What is Keynesian Macroeconomics

Keynesian macroeconomics takes as its starting point aggregate magnitudes and their interrelations. Of pivotal importance to the ideas of Keynes is his definition of national (money) income as the earnings of the factors of production, which must be equal to the cost of production. From this follows the equivalence of saving and investment; both are defined as the excess of income over consumption. This definition implies that consumers will always hold enough money to buy the product. However, this does not imply that supply creates its own demand in the sense that lack of aggregate demand cannot cause unemployment (Say’s law). Entrepreneurs decide the level of production, and they will not produce beyond their own investment demand plus expected consumption demand. If, at the level of full employment, consumers in the aggregate are expected to save more than entrepreneurs wish to invest, entrepreneurs will reduce production until expected savings equals expected investment. By, in this way, arguing in terms of aggregate magnitudes, Keynes depicts a different economy than the one known from neoclassical or general equilibrium theory—an economy where unemployment due to a lack of aggregate demand is not only possible but also likely.

Agent-Based Computational Economics

C. Bruun (Aalborg University, Denmark)