Journal of the History of Economic Thought, Book
Review
Volume 36, Issue 4, December 2014
Keynes’s General Theory:
Seventy-Five Years Later, ed. by Thomas Cate,
Edward Elgar, 2012, x+348 pp.
Toshiaki Hirai
(Sophia University, Tokyo & President of Keynes Society Japan)
Seventy-Five years have passed since the publication
of General Theory (1936. Hereafter GT). Over this period, evaluation of the
work has gone through a dramatic series of ups and downs, and for every GT anniversary, the 10th, 20th
…, books have appeared evaluating it from various points of view. The book
reviewed here marks the 75th anniversary.
Two points might be worth mentioning in advance. To
begin with, almost all the papers see GT
as containing essentials for understanding the present economy or
reconstructing macroeconomics, so the book is “Pro-Keynesian”. Secondly, the
book presents diverse points of view on GT.
The book is composed of 15 chapters. We will examine them, identifying
four types on the basis of common features, adding very brief comments due to
lack of space.
Type 1: Chapters Focused on GT
Focus on Institutions ― In Chapter 1,
Asensio maintains that GT provides a
wealth of concepts on institutions and equilibrium. Institutions and
conventional behaviors endow an economic system with structural stabilizers
such as law, regulations, monetary contracts, which contribute to its
convergence toward equilibrium at any given time, while excluding intrinsic
indeterminateness. This anchoring works through attraction of the market
interest rate towards a conventionally expected interest rate, the resistance
of money wages to a fall, and so forth. He attributes the chapter to
Post-Keynesianism (it reminds me of GT,
Ch.18-3 in which four stabilizers for underemployment equilibrium are
mentioned) .
Maverick Stance ― In Chapters 2 and
12 each author puts forward his own interpretation, keeping his distance from
both New Keynesians and Post-Keynesians.
In Chapter 2, Hayes states that Keynes’s innovative achievements have
been practically neglected in both theory and policy. The Neo-Classical
Synthesis and New Keynesianism as its modern version wrongly took Keynes’s
theory as “economics of rigidity”, while Post-Keynesians failed to grasp Keynes’s
achievements, rejecting the Marshallian framework and deviating from the
mainstream. Keynes’s principle of effective demand is a theory of employment as
a restatement of Marshallian equilibrium theory, which takes both time and
money into consideration. He also stresses the significance of liquidity for GT.
I wonder just to what degree this interpretation of GT is unique as compared with the one, for example, by the Neo-Classical
Synthesis.
In Chapter
12, Hamouda starts with putting forward his interpretation, criticizing Post
Keynesians. Firstly, he insists that A
Treatise on Money (1930. Hereafter TM)
should not be neglected, for TM and GT should be regarded as one. He
maintains that the neglect of TM in
economics has lead economists to misunderstand GT. In his argument, the Keynesian Revolution occurred in TM rather than GT. Secondly, his analysis of GT
is based essentially on the aggregate demand and supply theory in Chapter 3 of GT, placing the emphasis on the marginal
efficiency of capital as well.
I think that
much of the importance of TM lies in enabling
to trace how Keynes changed his theory from it to GT and see the manuscript written at the end of 1932 as a turning
point from TM to GT. Incidentally, this chapter is the only one to deal with TM in the book.
Focus on Uncertainty ― In Chapter 3 (the
only chapter focused on uncertainty), Muchlinski argues that Keynes’s
philosophical stance is shared with Russell and Wittgenstein as a philosopher of
ordinary language (rather than logical atomism). Based on this, he maintains
that GT develops the themes of “vagueness”
and “state of confidence” under uncertainty in sharp contrast with orthodox
economic theory, which is based on certainty and rigid deduction.
Two questions emerge. One concerns the fact that GT’s main theoretical achievement lies in a principle of effective
demand, which shows how employment is determined. This aspect is ignored here.
The other concerns the view that A Treatise
on Probability runs through GT in
full scale. Didn’t Keynes change his philosophical view, accepting Ramsey’s
criticism?
Focus on Nested Structure ― In Chapter 8, Ramrattan=Szenberg argues that GT incorporates Classical views in a “nested” way, thus seeing
complementarity between GT and the
Classical. They maintain that Keynes’s idea evolved in a nested way,
incorporating marginal analysis as well as macro analysis. They also admire
Clower=Leijonhufvud’s non-Walrasian approach, according to them, as a precursor
constructing a nested vision of Keynes.
One cannot help wondering if they mean by the
word “nested” that GT is compatible
with both Classicals and Non-Walrasians.
Type 2: Chapters on
Essential Rather Than GT.
Reinforced with Sraffa’s Idea and Kaldor’s Theory ― In Chapter 10, Camara-Neto=Vernengo maintain that in arguing long-run
under-employment equilibrium Keynes’s theory needs to be reinforced on two
points. One is Sraffa’s criticism of the limitations of neoclassical capital
theory. The other is rectification of Keynes’s principle of effective demand,
which was spoiled by neoclassical marginalism, through adoption of a (Sraffian)
“supermultiplier” model together with Kaldor’s “Verdoon Law”.
Monetary Stance – In Chapter 13 Rochon takes the Horizontalist approach. In this regard,
he evaluates not so much GT, which
assumes the exogeneity of money supply, as Keynes’s Economic Journal papers (1937 and 1939). Even there, the author
argues, Keynes did not deal with the problem of endogeneity between banks and
central bank, although the direction in which Keynes moved is the same as the Horizontalists
took later.
I wonder if
he judges GT a failure because of the
liquidity preference theory.
In Chapter
15 Wray mentions two alternative approaches to money – market efficiency
enhancement approach, and state creation approach (Chartalism) ― and claims that his stance
(neo-Chartalism), which regards money as public monopoly, should update Keynes’s
view on chartal money. I am inclined to agree with Wray’s view in regard to “the
difference between the actions of central banks and treasuries” together with “many
potential problems” (p.337), which is a central problem with which the present
world economy is faced.
Type 3: Chapters on
Development of Postwar Macroeconomics
Positive Evaluation ― In Chapter 7,
Lazzetti=Ohanian stress the influences initiated by GT. The framework it provided was taken up by economists and
policymakers, who collected the time-series data of macro economy and developed
econometrics. On these points, the impact of GT was no less important than that of Kydland=Prescott. They state
that the FRB forecasting models are similar to Keynesian models in the 1960s,
including the Philips curve and management of aggregate demand. The Keynesian
vision provides the framework for policy implementation in the context of a
central bank’s behavior aiming at achieving a low unemployment rate and
stability of the price level. Thus a central bank (in this condition) is
unlikely to give way to pessimism. The authors are sure that GT will continue to find strong support
among policy makers.
It is my
opinion that without this kind of development the “Keynesian Revolution” would
not have taken place. This should be evaluated in a direct fashion.
Negative Evaluation (The Case for New Classicals) ― In Chapter 4, describing the development of macroeconomics through to the
present day, DeVroey concludes that macroeconomics from now on should be
developed along the direction which New Classicals initiated, declining the
return to Keynes - the only chapter against Keynesianism.
The first striking point is that DeVroey categorizes the IS-LM approach
and New Keynesian model mark II as a Marshallian approach, while classifying the
New Keynesian models of the coordination failures type and New Classical models
as a Walrasian approach. To my understanding, the IS-LM approach and its
extended version incorporating many equations belong to a Walrasian approach
(see Patinkin), while the New Classical models are not Walrasian, for they
assume a representative agent. Secondly, I see no future for macroeconomics
along the lines of the New Classicals, who use utility maximization of a
representative agent over an infinite period, rational expectations and the calibration
method. These assumptions are of no use in analyzing the real world which has
experienced unstable financial globalization over the last two decades.
Long-run Post Keynesian Stance ― In Chapter 6, Docherty states that Monetarism turned out to be
unsuccessful, and that the vindication of Keynes was rapidly provided by the New
Keynesians and the Post Keynesians. That said, he points out two differences
between the two: (i) the difference in causality structure; (ii) the long-run
features in the Post Keynesians are similar to the short-run ones in the New
Keynesians. He emphasizes that economics should move in the direction of the
Post-Keynesian approach, which analyzes macroeconomic policy on short run and
long run issues.
I cannot
help wondering why New Classical macroeconomics, which has triumphed over
Keynesianism in these two decades, is not referred to at all.
Response to GT
from Soviet and Western Marxism ― In Chapter 11, Dostaler
discusses the relation between Keynes and Marx – destruction of the foundation
of Ricardian economics on which Marxian economics is built, the relation in
terms of “Monetary Theory of Production”, the familiarity in terms of “love of
money” - , followed by Keynes’s view on the Soviet Union, and the impact of GT on Western Marxism as well as in the
Soviet bloc.
What attracts me most here – the only chapter argued in the context of
political regime change – is the great up-and-down swing in evaluation of GT/Keynes in the Soviet bloc as well as
among Western Marxists. This is a theme that merits more extensive investigation
– also in relation to the Japanese Marxists.
Comparison between Keynes and Friedman ― In Chapter 9, Backhouse = Bateman compares Keynes and Friedman, treating
the two on equal terms, and mentions similarities and differences in various
aspects, to the extent that one might have an impression of a neutral stance.
What is
striking is that they maintain the methodological similarities, and argue that
Keynes just “moved away” from, without rejecting, the quantity theory of money.
Type 4:
Others
New Theories in the Previous Period ― In Chapter 5, Dimand points out that many theories thought to have been
currently invented were, in fact, developed some time before, but failed to
find due attention, even among scholars simply (e.g. Minsky’s theory can be
found in Fisher’s theory of debt deflation). Among other examples, he considers
Allais’ achievements, only one of which was credited for the Nobel Prize.
One problem
here is how we should explain and evaluate the revolutionary movement in
economics, taking into account these unnoticed achievements.
Emphasis on Interest and Profit - In Chapter14, Smithin maintains that the profit
seeking activities of firms are essential for understanding capitalism. However,
they are neglected in Neoclassical theory, which cannot therefore constitute an
adequate theory of capitalism. He also emphasizes the difference between profit
and interest, rejecting the “equalization of the rate of profit”.
I would like to know how this relates to GT.
The book thus offers a great
diversity of viewpoints on GT as well
as Keynesian economics in general, which might well reflect the present
situation in which the “Pro-Keynes” Camp finds itself in, but on the whole it
is to be welcomed.
Finally, there are a few points I would need
to make: (i) As far as interpretation of GT
is concerned, it should be pursued essentially on primary material as well as
Keynes’s publications, and that in their entirety; (ii) The most important task
for all Pro-Keynesians is to place GT
and Keynes in the context of the present world economy over these two decades.
References
Bateman, B., Hirai, T. and Marcuzzo, M.C. eds., The Return to Keynes, The Belknap Press
of Harvard University Press, 2010.
Hirai, T., Keynes’s
Theoretical Development – From the Tract
to the General Theory, Routledge,
2008.
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