We turn now to the Keynesian classical situation, not only because this is where our investigation naturally begins, but also because we shall discover within it a clue to the successive unstable equilibria whose unfolding we seek to explain. As with previous classical moments, it focuses our attention on the precursors from whose work the situation emerges – in this case, the marginalist approach that constituted the core concept of economics from the 1870s until the explosive entrance of The General Theory of Employment, Interest and Money in 1936.

Immediately we discover a problem that throws light on the difficulties eventually to trouble the successor to marginalism. Marginalism per se is a theory of decision making, in which costs and benefits are weighed precisely, and no certain net benefit is ever forgone. But in practice marginalism has become an amalgam of two approaches to economic theory: approaches that conceal beneath their shared antipathy to Millian economics sharply differing construals of what a “marginalist” vision means. One approach, central to the work of Leon Walras, has stressed the interconnectedness of markets, leading to the vision of general equilibrium as the core concept of economic analysis itself. The other, central to the Marshallian framework, has concerned itself with the process of price formation discoverable in all competitive markets, despite many surface dissimilarities. This process was easily shown to be identical across markets, making the core concept of Marshallian marginalism the “scissors” mechanism of supply and demand.

From these two foci eventually emerged two very different visions of the new classical situation.