Building models of non-clearing markets
Building models of non-clearing markets
This chapter examines the extent to which Keynesian models can overcome the limits of equilibrium models without violating the methodological individualism that is required in all neoclassical equilibrium models. This chapter discusses an approach that involves a generalized version of Keynesian liquidity preference due to John Hicks. It goes beyond financial liquidity by recognizing the possible desirability of deliberate excess capacity. The generalized version involves endogenously deliberate disequilibria during which participants with incomplete knowledge of the market’s future are understood not to use all their resources, but to keep some in reserve thereby allowing flexibility in dealing with unforeseen circumstances.
Keywords: Keynesian model, methodological individualism, neoclassical equilibrium model, liquidity preference, John Hicks
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