FACTOR DEMAND UNDER CONDITIONS OF PRODUCT DEMAND and SUPPLY UNCERTAINTY

The paper develops a theory of factor demand under uncertainty, that encompasses neo‐classical factor demand and Keynesian effective factor demand as special cases. The model allows factor demand and output to move positively with product demand, even with a constant product price. This, in turn, permits real wages to move pro‐cyclically in response to product demand shocks. In addition the model provides a new perspective on the “adding‐up” problem (which posits that total factor payments exceed output if increasing returns to scale exist), and generates positive uncertainty profits that are similar in spirit to those of Frank Knight.