By John Weeks (auth.)
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Additional info for A Critique of Neoclassical Macroeconomics
But when one makes such an abstraction based upon the world as it is, the abstraction enters in an ad hoc manner into the neoclassical model, conflicting with the method of the theory. It should also be noted that treating the supply of labour as independent of the interest rate is an implicit acceptance of the pre-marginalist view that the population of economic agents is divided strictly between the owners of capital and those who have no source of income but the capacity to labour. To return to the principal theme of this section, the introduction of the aggregate production function into the synthesis model apparently brings a total theoretical defeat of the argument that unemployment could result from insufficient expenditure ('effective demand' in Keynes's terminology).
Since full employment was previously assured by the labour market equilibrium, an increase in investment induces no increase in output/income - the multiplier is zero. The only consequence of the increase in investment (prompted by a fall in the interest rate) is to reduce consumption by an amount equal to the increase in investment, for aggregate demand cannot change. Had one begun at any point in the story other than the labour market, the story must be retold if the level of output/income is not consistent with labour market equilibrium (full employment).
If we accept that the value of final commodities equals the value added generated in production, then the aggregate supply of final commodities is simultaneously income to households. Ignoring any material inputs, production (income) is a function of currently expended labour and the means of production used by that labour, with these means referred to as 'capital'. The output of this labour and capital must be measured in units which are unaffected by absolute or relative changes in prices (labour and capital produce commodities, not the market value of commodities).
A Critique of Neoclassical Macroeconomics by John Weeks (auth.)