Post Keynesian Monetary Economics

Rousseas

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781315486154
• Edition: 2
• Topic: Business
• Subtopic: Business General
• Index: Business

During the past five years, crises in the US savings and loan industry, commercial banks, and other financial institutions have borne out the ideas that Rousseas expressed in the first edition. His main theme stresses the role of innovation in the financial sector of the economy and its implications for control of the money supply and credit, as well as the larger issue of macroeconomic policy. He holds a Post-Keynesian view of an elastic and endogenous money supply that is largely founded on the "general liquidity thesis" of the Radcliffe Committee. Indeed, the elasticity of the credit structure is even greater than the Radcliffe Committee originally claimed. Tables and charts are revised through 1990, and the text has been revised accordingly. An expanded preface to the revised edition makes this book very relevant to contemporary problems and policy.

CHAPTER 1
Introduction

The rise of neoclassical Keynesianism

Revolutions have a nasty way of devouring their progenitors and replacing them by a lesser and more arrogant breed who, in the name of the revolution, seek to consolidate its gains only to betray it in the process. The Keynesian revolution, in the realm of ideas, is a case in point, though in this instance the creator of the revolution was not quite the revolutionary others had made him out to be. Keynes himself, according to Joan Robinson, did not grasp the full import of his General Theory, and shortly after its publication in 1936 there were many heated discussions between him and his followers over what the General Theory "really" meant. The fact is that Keynes had never fully broken with his neoclassical upbringing at Cambridge under the tutelage of Alfred Marshall. His neoclassical heritage showed clearly in the opening pages of his General Theory. Though he rejected "Postulate II" of neoclassical theory, namely, that the supply of labor depends positively on the real wage, he did not openly reject "Postulate I," that the demand for labor is inversely related to the level of real wages. This half-way break with neoclassicism was to generate a great deal of mischief.¹ Still, his rejection of the neoclassical view that all unemployment was voluntary was, itself, a major breakthrough. Indeed, the notion of involuntary unemployment was the foundation of his revolution. Nevertheless, by downplaying the caveats attached to the end of each postulate concerning the existence of market power, it was possible for later neoclassical Keynesians to argue that Keynes accepted Postulate I and thus went along with the neoclassical idea that all firms are faced with increasing cost curves, the obvious counterpart of falling marginal productivity curves in a perfectly competitive market economy. This carry-over from neoclassical theory made the bowdlerization of Keynes that much easier.

In the post–World War II period it is this "bastardized" version of Keynesian economics that has come to dominate economic thought. It is far to the right of the more traditional and earlier postwar Keynesian model that allowed for a less-than-full-employment equilibrium to exist, albeit one supposedly capable of being offset by an optimal combination of monetary and fiscal policy. Within the more extreme general equilibrium model of Keynes, distribution became an aspect of pricing in a free market economy operating under the "laws" of supply and demand. It was a return to a pre-Keynesian world of simultaneous equations and instantly adjusting markets. The economy once again is seen to tend naturally towards a full-employment equilibrium with the "laws" of marginal productivity analysis determining the distribution of income between capital and labor, i.e., from each according to his ability, to each according to his contribution. The distribution of the social product is thus legitimated by the impartial "laws" of economics. What is is just; and any attempt to tamper with what is by unions, by government, or by big business serves only to make matters worse.

Convenient, self-serving conclusions followed easily. Any attempt by labor to achieve a larger slice of the pie than the market is prepared to allocate to it is bound to have an adverse effect on profits and thus on the rate of capital accumulation. The growth rate of the economy would fall as a result and the system would no longer be able to depoliticize the distribution of income through increases in the absolute level of well-being that growth makes possible. Capitalism would therefore quickly find itself in the throes of a serious legitimation crisis. In short, the viability of capitalism depends on continuous growth, which, in turn, depends on an unequal distribution of real output between capital and labor and labor's acquiescence in this seemingly unjust distribution.

Keynes’s early views on the distribution of wealth

In 1920, Keynes was in full agreement: "What an extraordinary episode in the economic progress of man that age was which came to an end in August 1914! The greater part of the population, it is true, worked hard and lived at a low standard of comfort, yet were to all appearances, reasonably contented with this lot."² It was in "this economic Eldorado, in this economic Utopia" that Keynes and his contemporaries were brought up. "The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion, which were to play the serpent to this paradise," wrote Keynes, "were little more than the amusements of . . . daily newspaper[s], and appeared to exercise almost no influence at all on the ordinary course of social and economic life."

The "psychology of society" was such as to organize itself socially and economically so as "to secure the maximum accumulation of capital." But while the daily conditions of life continued to improve for the mass of the population, "Society was so framed as to throw a great part of the increased income into the control of the class least likely to consume it." It was "the power of investment" and the economic growth that flows from it, not the "pleasures of immediate consumption," that was the driving force of a capitalism predicated on a maldistribution of wealth. In pre-capitalist society the aristocracy squandered its wealth on mansions, luxury goods, and frivolous baubles, which added nothing to the productive capacity of the economy. Stasis was the rule, not growth. It was only under capitalism and the Puritan ethic that the ruling class, the bourgeoisie, restrained its consumption in order to accumulate real capital. According to this argument, an equitable distribution of wealth would have precluded the "immense accumulations of fixed capital" that so greatly benefited all of mankind in the fifty years preceding the Great War. Indeed, as Keynes argued, "it was precisely the inequality of the distribution of wealth which made possible those vast accumulations of fixed wealth and capital improvements which distinguished that age from all others. Herein lay, in fact, the main justification of the Capitalist System." And this extraordinary achievement was predicated on the capitalist class's abstinence from consumption, which provided the savings out of which the accumulation of capital was financed. It was the capitalists who deserved most of the credit for the enormous increase in social welfare, not labor. Labor's main contribution was to go along, passively, with the unequal distribution of wealth which made it all possible; it was in its own best interest to do so. As Keynes put it:

Thus this remarkable system depended for its growth on a double bluff or deception. On the one hand the classes accepted from ignorance or powerlessness, or were compelled, persuaded or cajoled by custom, convention, authority, and the well-established order of Society into accepting, a situation in which they could call their own very little of the cake that they and Nature and the capitalists were co-operating to produce. And on the other hand the capitalist classes were allowed to call the best part of the cake theirs and were theoretically free to consume it, on the tacit underlying condition that they consumed very little of it in practice. The duty of "saving" became nine-tenths of virtue and the growth of the cake the object of true religion . . . And so the cake increased; but to what end was not clearly contemplated.

A gross inequality in the distribution of wealth and the incomes which flow from its private ownership were, for Keynes, "a vital part of the pre-war order of Society and of progress as we then understood it." But this progress, as Keynes was well aware, depended on labor's passive and compliant willingness to go along. Nevertheless, "It was not natural for a population, of whom so few enjoyed the comforts of life, to accumulate so hugely." And what Keynes most feared was that the laboring class would call the bluff and seek to appropriate for itself a larger part of the social pie at the expense of capitalist profits. In the resulting social upheaval, and as a prelude to a revolutionary restructuring of society, the capitalist class would then lose confidence in the future and "seek to enjoy more fully their liberties of consumption so long as they last, and thus precipitate the hour of their confiscation." With the capitalist class no longer willing to save, accumulation would no longer be possible and the struggle over the distribution of income between capital and labor would become more and more intense leading ultimately to open class warfare and the demise of the capitalist system and all the benefits that derived from its earlier existence.

The distribution of wealth in the General Theory

This is where matters stood until the publication of Keynes's General Theory. Unlike the Economic Consequences of the Peace, the General Theory was concerned with an economy that was decidedly not in its Eldorado phase. Indeed, capitalism was rapidly approaching the very debacle Keynes had all along feared. His main preoccupation now was with developing a theory to explain the mass unemployment of the 1930s and to suggest the proper economic policies for restoring the economy to full employment. He was immersed in the short run, where the stock of capital could be taken as given. In this context the distribution of income was pushed into the background. It was not until the last chapter of the General Theory that Keynes returned briefly to the distribution of income and reversed himself completely from the position he had taken earlier in The Economic Consequences of the Peace.

Chapter 24 was titled "Concluding Notes on the Social Philosophy Towards which the General Theory Might Lead." The outstanding fault of capitalism was not only its "failure to provide for full employment," it was also "its arbitrary and inequitable distribution of wealth and incomes."³ Indeed, the two were linked, although Keynes did not fully spell out the connection, nor did he provide as Michal Kalecki was later to do a full blown theory of the distribution of income based on a theory of oligopoly pricing (where Postulate I would no longer apply).⁴ Keynes now reconsidered the necessity of an unequal distribution of income for an adequate rate of capital accumulation.

First, he claimed that progressive income and death duty taxes had gone far since the end of the nineteenth century to remove the "very great disparities of wealth and income" of an earlier age. But he was not willing to go along with the belief that a continued reliance on such taxes would diminish the growth of capital by weakening the capitalist's motive for individual saving. He went further. He now denied that "a large proportion of [the growth of capital was] dependent on the savings of the rich out of their superfluity." In the classical world, Say's law guaranteed the long-run equilibrium of the economic system at full employment, and any short-run deviation from that blissful state of affairs would be quickly corrected by automatic forces. Under such circumstances, capital accumulation would correspond with a relatively lower level of consumption, and an increase in the rate of capital accumulation would require a further lowering of consumption than would otherwise be the case. In Keynes's General Theory, however, a full-employment economy would be a matter of happenstance. Keynes now argued that with the economy at less than full employment, a low overall propensity to consume would hold back the growth of capital.

The next step in the argument was to relate the propensity to consume to the distribution of income. It is not the case, said Keynes, that high death duties "are responsible for a reduction in the capital wealth of the country." Insofar as the proceeds of high death duties would allow the government to lower its direct taxes on incomes, a move toward greater equality in the distribution of income would "increase the habitual propensity to consume" and thus "serve to increase at the same time the inducement to invest." Or, more generally, fiscal policy could be used to affect the distribution of income as part of its aim to increase the levels of real output and employment. It does not follow, under conditions of less than full employment, that a more equitable distribution of the social product in favor of labor (i.e., a decrease in the proportion going to profits) necessarily slows down the rate of capital accumulation in a self-defeating way. Indeed, the opposite is more likely to be true given capitalism's natural tendency toward deflation.

Although Keynes acknowledged that significant inequalities of income and wealth could be psychologically justified, the "large disparities as exist to-day" could not. Keynes's position on this matter was unequivocal:

Thus our argument leads towards the conclusion that in contemporary conditions the growth of wealth, so far from being dependent on the abstinence of the rich, as is commonly supposed, is more likely to be impeded by it. One of the chief social justifications of great inequality of wealth is, therefore, removed.⁵

This represented a complete turnabout for Keynes, compared to his earlier analysis in The Economic Consequences of the Peace. The distribution of income may be a short-run parameter of the consumption function, but it can easily be turned into a positive policy variable. Since workers generally spend all of what they get, any forced redistribution of income to the laboring classes would serve to increase the overall propensity to consume and hence increase real output and employment by increasing aggregate demand, leading to a possible increase in the level of profits as well. Whether the magnitude of this redistributive effect would be large enough to achieve full employment is open to serious doubt. What is not is that it would in some measure, however limited, contribute to the solution and that an increase in the maldistribution of wealth and income would serve only to aggravate an already bad situation, perhaps seriously.

Perversely and in a nostalgic yearning for a return to earlier pre-Keynesian times, supply-side "theorists" in the first four years of the Reagan administration sought to promote capital accumulation and growth by cutting down on consumption via a redistribution of income away from labor to capital. It was a return, once again, to the pre-World War I habit of linking the rate of growth to the profits of a presumably low-consumption, high-saving capitalist class. It was not difficult to find these new "theorists" scolding degenerate capitalists for living too high on the consumption hog.⁶ Growth, it was argued, is contingent on a fiscal policy that will cut down on consumption by swinging the distribution of income sharply in favor of the traditional capitalist class while putting pressure on unions to comply.

In the meantime, mainstream, neoclassical Keynesians continue to putter either with general equilibrium models which avoid the entire problem by arguing that capitalism has a natural, long-run tendency toward full employment, or with fine-tuning models designed to achieve artificially what cannot be brought about naturally. The end result, in either case, is the same. The curse of unemployment as a long-run tendency either does not exist or it can easily be dealt with on a policy level. The circle has been completed. It is against the counterrevolutionary complacency of neoclassical Keynesian theory and the retrograde theories of supply-side economics that Post Keynesian economics takes its stand.

Post Keynesian surplus economics

The neo-Ricardian school of modern Post Keynesian economics bases itself on Piero Sraffa's 1960 monograph, The Production of Commodities by Means of Commodities.⁷ Picking up on Sraffa's total rejection of neoclassical marginal productivity theory, the neo-Ricardians have developed an analytical core that can most accurately be described as "Surplus Economics."

Any economy, if it is to be viable, must at the minimum be able to reproduce itself, i.e., it must be able to meet the subsistence needs of its people and to provide for the replacement of the preexist...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Dedication
• Contents
• Preface to the First Edition
• Preface to the Second Edition
• Chapter 1: Introduction
• Chapter 2: The Peculiarity of Money
• Chapter 3: The Demand for Money and the Rate of Interest
• Chapter 4: The Endogenous Money Supply
• Chapter 5: The Weintraub-Kaldor Models of Endogeneity
• Chapter 6: The Policy Implications of Post Keynesian Monetary Theory
• Bibliography
• Index