Question

I wonder if you could help me with the following.

The neoclassical school of economics claims that the results found in Keynes' theory can be deducted from the General Competitive Equilibrium theory by changing one of its hypothesis. I am not sure how this is possible. My professor always refers to the rigidity of wages but that does not solve my doubts.

Do you know the hypothesis that is relaxed in the GCE and how from there one arrives to Keynes' conclusions?

thank you

Answer 1

The Neoclassical theory refers to the dealing with the activities of supply and demand functions of the market. Those supply and demand functions are studied through the analysis of rate of output, income and productive goods and services related to Market conditions. Neoclassical theory is propogated basically on concepts of micro-economics. Though the Keynesian theory was formulated from the base idea of Neoclassical theory, It was formulated with the factors of Macro-economics in nature. They Keynesian theory

As discussed in the question, The Hypothesis formulated in Keynes theory was rigidly rejected by the Neoclassical school of economics in context of explaining General Competitive Equilibrium was as following factors. They are  1)  Keynes spreads the concept of aggregative nature. The theory tells that the rate of production of goods and services are determined in the short-run. The theory explains the effect of recession in the short-turn. It considers the concept as a whole in the short-run. But in the neo-classical theory only explains the effect of the individual units which affects the rate of goods and services in the market. 2) According to Keynes view, actually Wage-rigidity alone not the cause for the exclusion of keynes theory from Neoclassical view on General Competitive Equilibrium, Monetary and Fiscal measures of the Federal Governent may affect the Rate of output in the Market, In this situation only it have direct effect on Wage Rigidity. 3) This Monetary and Fiscal measures excludes the consumers rational behaviour on consuming goods and services and also the individuals total utility function related to firms maximizing profit. That is more utility of individual customers more profit margin can be achieved by the firms in the long-run. 3) GCE always test the market conditions of only one firm in a particular time. It uses one single firms market condition as a fine parameter to judge the overall performance of the output, income and the goods and services, But the Keyensian hypothesis was different. It resembles partial equilibrium. It explains only the study of more than one firms in the market, The data was used in aggregate level. So from above points it is prooved that hypothesis is relaxed in GCE.