Post-Keynesian Theory Revisited

Money, Uncertainty and Employment

Matteo Iannizzotto

• Publisher: Agenda Publishing
• Year: 2020
• ISBN:
  9781788213196
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

With its emphasis on the centrality of fundamental uncertainty and the resulting desire for liquid assets, post-Keynesian economics offers important insights into understanding how modern economies work, placing money and banking at their heart, exactly as any realistic account would do.

In this advanced introduction, Matteo Iannizzotto revisits the contributions of post-Keynesian ideas to such central issues as the inescapable condition of uncertainty in economic decisions, the theory of liquidity preference, effective demand, endogenous money supply, and the financial instability hypothesis. In each case, the author traces the foundations in the work of Keynes and presents the strength of post-Keynesian ideas of later authors like Kaldor, Minsky and Weintraub in comparison with the corresponding models of mainstream economics and shows their greater explanatory power particularly in the light of the recent global financial crisis.

1

Introduction and history

The post-Keynesian school is a heterodox school of economics the scope and objectives of which can be summarized as Thomas Palley (1996: 9) does when he claims that “[t]‌he Post Keynesian project represents both a recovery and an extension of the economic paradigm developed by Keynes” (emphasis added). Both terms, “recovery” and “extension”, require some explanation and qualification.

Recovery from the neoclassical synthesis

In the first instance, the message of the General Theory of Employment, Interest and Money (Keynes 1936) has to be “recovered” from the limiting interpretation that it was given pretty much as soon as it was published, when crucial choices were made the overall effect of which could arguably be described as the domestication and eventual dismissal of anything truly revolutionary. This is the general body of literature that has come to be known as the neoclassical synthesis and that constituted, and to an extent still does, the bulk of taught undergraduate macroeconomics. In summary, it broadly comprises the IS–LM model developed independently by several, most notably John Hicks in Britain and Alvin Hansen in the United States, combined with a supply side represented by the Phillips curve. Its most influential statement arguably comes in Paul Samuelson’s textbook Economics (1948), which has had many subsequent editions since its first publication in 1948. It could be described as the most widely read and adopted textbook in the entire discipline of economics, and therefore its influence is enormous. What Samuelson wrote was an interpretation of Keynes that was not at odds with the rest of economic theory developed until then. This is why it can be described as a synthesis, in that it provides a way of reconciling the novel statement of why an economy would settle at an under-employment equilibrium in the short run only. The longer run was determined exactly as classical (and neoclassical) theory had done, however, so that the Keynesian contribution had not been one of a paradigm shift, or of a scientific revolution, but, instead, one of qualifying the overall statements, which remained classical in their method and outlook. So, in the end, the General Theory was not actually general at all, in this view. It was very much a special case of the truly general theory (the classical one), justified by the imperfections and frictions of the shorter time frame of the analysis and the inflexibility of some variables, such as prices and wages, within that time frame.¹

This entire literature, which claimed the status of mainstream pretty much all the way to the advent of monetarism in the late 1960s, has come to be described in the colourful language of Joan Robinson (Robinson 1962: 690) as “bastard Keynesianism”. This implicitly defines one of the historical tasks of the post-Keynesian school, namely arguing how and why the neoclassical synthesis was an unfair and misleading representation of what Keynes had written, and how what had been left out was relevant and important in understanding the workings of a modern capitalist economy. A typical such statement is given by Hyman Minsky when he says that the neoclassical synthesis “had neglected or lost … a major part of the substance of the General Theory” (Minsky 1975: viii)

It should be understood that the task inevitably has two sides: a destructive one, in demonstrating why mainstream theory is wrong; and a constructive one, in replacing the refuted elements with new ones based on what Keynes actually wrote, rather than on the translation of it that Samuelson (and others) had provided.

Recovery from Keynes himself

It may seem absurd and unnecessary, but there is undoubtedly a case to be made for Keynes’ theory to be “recovered” from his own writing. The issue is that Keynes, famously, changed his mind over the years. There is – as Rod O’Donnell (1989) has claimed – a general continuity and underlying consistency of thought, but it is undeniable that on several specific theoretical points there are irreconcilable shifts, though this is understandable over such a long and prolific publishing career.² So, a judicious choice has to be made especially when, for instance, connecting the earlier monetary writing of the Treatise on Money (Keynes 1930) to the later statements of the General Theory.

Second, Keynes’ theorizing was a means to an end. Even when he claimed, in the General Theory or in journal articles, purely to be debating theoretical points with his fellow economists, there is no question that the underlying emphasis was for him one of policy. Disputes on theory were necessary in order to make the argument for policy action more compelling and convincing. And the argument on policy was indisputably driven by what may be called an ethical imperative. It was his perceived moral duty to act in matters of economic policy (be it reparations after the First World War, the resumption of the gold standard or the depression of the 1930s), for the relief of the economic suffering of his fellow men. This ethical imperative is an obvious subtext, and it is the justification for the second volume of his biography by Robert Skidelsky being aptly entitled The Economist as Saviour (Skidelsky 1992). The implication of this, however, is that the historically determined policy context sometimes obscures and blurs the truly revolutionary statements of economic theory. In a way, the “pure” theory in Keynes – “pure” in the sense that it is purged of its immediate policy relevance – has to be extracted and restated so as to be understood, and potentially criticized, regardless of the hic et nunc context that brought it to life in the first place.

The third reason why the theory has to be “recovered” is Keynes’ own rhetoric. He is justly celebrated as an extremely elegant and persuasive writer, but his rhetorical choices quite often end up having the effect of making persuading fellow economists more difficult. The obvious example is the habit, in which he often indulged, of describing diagrams without actually drawing them. There is an important point here, namely that Keynes’ rhetoric is an implicit rejection of the formalistic approach for its own sake (see O’Donnell 1997). Thus, there is no case to be made for “translating” the entirety of the General Theory into equations and diagrams, because such an act would destroy much of the most fruitful analysis, which exists, necessarily, in purely verbal form. Nonetheless, there are many diagrams that really ought to have been drawn, and properly discussed, before moving on to refining and qualifying them with the inevitable limitations. A case can therefore be made for filling out these analytical gaps, not in order for them to take the place of a direct reading of the original, but for them to act in support of it.³

In summary, what can be said is that Keynes should be read in the original, as it is so rarely done, but it is nevertheless undeniable that the original needs to be interpreted. Not surprisingly, the literature on interpreting Keynes is now vast. As an example, John King (2002: 184) claims to have, in his own post-Keynesian bibliography, as many as 248 entries on the interpretation of Keynes.

Extensions

There are also several themes and economic questions on which Keynes is, essentially, silent, or uninterested in elaborating. The additional (constructive) task of what has come to be known as the post-Keynesian school is, therefore, to address precisely those additional questions that did not feature, or featured only partially, in Keynes’ agenda – for any number of reasons.

Examples are needed here to make the point clearer, but it will inevitably be the case that a list of these extensions will appear very disjointed and only loosely connected with the central themes of Keynes’ writings.

Money supply and banks

This is one of the areas in which the post-Keynesian school claims to have developed some of its most distinctive theoretical statements. The point is that, up to the 1970s, it was customary to imagine, in economic models, that the supply of money intended as currency or monetary base only was fully under the control of the issuing central bank; in other words, the money supply was deemed to be exogenous.⁴ Post-Keynesians authors Nicholas Kaldor (1970) and Basil Moore (1988), in particular, have rejected this view as at best anachronistic, and reconnected to earlier Keynesian writings in order to develop a fully fledged theory of a money supply that is, instead, determined endogenously, by the interaction of firms, commercial banks and the central bank. In so doing, a crucial element of the theory was developed by Victoria Chick (1986) in establishing historically determined stages of banking development.

Inflation

The General Theory seems to neglect the question of how inflation might develop.⁵ Again, it was not part of the immediately relevant question that Keynes had in mind. But, obviously, inflation is a serious economic question, and because the General Theory is incompatible with the quantity theory of money in its various forms, the question inevitably arises of how inflation can be explained and constrained. Robinson is probably the earliest contributor, in her review of Constantino Bresciani Turroni’s book on the German hyperinflation episode (Robinson 1938). But the issue of inflation became important again during the Second World War and the 1960s, and more so in the 1970s, when the contributions of Sidney Weintraub became paramount. Because these years also saw the rise of the monetarist challenge to the neoclassical synthesis, the post-Keynesian theory of inflation also became an essential element of the critique of the changing shape of the dominant paradigm.

Economic growth

Ever since Keynes famously said that “in the long run we are all dead” (Keynes 1923: 80) it has been easy to dismiss his theory – and, by extension, post-Keynesian theory – as applicable only to a shorter time span, and unable to address the questions that inevitably arise when the time horizon is substantially lengthened.⁶ Such a dismissal is easy, but it is also unfair, because post-Keynesian authors have attempted to project many propositions onto the perspective of economic growth. The crucial early contributors to this literature are Roy Harrod, Joan Robinson and Nicholas Kaldor. This literature is obviously important, and is vital for any claim that the school may lay on being a genuine alternative to the mainstream, but, arguably, the connections with the core propositions of the school are more tenuous and need some elaboration in order to be made visible.

Imperfect competition and microeconomics

The post-Keynesian school is primarily a macroeconomic one. Indeed, some of its most important statements hinge on the claim that the whole is more than the sum of its parts, and it is therefore necessary to have a theory of the behaviour of the whole in its own right, as that cannot be gleaned merely by aggregating up what the parts decide to do independently of each other, which – in truth – can never be the case. But there is now a substantial body of literature that explores the implications of crucial post-Keynesian propositions for the decisions of the individual household and individual firm. Some of these results are very important, because they provide a microeconomic justification or perspective for what are primarily macroeconomic statements.

In this same vein, some have argued that imperfect competition is an implicit assumption of the General Theory.⁷ That may in fact not be accurate, but it is nonetheless true that at least some statements of the 1936 book can be made more plausible or comprehensible by accepting the fact that the perfect competition case assumed by economics is the exception and not the norm. The pionee...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Contents
• Preface
• Acknowledgements
• Figures
• 1 Introduction and history
• 2 Flavours of uncertainty
• 3 Conventions and the thirst for liquidity
• 4 Effective demand
• 5 Time and money
• 6 Banks
• 7 Destabilizing stability
• 8 Where to now?
• References
• Index