Post-Keynesian Economics

Kenneth K. Kurihara

• Publisher: Taylor & Francis
• Year: 2013
• eBook ISBN: 9781136517921
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This volume represents the extension of Keynes' General Theory by a group of eminent economists. Each essay takes Keynes' work as a frame of reference for criticism, explorations and insights, whilst adding to the superstructure on the foundation of the General Theory. The essays also provide the necessary sense of perspective with a view to examining the Keynesian contribution to economic thought and also the limitations of Keynesian economics.The international contributors include: Dudley Dillard, Martin Bronfenbrenner, Mabel F. Timlin, William S. Vickrey, Don Patinkin, Howard R. Bowen, Gerald M. Meier, R.C.O. Matthews, Shinichi Ichimura, Anatol Murad, Lawrence R. Klein, Shigeto Tsuru, Paul P. Streeten, Lorie Tarshis and Franco Modigliani.

PART ONE

MONETARY THEORY AND POLICY

[CHAPTER ONE]

The Theory of a Monetary Economy

Dudley Dillard

“… money is the father of private property.”—Max Weber, General Economic History.

MONEY is the central concept in the economics of John Maynard Keynes. Viewing his work as a whole, this proposition seems hardly debatable. With respect to his general theory of employment, it may be less obvious, although the title of his book, The General Theory of Employment, Interest and Money, is primafacie evidence that money, along with interest, is the key to his explanation of employment. The present essay examines the hypothesis that the properties of money constitute the ultimate theoretical basis in Keynes’ analysis for the tendency of the economic system to reach equilibrium at less than full employment. This idea is discussed in terms of the origin, evolution, exposition, evaluation and possible further development of what Keynes calls The Theory of a Monetary Economy, or alternately, A Monetary Theory of Production. Although the modern theory of income and employment was stimulated mainly by Keynes, it has departed from his primary emphasis on money. Consequently the present essay has meaning in relation to a clear distinction between Keynes’ own theory and what is often referred to as Keynesian economics, that is, the modern theory of income and employment which uses Keynes’ tools, in refined form, but departs from his fundamental thought, as here interpreted.

Although this essay is mainly concerned with an interpretation of Keynes’ fundamental thought, as distinguished from the apparatus in terms of which this thought is expressed, the fact that he was a person of exceptional ability and perspicacious insight suggests the fruitfulness of pursuing further the original direction of his thought. In the vast literature on Keynes almost no recognition has been given to his Theory of a Monetary Economy, and the concept has not been developed anywhere. Keynes’ most important statement of the task to be performed by such a theory appears to be largely unknown to the contributors to Keynesian literature in English, perhaps because the essay in which this was elaborated appeared in a German volume in 1933.¹

From a Monetary Theory of Prices to a Monetary Theory of Output

During the early part of his career Keynes was preoccupied with technical monetary theory and policy. His economic writings of the 1920’s are concerned mainly with monetary standards, domestic price levels, and foreign exchange rates. His criticisms of the gold standard stemmed from a conviction that what was gained from stability of foreign exchange rates was more than outweighed by the instability of domestic price levels under such a system. He argues in the Tract on Monetary Reform for a managed currency and in the Economic Consequences of Sterling Parity he inveighs against a return to the gold standard at prewar parity.

The Treatise on Money (1930) marks a turning point from the earlier monetary theory of prices to the later monetary theory of output. This transition is described by Keynes as follows: “When I began to write my Treatise on Money I was still moving along the traditional lines of regarding the influence of money as something so to speak separate from the general theory of supply and demand. When I finished it, I had made some progress towards pushing monetary theory back to becoming a theory of output as a whole.”² The so-called fundamental equations belong to the earlier, or price level theory. These equations are alternative forms of expressing the traditional quantity equation for analyzing changes in price levels. However, the Treatise also analyzes fluctuations in output as responses to profit disequilibrium and in this respect it makes a substantial contribution to a monetary explanation of the trade cycle. Keynes describes the weakness of the Treatise as a failure “to deal thoroughly with the effects of changes in the level of output.” ³

While the Treatise remained closer to price theory than to output theory, the General Theory of Employment (1936) completes the transition from monetary price analysis to monetary income analysis. Technical monetary theory falls into the background and is replaced by a monetary theory of output as a whole. It is not quite accurate to say that the General Theory integrates monetary theory into general economic analysis; more appropriately general theory is integrated into monetary theory (of a broad type). Not only is the theory of prices in the General Theory incidental to the theory of employment, but it has an entirely new look. Prices are determined mainly by labor costs associated with an adumbrated labor theory of value (sometimes confused with sticky or inflexible wages). The level of prices and the physical volume of output determine the quantity of money needed for active circulation, and the rest of the money supply is held in idle balances, where it operates on the rate of interest, which in turn is an important determinant of the volume of investment and employment.

The Task of a Monetary Theory of Production

“Monetary economy,” which always remained a sort of will-o’-the-wisp in Keynes’ writings, becomes an explicit notion only after the onset of the Great Depression. As a member of the Macmillan Committee to investigate unemployment in Great Britain, Keynes was very critical of Professor Pigou, who appeared as a witness, for analyzing unemployment and related questions on a “real” level and only subsequently introducing minor modifications occasioned by shifting to a money level of analysis. The unreality of the “real” approach is the burden of Keynes’ questions and exposition—for he could not resist expounding his own ideas even when interrogating witnesses.

In his essay on Malthus (1933), Keynes praises Malthus for analyzing problems in terms of “the monetary economy in which we happen to live,” and criticizes Ricardo for using “the abstraction of a neutral money economy.” ⁴ From his monetary level of analysis Malthus was able to work out an explanation of fluctuations in output in terms of a theory of effectual demand, which Keynes felt that Ricardo was never able to comprehend. However, Malthus was unable to carry his analysis far enough to provide a satisfactory theory because “Malthus’s great defect lay in his overlooking entirely the part played by the rate of interest.” ⁵ Keynes’ critique of Malthus may be summed up by saying that the strength of Malthus’ position lay in projecting his analysis on a monetary level and his weakness lay in the lack of a theory of interest. This evaluation anticipates Keynes’ own theory of employment in terms of money and interest.

Keynes’ clearest statement of the Theory of a Monetary Economy is given in his essay in the Festschrift for Arthur Spiethoff, already referred to above. The Festschrift, which appeared in 1933 on the occasion of Spiethoff’s sixtieth birthday, is devoted to discussions and explanations of crises and business fluctuations. Keynes opens his contribution by stating: “In my opinion the main reason why the Problem of Crises is unsolved, or at any rate why this theory is so unsatisfactory, is to be found in the lack of what might be termed a Monetary Theory of Production.” He develops this theme in terms of a distinction between Monetary Economics and Real-Exchange Economics. A Monetary Economy is defined as one in which “Money plays a part of its own and affects motives and decisions and is, in short, one of the operative factors in the situation, so that the course of events cannot be predicted, either in the long period or in the short, without a knowledge of the behaviour of money between the first state and the last.” Money has a role sui generis in a Monetary Economy; it is not neutral; it is not just a device for facilitating transactions in real things.

Real-Exchange Economics, which is similar to what Keynes later called “classical economics,” assumes away the whole problem of booms and depressions. The assumptions of Real-Exchange Economics are “precisely the same as those which will insure that crises do not occur.” In Real-Exchange Economics money is neutral in the sense that it does not affect the essential nature of transactions—it is not allowed to enter into and help to determine motives and decisions which influence the volume of output. Money is important only in the sense that it is more efficient than barter.

Two other points in the Spiethoff essay are of special interest in connection with the Theory of a Monetary Economy which Keynes subsequently developed in the General Theory. The first concerns the relation of money to interest and of interest to output. The link between money and output via the rate of interest is quite explicit in the 1933 article. The difference between Real-Exchange Economics and Monetary Economics is “most marked and perhaps most important when we come to the discussion of the rate of interest and to the relation between the volume of output and the amount of expenditure.” No mention is made of the savings and investment nexus which has been featured in most interpretations of Keynes’ general theory of employment. The second point concerns the relation of Monetary Economics to policy. Although a Monetary Theory of Production is essential for explaining booms and depressions, Keynes does not view the business cycle as a purely monetary phenomenon nor does he espouse a purely monetary remedy. Finally in concluding the essay he poses the task later performed in the General Theory: “Accordingly I believe that the next task is to work out in some detail a Monetary Theory of Production, to supplement the Real-Exchange Theories. … At any rate that is the task on which I am now occupying myself, in some confidence that I am not wasting my time.”

In the three years between the Spiethoff essay and publication of the General Theory, Keynes made occasional published references to his work, but there is no other statement in which the plan of the work is so clearly sketched as in the Festschrift contribution. However, by way of indicating the lines along which his Monetary Theory of Production was crystallizing, mention should be made of the New Republic article in 1935 entitled “A Self-Adjusting Economic System?” in which Keynes states he has found the answer to the paradox of poverty in the midst of potential plenty. The real issue between Keynes and the orthodox theory is not so much whether unemployment or full employment actually exists at any time, but whether there are automatic processes which always tend toward full employment. In this 1935 article, as later, Keynes rests his case for the lack of automaticity in the economic system on the monetary nature of the rate of interest. The “fatal flaw,” as he calls it, of the orthodox theory has been its failure to provide a realistic theory of interest. Keynes’ earlier concern with money and his new preoccupation with output ...

Table of contents

• Cover
• Title Page
• Copyright Page
• Orginal Copyright Page
• Dedicaiton
• Preface
• Notes on the Authors
• Contents
• Part I. Monetary Theory and Policy
• Part II. Economic Fluctuations and Growth
• Part III. Aggregative Economics and Testing
• Index