The Multiplier Process as Market Exchange ProcessA Contribution to the Micro Foundation of Keynesian MacroeconomicsGang Gong#. Dept. of economics, Graduate Faculty, New School for Social Research, 65 Fifth Ave. New York, NY 10003. 093992newschool.edu. Feb., 1995The 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.The Multiplier Process as Market Exchange ProcessA Contribution to the Micro Foundation of Keynesian MacroeconomicsAbstractTraditional 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, Keyness 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. IntroductionLast 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 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.This paper will present my own contribution to this subject. I believe the micro foundation of Keynesian macroeconomics exists in the context of Keyness multiplier principle. Specifically, Keyness 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 Keyness 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 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,