Keynes's degree of competition∗

∗ A version of this paper was first presented at a meeting of the Post Keynesian Economics Study Group (PKSG) in November 2005.

Abstract

The present paper argues that Keynes's theory of aggregate employment assumes perfect competition (understood as price-taking, in the modern sense promoted by Joan Robinson in her 1934 article) in the markets for current output and for existing capital-goods. The degree of competition, to which Keynes makes a single cryptic reference, refers to the social and institutional obstacles to the free movement of resources, associated mainly with closed shops of entrepreneurs and workers. Keynes is here invoking an older, Marshallian, concept of competition. The implication is that the received understanding of the terms ‘expectation’ and ‘liquidity’ in The General Theory needs revision.

Keywords:

• Keynes
• perfect competition
• degree of monopoly
• expectation
• liquidity

Acknowledgements

The author would like to thank Victoria Chick and Paul Davidson for our correspondence over several years and three anonymous referees of this journal for their comments. The usual disclaimer applies.

Notes

∗ A version of this paper was first presented at a meeting of the Post Keynesian Economics Study Group (PKSG) in November 2005.

1 Robinson wrote that ‘Keynes did not accept the “perfect competition” of the text-books, but some vague old-fashioned notion of competition that he never formulated explicitly’ (quoted by Sawyer 1992: 107).

2 A more complex reason is that the theory of monopolistic competition is an exercise in partial equilibrium analysis, and an aggregate theory based on imperfect competition requires that the mark-up be independently determined. The mark-up(s) cannot be derived from objective demand curves without circularity, since these depend on aggregate employment. The aggregate employment function, relating effective (note, not aggregate) demand to employment (1973a: 280–2), can be uniquely defined only on the basis of a physical aggregate supply curve for industry as a whole, and therefore only on the assumption of price-taking, in the absence of auxiliary assumptions about mark-ups. Keynes's degree of competition means that firms can make profit in excess of long-period average cost, but he assumes that individual firms set output so that marginal cost equals expected price, rather than setting price to marked-up average cost. The source of the excess profit is the ‘closed shop’ at industry level.

3 Although Marcuzzo writes: ‘The attitude of Keynes towards imperfect competition was described by Joan Robinson as a dismissive one: “Neither Roy Harrod nor I could get Maynard to take an interest in ‘marginal revenue’”’ (1994: 26).

4 The assumption of a fixed number of firms in a footnote (Keynes 1973a: 55 n. 2) is required, inter alia, only for the Classical marginal productivity theorem to hold at the aggregate level, which Keynes does not assume in general (Hayes 2007b).

5 Marshall (1974: 304–14). Keynes refers to proceeds rather than price (1973a: 24 n. 3), but the ordinary and aggregate supply functions define a unique relation between proceeds and price (1973a: 44).