The Aggregate Supply Function in Keynes's General Theory

Abstract

This chapter reviews the aggregate supply function in Keyne's general theory. Although Keynes (1936) devoted little attention to the aggregate supply function in the General Theory, he was keenly aware of its importance. The aggregate supply function, for all its importance to Keynes, received relatively little space in The General Theory. Subsequently, opinions clearly differ as to those features of Keynes's General Theory that gave it its special novelty. Keynes in his Treatise on Money (Keynes, 1930) sketched in the beginnings of his analysis of the role of what he later called the aggregate demand function and showed how it was determined. The aggregate supply function (ASF) bridged two branches of economics: (1) money theory and (2) value theory. Keynes defines the notion of aggregate supply price of the output of a given amount of employment as the expectation of proceeds which will make it worth the while of the entrepreneurs to give that employment. The aggregate supply price for any output then is that expectation of proceeds which will lead entrepreneurs to produce that output. Subsequently, the aggregate supply function is the relationship between various levels of output and those expectations of proceeds that would induce entrepreneurs to make them available.