The Inadequacies of Utility Theory from a Macroeconomic Modelling Perspective
Keywords:Utility Theory, Liquidity Preference, Macroeconomic Modelling, Stock-Flow-Consistent Modelling
The paper briefly draws on the work of Marx and Keynes to question the contribution that utility theory has made to Macroeconomics. Contemporary utility-theoretic developments (in Growth Theory and Behavioural Economics) are also examined from a Post-Keynesian, Macroeconomic-Modelling perspective and are found to be wanting. First and foremost, we discuss the implications of using representative agent models in a single good (i.e., corn model) context. In these “Robinson-Crusoe” models, the corn uneaten automatically becomes the seed corn planted in the ground and, through her choices, the consumer-farmer-investor implicitly determines the corn's own rate-of-return (interest rate) that ensures optimal production. As such, any departures from full utilisation of capacity and labour can only be the temporary result of optimal though costly processes of adjustment. Macroeconomic behaviour and outcomes that are still not adequately explained by more complex models include: (1) the existence of very high average propensities to save for wealthy households; (2) the phenomenon of liquidity preference, which explains the desire to hold money on the part of investors and determines short-run equilibrium in the market for both real and financial assets while providing a partial explanation for obstructions within the monetary circuit. In this context, it is argued that the process of expectations-formation is best seen as something that is fragile, contingent, and potentially subject to dramatic revision.
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