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      The Inadequacies of Utility Theory from a Macroeconomic Modelling Perspective

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      Journal of Resilient Economies (ISSN: 2653-1917)
      James Cook University

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          Abstract

          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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          Most cited references24

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          Risk, Ambiguity, and the Savage Axioms

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            Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework

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              Subjective Probability and Expected Utility without Additivity

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                Author and article information

                Journal
                Journal of Resilient Economies (ISSN: 2653-1917)
                JRE
                James Cook University
                2653-1917
                July 31 2022
                July 31 2022
                : 2
                : 1
                Article
                10.25120/jre.2.1.2022.3912
                bb5a7aa7-2ff2-4520-8c25-66f95d376276
                © 2022

                https://creativecommons.org/licenses/by-nd/4.0

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