KEYNES, PIGOU, AND THE GENERAL THEORY GERHARD MICHAEL AMBROSI Contents 1. Introduction 2 2. Keynes and Pigou 3 2.1. Beginnings 3 2.2. Collegiality 4 2.3. Controversy 5 3. The General Theory in a post-Pigovian perspective 8 3.1. Keynes’ “Classical Postulates” 8 3.2. Keynes’ acceptance of “well behaved” production functions 10 3.3. Keynes’ acceptance of “conventional” utility functions 11 3.4. The common problem of macroeconomic aggregation 12 3.5. Keynes’ Pigou-oriented criticism 14 4. The General Theory in an anti-Pigovian perspective 15 4.1. The Z-functions 15 4.2. Effective demand 20 4.3. Walras’ Law versus Say’s Law in the General Theory 26 4.4. Linking up with the Z -curve 31 4.5. In search for the “right” representation 35 4.6. The “frozen land” metaphor 39 5. Concluding remarks 42 Appendix A. The problem of aggregation and Keynes’ wage units 45 A.1. Some analytical issues 45 A.2. Generalisations and simplifications 49 Appendix B. Consumption and time preference 52 B.1. Keynes on time preference and consumption 52 B.2. A two-period model of time preference and consumption 52 B.3. Extending the two-period model 55 B.4. The classical stationary state 59 B.5. “Personal” and “subjective” factors in time preference 62 Appendix C. The microfoundations of effective demand 64 References 73 Abstract. The paper discusses the General Theory under the perspective of Keynes’ methodological similarities and controversies with his Cambridge col- league A.C. Pigou. Date : 2008. Key words and phrases. Keynes, Pigou, General Theory, Macroeconomics, Classics . Revised and extended manuscript of a lecture, held at Cambridge, 22 October 2008. The author gratefully acknowledges interesting discussions with Victoria Chick and Mark Hayes. He confesses to some stubborn resistance against their criticism. 1 Preliminary version – January 25, 2009