ABSTRACT

The chapter explores the theory of the aggregate price, profit, and business fluctuations in Keynes’s Treatise for its implications for modern macro-economic analysis. As in the Treatise, profits are first defined within a theory of the aggregate price level, as aggregate investment minus saving. Deriving aggregate total revenue and aggregate total cost from this price theory, the paper shows how to construct a version of the Keynesian cross diagram. The cross construction suggests an important qualification for fiscal policy, that total cost does not shift. Then, using a neoclassical definition of profit and the total-cost/total-revenue approach, the paper derives aggregate supply, and then adds aggregate demand in an integrated framework. Comparative statics of the AS-AD analysis and the central role of profit in the Treatise suggest that a focus on profit might be useful in identifying exogenous technology shocks of real business cycle theory.