Menu

Comparison and contrasts of the adoption of Walras’ ideas in the reinterpretation of The General Theory

0 Comment

Macroeconomics Introduction The General theory of microeconomics originally developed by Keynes in 1936 epitomizes the essence of monetary value in an economy. The theory postulates the relationship between employment and the purchasing power of a populace in relation to their contribution to the development of recession in an economy. It is factual that money is an important factor in any economy, employment which is the key introducer of money in an economy thus becomes equally important with any factor affecting employment thus affects recession in an economy by extrapolation. Several renowned economists adopted later adopted the theory introducing their own understanding and inclusions, key among such were Clower and Leijonhufvud. In explaining the state of an economy, Clower and Leijonhufvud explain the factors of production and their effect on an economy. In this, they explain the micro and macro-economic factors, which affect an economy. The NCS model The new classical school model of economics on the other hand seeks to succeed the general theory by attempting to disambiguate some of the assumptions that sustain the Keynesian theories of microeconomics. The new theory seeks to develop a clear explanation by majoring on rational and self-interested agents of economics in developing effective market competitions. This is unlike the general theory, which assumes non-rational and non-optimizing behaviors of the very agents in constructing market structures and economic conditions. In doing this, the new classical school theory has three main assumptions in explaining effective market clearance mechanisms. The three assumptions include the rational expectations, the continuous market clearance and the aggregate supply hypothesis. Rational expectations demand that producers have rational expectations of the market when determining their future operations. This includes both weak and strong expectations that should help market players trim their expectations especially on future market trends. Continuous clearance state that the market should have constant activities despite the economic state. This way, the economy stays operational as all economies always are. The activities may slow following weak policies but such should not stall the economy. The assumption creates an active economic situation. The aggregate supply hypothesis investigates the laborers decision making between leisure and work. An effective consideration should result in the longevity of production by the laborers (Levacic and Rebmann, 1982). Microeconomic factors are specific factors of an industry that influences their operations thus their cash flow. such include allocation, production and distribution. They investigate the role of the factors in the overall operations of an organization and their contribution in sustaining employees. Macroeconomic factors on the other hand are market factors, which equally affects the financial might of an organization. These include aggregate output, employment and inflation. The economists develop a split in the two concepts by alluding that microeconomic factors affect the populace directly thereby influencing their purchasing power while macroeconomic factors affect the business organizations. However, they later reconcile the factors by stating that the economy is a self-sustaining cycle in which every element depends on the other. Furthermore, the two factors have a common market. They thus admit that both the factors affect the financial activity in a market thereby contributing equally to recession. Clower develops a concept he refers to as the dual decision hypothesis in which he investigates the purchasing patterns of most families. He develops the argument from general theory. In the theory, he postulates that families will only purchase products after determining their sources of income. In this theory, Clower investigates the relationship between employment and the purchasing power of a family. The concept of a self-sustaining cycle portrays itself as Clower explains that one will only purchase a product from a market after determine their income most derived from their employments. The theory provides an enabling background on which he calculates the effect of demand, supply and the effect of factors that influence the two in price determination thus the purchasing pattern of the populace. Clower therefore provides a systematic scenario of market clearance in which the consumers considers the independent factors of production and their effect on product and service prices (Hillier, 1986). Leijonhufvud on other hand adopts a similar hypothesis in which he investigates the origin and importance of market information. The current market trends often result from past market tendencies and will likely influence future market activities. Leijonhufvud asserts that economists would formulate inelastic prices for such factors as labor and raw materials for their products thereby affecting the prices of the finished products owing to their lack of adequate market information. The absence of adequate market information affects future market activities since most economists lacked more information about the future and relied purely on speculation. In general, Leijonhufvud claims that economists operate in fear of the unknown a feature that results in reservations and uncertainty especially in price determination. While the two economists make perfect economic sense, they do not offer adequate criticism on Walras’ general theory, which investigates the relationship between employment and subsequent economic activities that affects the state of the economy. The two use some of his ideas in supporting their independent ideas thus drifting from the actual criticism. sReferences Class lecture notes. Hillier. B. (1986) Macroeconomics: Models, Debates and Developments, Oxford: Basil Blackwell. Levacic, R. and Rebmann, A. (1982). Macroeconomics: an Introduction to Keynesian Neoclassical Controversies, London: Macmillan