Meade's General Theory Model: Stability and the Role of Expectations

Abstract

This paper develops a one sector version of James Meade's Keynesian system (1937). In contrast to the traditional IS-LM model, expectations are endogenous and the valuation of capital by financial markets plays a central role in Meade's model. The model formalizes Keynes's views on the role of the stock market and the sensitivity of long-term expectations to current events. With sufficiently elastic expectations, wage flexibility causes a downward spiral of wages, prices, and output, an outcome James Tobin (1975) argued may represent Keynes's contribution better than an underemployment equilibrium sustained by rigid wages. Copyright 1992 by Ohio State University Press.