Development and Underdevelopment in the History of Economic Thought

Notes on Clower's Dual-Decision Hypothesis

Galeotti Andrea , University of Siena

Recent literature in the history of Macroeconomics (e.g. Backhouse & Boianovsky, 2013) revived an academic interest on Clower’s contributions. He is considered, together with Leijonhufvud, the main 'inspirator' for the later search of the microfoundations of disequilibrium macroeconomics officially initiated by Barro and Grossman (1971). Clower himself parted from this literature strongly inspired by his 1965 article. Plassard (2018) considers this article as Clower’s “Volte-Face regarding the “Keynesian Revolution””. Although we acknowledge the path-breaking intention of Clower’s 1965 article, with this work we suggest that a careful reappraisal of the Dual-Decision theory can shed further light on the real nature of such volte-face and, at the same time, show its inherent theoretical limits. Our central argument is that Clower begins his article from a correct premise: there is no legitimacy in assuming that, in a disequilibrium situation, output demands can be derived from an income distribution corresponding to full-employment incomes. Clower’s conclusion is equally correct: established general equilibrium theory (i.e. Neo-Walrasian) holds only provided we can rely on notional demands and, hence, only if full-employment conditions are met. The stability of the equilibrium, alias the tendency towards full-employment, is thus illegitimately assumed and nowhere theoretically justified. The problem, nevertheless, is in the argument he provides to support this correct conclusion. This work aims to show the logical flaws in Clower's argument. In a nutshell, Clower criticizes i) the traditional vertical competition assumption but overlooks that it is a separate, but not independent, assumption with respect to the ii) possibility of deriving decreasing and fairly elastic neoclassical factor demand curves. By accepting ii), we show how Clower's correct criticism of i) is ultimately strongly weakened, as much as his Dual-Decision Theory as a critical solution of i).


Keywords: Vertical Competition; Factor demand curves; Effective demand; Income Distribution; Full-employment; Stability.