The Multiplier Process as Market Exchange process A Contribution to the micro Foundation of Keynesian macroeconomics ang Gong Feb.1995 The author is very grateful to Edward Nell, Willi Semmler, Duncan Foley, David Colander John Eatwell, Paul Davidson and william Milberg for their comments and suggestions on the arly draft of this paper R Dept, of economics, Graduate Faculty, New School for Social Research, 65 Fifth Ave. New York, NY 10003 093992@newschool.edu
The Multiplier Process as Market Exchange Process A Contribution to the Micro Foundation of Keynesian Macroeconomics Gang Gong# Feb., 1995 The author is very grateful to Edward Nell, Willi Semmler, Duncan Foley, David Colander, John Eatwell, Paul Davidson and William Milberg for their comments and suggestions on the early draft of this paper. # . Dept. of economics, Graduate Faculty, New School for Social Research, 65 Fifth Ave. New York, NY 10003. 093992@newschool.edu
The Multiplier Process as Market Exchange Process A Contribution to the micro Foundation of Keynesian macroeconomics Abstract Traditional equilibrium analysis has been incorrectly founded once an"ordering issue"is concerned. To circumvent this problem, the autonomous demand, which has been missed in traditional microeconomic analysis, has to be introduced into the system as a starting point of a quence of market exchanges. Foll his direction, Keynes's multiplier analysis can also b viewed as a description of the process through which market exchanges are generated. Further, the Keynesian macroeconom ic re lation can also be proved within a micro econom ic context. JEL DO 0) he consensus in macroeconomics that prevailed until the early faltered because of no flaws, one empirical and the other theore tical theoretical flaw was that the consensus view leff a chasm betwveen microeconomic principles and macroeconomic practice that was too great to be intellectually satisfying. (Mankiw, 1990, pp. 1647) I Introduction Last twenty years have witnessed two opposite research directions. One, entitled as New Classical, is to explain macroeconomic phenomena based on an individual choice-theoretic framework of trad itional microeconomics-though the axiom of rational expectation is often adopted. The other is the attempt to reconstruct microeconomics so as to put Keynesian macro- analysis on a firmer foundation. This category is now termed New Keynesian. Is the "chasm still left? We believe (indeed many believe)"it is! " It is still not obvious what is the micro foundation of Keynesian macroeconomics
2 The Multiplier Process as Market Exchange Process A Contribution to the Micro Foundation of Keynesian Macroeconomics Abstract Traditional equilibrium analysis has been incorrectly founded once an "ordering issue" is concerned. To circumvent this problem, the autonomous demand, which has been missed in traditional microeconomic analysis, has to be introduced into the system as a starting point of a sequence of market exchanges. Following this direction, Keynes's multiplier analysis can also be viewed as a description of the process through which market exchanges are generated. Further, the Keynesian macroeconomic relation can also be proved within a micro economic context. (JEL D0, E0) "The consensus in macroeconomics that prevailed until the early 1970s faltered because of two flaws, one empirical and the other theoretical. ... The theoretical flaw was that the consensus view left a chasm between microeconomic principles and macroeconomic practice that was too great to be intellectually satisfying." (Mankiw, 1990, pp. 1647) I. Introduction Last twenty years have witnessed two opposite research directions. One, entitled as New Classical, is to explain macroeconomic phenomena based on an individual choice-theoretic framework of traditional microeconomics ⎯ though the axiom of rational expectation is often adopted. The other is the attempt to reconstruct microeconomics so as to put Keynesian macroanalysis on a firmer foundation. This category is now termed New Keynesian. Is the "chasm" still left? We believe (indeed many believe) "it is!". It is still not obvious what is the micro foundation of Keynesian macroeconomics
This paper will present my own contribution to this subject. I believe the micro foundation of Keynesian macroeconomics exists in the context of Keynes's multiplier principle. Specifically, Keynes's multiplier analysis can also be viewed as a description of the process through which market exchanges are generated. This consideration provides us a new theoretical framework The way an economy operates is completely different from the way described by trad itional equilibrium analysis. Even the concept of equilibrium has to be changed. Yet the new theoretical framework provided here turns out to be much superior in the sense that many mysteries of trad itional microeconomics automatically disappear and further, the Keynesian macroeconomic relation is exactly specified in a micro economic context The paper is organized as follows. First, I will raise an issue, which I believe has long been suppressed in economic literature. This issue is crucial, for the theoretical framework of trad itional equilibrium analy incorrectly founded once this issue is concerned. My own contribution, however, is exactly generated from my attempt to deal with this issue. I then expose how Keynes's multiplier analysis can be understood as an approach to describe the generation process of market exchanges. There are two ways of this exposition: one I call the forward exposition and the other the backward exposition. Then two possible doubts will be addressed which seem to be, in the view of many economists, unsatisfactory to the multiplier theory. A mathematical model will follow to show how Keynesian macroeconomic relation can be specified in my micro model of market exchange. Finally, the relation between this multiplier approach to other approaches on this subject will be discussed Il. Demand and Supply, which one is the first? Consider an agent who comes to an economy. He certainly wants to have two types of exchange: buying and selling. Which one should he have first? The trad itional equilibrium analysis does not offer an explicit answer. Implicitly, the system assumes that agents make their
3 This paper will present my own contribution to this subject. I believe the micro foundation of Keynesian macroeconomics exists in the context of Keynes's multiplier principle. Specifically, Keynes's multiplier analysis can also be viewed as a description of the process through which market exchanges are generated. This consideration provides us a new theoretical framework. The way an economy operates is completely different from the way described by traditional equilibrium analysis. Even the concept of equilibrium has to be changed. Yet the new theoretical framework provided here turns out to be much superior in the sense that many mysteries of traditional microeconomics automatically disappear and further, the Keynesian macroeconomic relation is exactly specified in a micro economic context. The paper is organized as follows. First, I will raise an issue, which I believe has long been suppressed in economic literature. This issue is crucial, for the theoretical framework of traditional equilibrium analysis is incorrectly founded once this issue is concerned. My own contribution, however, is exactly generated from my attempt to deal with this issue. I then expose how Keynes's multiplier analysis can be understood as an approach to describe the generation process of market exchanges. There are two ways of this exposition: one I call the forward exposition and the other the backward exposition. Then two possible doubts will be addressed, which seem to be, in the view of many economists, unsatisfactory to the multiplier theory. A mathematical model will follow to show how Keynesian macroeconomic relation can be specified in my micro model of market exchange. Finally, the relation between this multiplier approach to other approaches on this subject will be discussed. II. Demand and Supply, Which One is the First? Consider an agent who comes to an economy. He certainly wants to have two types of exchange: buying and selling. Which one should he have first? The traditional equilibrium analysis does not offer an explicit answer. Implicitly, the system assumes that agents make their
demand and supply decisions simultaneously. Then how can this simultaneity be rational ized practice? One first finds that this simultaneity is indeed rationalized in the t tonnement process Agents, in the t tonnement process, are supposed to put forward their demand and supply decisions simultaneously at quoted prices. These demand and supply decisions are not subject to actual exchanges. Actual exchanges will not take place until the equilibrium has been reached Yet outside the t tonnement, this simultaneity can hardly be rationalized First, a decision without exchange is economically meaningless. Second, agents cannot have two types of exchanges, demand and supply, to take place at the same time. Naturally there is a problem which one is the first? One should note that this issue, which one is the first? has long been suppressed in economic literature. Weintraub(1977, pp. 4)once regarded"the simultaneity"as one of the anomalies of neoclassical system, but did not provide a solution. Benassy(1982)was even entangled. In chapter 4, he distinguishes the time ordering of an agent's different decisions Through this manner, he appropriately illustrates the " spill-over effect"caused by an"initial disturbance"transmitted from market to market. Yet in chapter 7, he gives up this distinction and works again on the simultaneous nature of adjustment process. Though he believes that"in reality agents visit marke ts sequentially, "(pp 63)working on simultaneous nature, in his mind, is absolutely standard in all multi-market equilibrium model and it will simplify the exposition, as we shall not have to formalize the ordering of the markets. "(pp. 63) But this"standard"is mislead ing. In practice, agents cannot visit all markets simultaneously Second, that ordering, as we shall see later, can be formalized. Third, that ordering is crucial to economic analysis: when the ordering is appropriately formalized, the equilibrium state, at which the actual quantities are transacted, is completely different from the one achieved by the trad itional equilibrium analysis, essentially, the analysis based on simultaneity
4 demand and supply decisions simultaneously. Then how can this simultaneity be rationalized in practice? One first finds that this simultaneity is indeed rationalized in the t_tonnement process. Agents, in the t_tonnement process, are supposed to put forward their demand and supply decisions simultaneously at quoted prices. These demand and supply decisions are not subject to actual exchanges. Actual exchanges will not take place until the equilibrium has been reached. Yet outside the t_tonnement, this simultaneity can hardly be rationalized. First, a decision without exchange is economically meaningless. Second, agents cannot have two types of exchanges, demand and supply, to take place at the same time. Naturally there is a problem "which one is the first?". One should note that this issue, "which one is the first?", has long been suppressed in economic literature. Weintraub (1977, pp. 4) once regarded "the simultaneity" as one of the anomalies of neoclassical system, but did not provide a solution. Benassy (1982) was even entangled. In chapter 4, he distinguishes the time ordering of an agent's different decisions. Through this manner, he appropriately illustrates the "spill-over effect" caused by an "initial disturbance" transmitted from market to market. Yet in chapter 7, he gives up this distinction and works again on the simultaneous nature of adjustment process. Though he believes that "in reality agents visit markets sequentially,"(pp. 63) working on simultaneous nature, in his mind, is "absolutely standard in all multi-market equilibrium model and it will simplify the exposition, as we shall not have to formalize the ordering of the markets."(pp. 63) But this "standard" is misleading. In practice, agents cannot visit all markets simultaneously. Second, that ordering, as we shall see later, can be formalized. Third, that ordering is crucial to economic analysis: when the ordering is appropriately formalized, the equilibrium state, at which the actual quantities are transacted, is completely different from the one achieved by the traditional equilibrium analysis, essentially, the analysis based on simultaneity
Now let's attempt to deal with this ordering issue. Superfic ially, agents seem to demand first To supply an output, one first needs to produce it, and that requires input. This might be true in a primitive commodity economy. In such an economy, production scales are small and producers are often self-employed, though few workers other than family member may be employed. This indicates that the financial cost to produce output may be small and therefore the cost from the failure to sell the output may not be large However, in a modern mass-production economy, production is often largely scaled and financial costs to produce outputs are often high. This indicates that agents are not willing to bear the risk that their produced output cannot be sold Therefore before a producer buys input he will make sure that he can sell the associated supply, or in other words, engage in his selling activity. 1 The similarity is also applied to consumer. We cannot imag ine that a consumer would buy consumption goods without knowing whether he can or cannot or how much he can sell ou his own endowments. Though, in practice, situations may be much more complicated, the general ity is clear: agents will engage in their selling activity before their buying activ ity. Precisely in this sense, a modern capitalist economy is a demand-determined economy Now if all agents try to sell (or engage in their selling activ ity) first, where does the demand come from? If nobody tries to demand something without selling first, the system will not work For traditional equilibrium economics, this is a serious problem. It is serious because the solution to this problem cannot be derived from the traditional framework of equilibrium analysis. We indeed need a revolution in methodology Ill. Where Does the demand Come from? a Backward Exposition The selling activity may have a broad meaning. Signing a contract is certa inly a typical example. Forecasting or expecting the future sale may be an other. In traditional equilibrium analysis, an agent's expectation only depends or price. By this expectation behav ior, the ordering issue seems unimportant. Therefore, it is the expectation in such a ay that ties the two(demand and supply) together. We will argue that this expectation behavior is not justified in an uncerta inty economy. Later, we will deal with this issue in detail
5 Now let's attempt to deal with this ordering issue. Superficially, agents seem to demand first. To supply an output, one first needs to produce it, and that requires input. This might be true in a primitive commodity economy. In such an economy, production scales are small and producers are often self-employed, though few workers other than family member may be employed. This indicates that the financial cost to produce output may be small and therefore the cost from the failure to sell the output may not be large. However, in a modern mass-production economy, production is often largely scaled and financial costs to produce outputs are often high. This indicates that agents are not willing to bear the risk that their produced output cannot be sold. Therefore before a producer buys input, he will make sure that he can sell the associated supply, or in other words, engage in his selling activity.1 The similarity is also applied to consumer. We cannot imagine that a consumer would buy consumption goods without knowing whether he can or cannot or how much he can sell out his own endowments. Though, in practice, situations may be much more complicated, the generality is clear: agents will engage in their selling activity before their buying activity. Precisely in this sense, a modern capitalist economy is a demand-determined economy. Now if all agents try to sell (or engage in their selling activity) first, where does the demand come from? If nobody tries to demand something without selling first, the system will not work. For traditional equilibrium economics, this is a serious problem. It is serious because the solution to this problem cannot be derived from the traditional framework of equilibrium analysis. We indeed need a revolution in methodology. III. Where Does the Demand Come from? a Backward Exposition 1 . The selling activity may have a broad meaning. Signing a contract is certainly a typical example. Forecasting or expecting the future sale may be an other. In traditional equilibrium analysis, an agent's expectation only depends on price. By this expectation behavior, the ordering issue seems unimportant. Therefore, it is the expectation in such a way that ties the two (demand and supply) together. We will argue that this expectation behavior is not justified in an uncertainty economy. Later, we will deal with this issue in detail
This section will prov ide a solution to our aforementioned problem, that is, where does the demand come from if agents try to sell first. Apparently, for the system to work, there must appear a trader who comes to the economy only to demand without trying to sell something first Does this type of trader exist in the real world? Yes, it does, and we call the demand from such a trader the non-supply related demand Supply-Related Demand and Non-Supply Related Demand. a supply related demand is the demand whose payment is supposed to be covered -not necessarily in ad vance but soon by a corresponding sale. A non-supply related demand is the demand whose payment is not supposed to be covered by an immediate sale, though perhaps in a very long future, this pay ment should still be covered. a typical example of supply related demand is consumption demand which is supposed to be covered by consumer income coming from the sell ing of endowments Another example is production demand, e.g., labor, material, etc, whose pay ment is supposed to be covered by selling commod ities on which they are used in production processes. The non supply related demand is the autonomous demand in the usual sense In the traditional equilibrium framework, there is no such distinction. 2 As we shall see later these two types of demand play different roles in the market exchange process and hence the distinction turns out to be necessary Constraints for Economically Sensible Supply-Related Demand Demand always means a financial pay-out and hence for an agent it is a loss in his wealth. Thus before he pays out, the agent must make sure whether his pay-out is economically sensible Then what do we mean by an economically sensible pay-out or an economically sensible demand? For supply-related demands, two constraints must be posited Financial Constraint: The agent must have financial resource to pay for his p urchase. as demand 2. Paul Davidson (1992) remarks that in this sense"Keynes's taxonomy provides an inherently more general theory. (pp 458)
6 This section will provide a solution to our aforementioned problem, that is, where does the demand come from if agents try to sell first. Apparently, for the system to work, there must appear a trader who comes to the economy only to demand without trying to sell something first. Does this type of trader exist in the real world? Yes, it does, and we call the demand from such a trader the non-supply related demand. Supply-Related Demand and Non-Supply Related Demand. A supply related demand is the demand whose payment is supposed to be covered — not necessarily in advance but soon — by a corresponding sale. A non-supply related demand is the demand whose payment is not supposed to be covered by an immediate sale, though perhaps in a very long future, this payment should still be covered. A typical example of supply related demand is consumption demand, which is supposed to be covered by consumer income coming from the selling of endowments. Another example is production demand, e.g., labor, material, etc., whose payment is supposed to be covered by selling commodities on which they are used in production processes. The nonsupply related demand is the autonomous demand in the usual sense. In the traditional equilibrium framework, there is no such distinction. 2 As we shall see later, these two types of demand play different roles in the market exchange process and hence the distinction turns out to be necessary. Constraints for Economically Sensible Supply-Related Demand. Demand always means a financial pay-out and hence for an agent it is a loss in his wealth. Thus before he pays out, the agent must make sure whether his pay-out is economically sensible. Then what do we mean by an economically sensible pay-out or an economically sensible demand? For supply-related demands, two constraints must be posited. I. Financial Constraint: The agent must have financial resource to pay for his purchase, as demand. 2 . Paul Davidson (1992) remarks that in this sense "Keynes's taxonomy provides an inherently more general theory."(pp. 458)
II. Expectational Constraint: The agent must expect that he can sell the related supply so that the revenue from this selling can cover his current demand As to the financial constraint, where the financial resource comes from is not important. It can come from either previous selling or from credit. In the modern credit system, this constraint ms to be somewhat easily satisfied However this does not mean that the constraint does no exist. For example, income identification is often required by banks to issue a credit card Nevertheless this is only a necessary constraint, not sufficient. Even if a producer has sufficient idle cash, he will not demand those inputs used to produce the commodity that cannot be sold Similarly, a consumer will not plan his consumption demand without knowing whether he can (or cannot)or how much he can sell his endowments. We will find that trad itional equilibrium analysis lacks a consideration exactly on this constraint The Expectation as to Sales. We now focus our attention on the expectation constraint. This constraint itself means that before paying for the supply related demand an agent should expect that he can sell the related supply. Then where does the expectation come from? To make things clear, we may define an expectation function, g(N Above S is the expected sale; N is the information available to the agent, cond tional on which the expectation is derived. The major problem then becomes what is the information N? One should note that in traditional equilibrium analysis, the information N is only about price any rational expectations models, agents are only concerned with the future expected price, on which they rely to make their decisions. 4 This ind icates that agents have full-confidence that 3. In this sense, forming an expectation, as we mentioned early (see footnote 1), may also be regarded as a selling activity 4. Muth's original model (1961)is certainly such an example, others, e.g. Lucas(1972), Frydman(1982)among others
7 II. Expectational Constraint: The agent must expect that he can sell the related supply so that the revenue from this selling can cover his current demand. As to the financial constraint, where the financial resource comes from is not important. It can come from either previous selling or from credit. In the modern credit system, this constraint seems to be somewhat easily satisfied. However this does not mean that the constraint does not exist. For example, income identification is often required by banks to issue a credit card. Nevertheless this is only a necessary constraint, not sufficient. Even if a producer has sufficient idle cash, he will not demand those inputs used to produce the commodity that cannot be sold. Similarly, a consumer will not plan his consumption demand without knowing whether he can (or cannot) or how much he can sell his endowments. We will find that traditional equilibrium analysis lacks a consideration exactly on this constraint. The Expectation as to Sales. We now focus our attention on the expectation constraint. This constraint itself means that before paying for the supply related demand an agent should expect that he can sell the related supply. 3 Then where does the expectation come from? To make things clear, we may define an expectation function, (1) S = g(N). Above S is the expected sale; N is the information available to the agent, conditional on which the expectation is derived. The major problem then becomes what is the information N? One should note that in traditional equilibrium analysis, the information N is only about price. In many rational expectations models, agents are only concerned with the future expected price, on which they rely to make their decisions. 4 This indicates that agents have full-confidence that 3 . In this sense, forming an expectation, as we mentioned early (see footnote 1), may also be regarded as a selling activity. 4 . Muth's original model (1961) is certainly such an example, others, e.g. Lucas (1972), Frydman (1982) among others
at given or expected prices they can sell their output as much as they want. 5 Once they have such confidence, they certainly need not concern themselves with the ordering of their activities However an agent who reveals such a fully confidence within an uncertain economy can hardly be regarded as rational or intelligent, whether he is selfish(reflected by his optimization process) I thus argue that the expected sale cannot be determined only by price information. N must contain quantity information. The following, which I believe to be very common in practice, is my own suggestion Information Used for Expectation For consumers. working contracts tenures. etc Fo f information takes the form of contracts, orders, etc, the expect ation function is very easy to define. What is said in contracts (or orders) is exactly what is expected. If information comes from past sale, the expectation function will depend on the pattern by which agents form their expectation. The models of adaptive expectation, learning and even rational expectation might be applied here, but the information, from which the expectation is derived, should also contain the quantity(the past sale) Demand Determination, a Backward Exposition. We are now ready for my backward exposition of the way demand is determined. It seems that the best way to do this is to put forward a set of questions to a series of agents s. "the output as much as they want"is certa inly referred to the optimum output derived from the agents optimization process given the expected prices 6. Else where( Gong, 1993, 1994b), I call such a revealed behavior as"full-confidence expectation"with its meaning and relation to the neoclasical system explained in detail
8 at given or expected prices they can sell their output as much as they want.5 Once they have such confidence, they certainly need not concern themselves with the ordering of their activities. However an agent who reveals such a fully confidence within an uncertain economy can hardly be regarded as rational or intelligent, whether he is selfish (reflected by his optimization process) or not.6 I thus argue that the expected sale cannot be determined only by price information. N must contain quantity information. The following, which I believe to be very common in practice, is my own suggestion. Information Used for Expectation For consumers: working contracts, oral promises tenures, etc. For producers: orders past sales. If information takes the form of contracts, orders, etc., the expectation function is very easy to define. What is said in contracts (or orders) is exactly what is expected. If information comes from past sale, the expectation function will depend on the pattern by which agents form their expectation. The models of adaptive expectation, learning and even rational expectation might be applied here, but the information, from which the expectation is derived, should also contain the quantity (the past sale). Demand Determination, a Backward Exposition. We are now ready for my backward exposition of the way demand is determined. It seems that the best way to do this is to put forward a set of questions to a series of agents. 5 . "the output as much as they want" is certainly referred to the optimum output derived from the agents' optimization process given the expected prices. 6 . Elsewhere (Gong, 1993, 1994b), I call such a revealed behavior as "full-confidence expectation" with its meaning and relation to the neoclasical system explained in detail
Let's start with the agents who, as a group dubbed as a, are currently buying the supply- lated demand. We may suppose that this group has a representative to whom we can ask the following questions Step I Questions to A. the Current Supply-Related Demander Question: Why do you buy these commodities? Answer: Because we expect that we can sell out the related supplies of these comm Question: Why do you expect you can sell out these related supplies? answer: Because we have information Question: What is it? A nswer Well, some are orders and contracts. Some are oral promises. Others are relatively uncertain. For example, last month one of us sold out 29835 units of his commod ity. He thus guesses that this month the sale will go somewhat above that, because we are now in holiday season Next let,'s dub b as those who, as a group, sent the above information to A, more specificall engage their buying activities with A. Note that B's buy ing activities had already taken place last month, or at least before A's buying activ ities. We may assume that what the b's bought are again the supply-related demand. Thus we ask the similar questions to their representative Step II: Questions to B the Supply-Related Demander to A Question: Why did you buy these commodities from A? Answer: Because we expected that we could sell out their related supplies Question: Why did you expect you could sell out these related supplies? Answer: Because we have information Quest Answer: Well, some were orders and contracts. Some were oral promises. Others were relatively uncertain. For example, in the month before the last, one of us sold out 234 units of his commod ity. He thus guessed that last month the sale would also be around that We can in the same way dub c as those agents who demand B's goods. Again their buying activities with B must take place before B's buy ing activities with A. Similar questions can also
9 Let's start with the agents who, as a group dubbed as A, are currently buying the supplyrelated demand. We may suppose that this group has a representative to whom we can ask the following questions: Step I: Questions to A, the Current Supply-Related Demander Question: Why do you buy these commodities? Answer: Because we expect that we can sell out the related supplies of these commodities. Question: Why do you expect you can sell out these related supplies? Answer: Because we have information. Question: What is it? Answer: Well, some are orders and contracts. Some are oral promises. Others are relatively uncertain. For example, last month one of us sold out 29835 units of his commodity. He thus guesses that this month the sale will go somewhat above that, because we are now in holiday season. Next let's dub B as those who, as a group, sent the above information to A, more specifically, engage their buying activities with A. Note that B's buying activities had already taken place last month, or at least before A's buying activities. We may assume that what the B's bought are again the supply-related demand. Thus we ask the similar questions to their representative. Step II: Questions to B, the Supply-Related Demander to A Question: Why did you buy these commodities from A? Answer: Because we expected that we could sell out their related supplies. Question: Why did you expect you could sell out these related supplies? Answer: Because we have information. Question: What is it? Answer: Well, some were orders and contracts. Some were oral promises. Others were relatively uncertain. For example, in the month before the last, one of us sold out 234 units of his commodity. He thus guessed that last month the sale would also be around that. We can in the same way dub C as those agents who demand B's goods. Again their buying activities with B must take place before B's buying activities with A. Similar questions can also
be put forward to their representative. Now if C as a group is again the supply related demanders, the similar visiting process will continue. Indeed the process will continue infinitely if the successive demanders are always supply related demanders. However if C as a group is an autonomous demander, that is, the demander without related -supplies, we then reach to the end The conclusion is that the current supply related demand of A is ultimately due to the past autonomous demand of C The above case may be too simple. a more practical one is that a part of C, indeed also a part of B, are autonomous demanders and the others are supply related demanders. In this case, the visiting process may continue, but it seems unnecessary because the basic result has al ready been clear We can view any current supply related demand to be caused, either directly or indirectly, by the past autonomous demand, not necessarily of one type and of one period. Specifically, D4=f(G1,G1G12…G1,k…) where G, is the total demand in period t and g, the autonomous demand in t IV. The Process of Market Exchange, a Forward Exposition The Starting Point of Market Exchange. The above way to express the market exchange process that I argue to be a multiplier process is a backward way. Indeed, it is not immediately clear why a"multiplier"applies here. However if current demands are viewed as caused by past autonomous demands, it also means that each autonomous demand -so long as it is injected into the economy -will stir up a chain of reflections. by the chain of reflections, we mean the sequence of market exchanges that reflects the initial activ ity of that autonomous demand. 8 7. Elsewhere( Gong, 1994b), the linearized vers ion of equation(2)has been tested using U. S It tums out that the equation is statistically very significant with the adjusted R- almost equal to one after correcting the serial correlation 8. We will express this reflection chain in detail later
10 be put forward to their representative. Now if C as a group is again the supply related demanders, the similar visiting process will continue. Indeed the process will continue infinitely if the successive demanders are always supply related demanders. However if C as a group is an autonomous demander, that is, the demander without related-supplies, we then reach to the end. The conclusion is that the current supply related demand of A is ultimately due to the past autonomous demand of C. The above case may be too simple. A more practical one is that a part of C, indeed also a part of B, are autonomous demanders and the others are supply related demanders. In this case, the visiting process may continue, but it seems unnecessary because the basic result has already been clear: We can view any current supply related demand to be caused, either directly or indirectly, by the past autonomous demand, not necessarily of one type and of one period. Specifically, (2) Dt Gt Gt Gt Gt k = f ( , , , , , ) -1 -2 - , where Gt is the total demand in period t and Gt the autonomous demand in t. 7 IV. The Process of Market Exchange, a Forward Exposition The Starting Point of Market Exchange. The above way to express the market exchange process that I argue to be a multiplier process is a backward way. Indeed, it is not immediately clear why a "multiplier" applies here. However if current demands are viewed as caused by past autonomous demands, it also means that each autonomous demand ⎯ so long as it is injected into the economy ⎯ will stir up a chain of reflections. By the chain of reflections, we mean the sequence of market exchanges that reflects the initial activity of that autonomous demand.8 7 . Elsewhere (Gong, 1994b), the linearized version of equation (2) has been tested using U. S. macro time series data. It turns out that the equation is statistically very significant with the adjusted R 2 almost equal to one after correcting the serial correlation. 8 . We will express this reflection chain in detail later