A Classical Theory of Markets and Effectual Demand

Abstract

The paper argues that the Sraffian interpretation of Classical economics overlooks the individual dimension and the role of willingness to pay in Smith's definition of effectual demand. Generalizing a recent Smithian model of individual choice in precapitalistic economies, a model of individual choice in a Sraffian framework is proposed that allows a precise formulation of individual and aggregate effectual demand coherent with Smith's view. The model allows also a short-period analysis of markets and it provides sufficient conditions for the Classical adjustment process to converge towards the long-period configuration, thus mitigating Steedman's criticism to the Classical view of gravitation.