This monograph presents a comprehensive choice-theoretic analysis of the determination of the level of employment and the rate of inflation. This analysis has two principal and closely related objectives: first, to identify the interrelations between the behavior of individual economic units and the realization of macro-economic phenomena; and second, to explain the critical aspects of individual behavior in terms of the motivation of the individuals involved and the constraints which they face. In brief, this monograph attempts to rework the theory of macro economic relations through a reexamination of their micro-economic foundations.

The point of departure for the study, in chapter 1, is the basic model of Walrasian general equilibrium in an intertemporal context. This model involves three forms of economic decision-making units – firms, households, and government – and four economic goods – labor services, consumable commodities, public services, and fiat money. Within this framework, this chapter analyzes profit maximizing behavior of firms, life-cycle utility maximizing behavior of households, and the results of the implied harmonization of firm, household, and government behavior for the determination of the wage rate, price level, employment, and output. This idealized representation provides a useful basis for identifying the implications of relaxing various crucial abstractions. The Walrasian model, however, does not provide an adequate basis for theorizing about employment and inflation.

An unfortunate aspect of the evolution of conventional post-Keynesian macro-economics has been a chronic attempt to coax a theory of employment and inflation out of a framework of general market clearing.