ABSTRACT
Keynes’s Revolutionary Doctrine is that even if markets are perfectly competitive, deficiency of effective demand remains a danger. Contrary to Friedman’s argument, “Keynes’ key theoretical proposition, namely, that even in a world of flexible prices, a position of equilibrium at full employment might not exist” is, in fact, valid. Ironically, two of Keynes’s most significant contributions to empirical relevance, the liquidity preference doctrine and the multiplier process, may be responsible. In the General Theory, the microeconomic assumptions underlying the macroeconomic results are not made explicit. Instead, by a master-stroke of simplification, they are summed up “in the portmanteau function “propensity to consume”. For the Looking-Glass economy, the first assumption means that total planned holdings of real wealth remain fixed at 90,000 units throughout the multiplier process. The second assumption means that the Dums and the Dees are assumed to desire as much employment as is available at the existing real wage.
