within the same model. The motivation for the development of this model is not only to provide a response to Neo-ricardian critics of the general equilibrium theory, but also to propose a micro-founded new version of the Leontief input-output system, or a macroeconomic GE model where the adjustment process to equilibrium can take time and require production cycles.

Aggregate General EquilibriumGE models widely used in the macroeconomics profession, assume a continuous equality between supply and demand for each commodity, by considering disequilibrium situations as short-run phenomena rapidly resolved by the market clearing process. One should thus remember that such a simplifying assumption is not appropriate in the presence of perfect complement commodities, and that a real multi-sector economy may not be characterized by only gross substitute factors and goods.

First, it is well known that the short-run market clearing dynamics represented by the ‘tâtonment’ process where no transactions occur out of equilibrium, has been shown by Scarf (1960) to be unstable under some examples of perfect complementarity. Second, and independent from this problem, it is clear that in a Leontief input-output model involving technologies with fixed proportions of capital inputs, any set of production factors in the economy cannot be fully employed regardless of price levels. Starting from an exogenous set of endowments means starting presumably from out of equilibrium, in which case input quantities should necessarily adjust to reach a GE position, or in other words, capital accumulation, production, trade, and consumption, could reasonably occur during the market clearing process (i.e., outside equilibrium.)

In this paper, we propose a more general macroeconomic structure that allows one to account for such 'mixed' dynamics. We then use this framework to analyze the important question of potential obstacles preventing full-employment of labor resources. The analysis shows clearly that persistent unemployment results essentially from a coordination failure, and a lack of information about consumption preferences and production technologies. Abstracting indeed from labor market rigidities by assuming, for example, perfectly flexible wages, appears to be insufficient for the economy to reach a ‘full-employment’ equilibrium. Based on this analysis, a policy suggestion of  creating “growth stimulating labor contracts” (GSLC) is finally presented.