A cybernetic model of macroeconomic disequilibrium

Abstract

In “On Keynesian Economics and the Economics of Keynes” (1968) Leijonhufvud described his cybernetic vision for macroeconomic microfoundations and the dynamics that move the economy from one equilibrium to another. Here I implement that vision in agent-based model. I focus on the difference between price-led adjustments (“Marshallian” in the original text) and quantity-led adjustments (“Keynesian”). In a partial equilibrium model the two dynamics lead to the same equilibrium at the same speed through the same path. In a general equilibrium model the Keynesian dynamics overshoots and under-shoots with consequent over-employment and unemployment. The agents within the model act by trial and error using very limited knowledge which I simulate here through the use of PI controllers. When a demand shock is treated with increased labor flexibility or positive productivity shock the result is a deeper recession and longer disequilibrium.