Money, Macroeconomics and Keynes

Philip Arestis, Meghnad Desai, Sheila Dow

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781134573059
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This volume, along with its companion volume, Methodology, Microeconomics and Keynes is published in honour of Victoria Chick, inspired by her own contributions to knowledge in all of these areas and their interconnections. It represents both consolidation and the breaking of new ground in Keynesian monetary theory and macroeconomics by leading figures in these fields.

1

INTRODUCTION: ON CHICK'S LIFE AS AN ACADEMIC

Philip Arestis, Meghnad Desai and Sheila Dow

 

Keynes talked of The General Theory of Employment, Interest and Money as part of his ‘long struggle to escape from habitual modes of thought and expression’. But these modes of thought and expression continued to prevail, requiring subsequent like-minded economists to engage in their own struggle to escape. Victoria Chick is one of the leading economists to engage in such a struggle, and to assist others in the process.

We have prepared this volume and its companion volume (Methodology, Microeconomics and Keynes) bearing in mind the many economists, dispersed all over the world, who have assiduously sought out Victoria Chick's writings over the years to provide illumination and inspiration, who have benefited from her teaching, guidance and friendship, and who accordingly owe her a great debt of gratitude. It is therefore with great pleasure that we have invited a subset of her enormous international audience to contribute to the two volumes in her honour on the occasion of her retirement from University College London (UCL).

Victoria Chick was born in 1936, in Berkeley, California. She studied at the University of California at Berkeley where she took her Bachelor's and Master's degrees. Berkeley's Department of Economics was particularly strong and eclectic at that time. Thus, very high quality and tremendous concentration of calibre were two characteristics of the environment in which Victoria Chick developed as an economist. The important ingredient of that environment was the disparity of views that were flowing in the corridors and seminar rooms of the Department. The independent character and personality of Victoria Chick were stimulated by the diversity of theoretical views there, but she did not take sides on ideology or methodology. That came later. However, a continuity in her relationship with Berkeley was maintained through her friendship with Hyman Minsky.

At Berkeley she specialised in international trade theory and wrote a thesis on Canada's 1950s experience with flexible exchange rates. Then, in 1960 she moved to the London School of Economics (LSE) to continue postgraduate studies, where the impetus of Berkeley was maintained, indeed enhanced. That was the heyday of ‘Methodology, Measurement and Testing’ at the LSE. Just as at Berkeley previously, both staff and students at the LSE were of enormously high caliber; Victoria Chick took full advantage of these opportunities. The Staff and Graduate Student Seminar chaired by Lionel Robbins, Wednesday evenings in the Three Tuns, and the London-Oxford-Cambridge graduate students' seminars provided the platform for fertile ideas to be disseminated and indeed to become firmly embedded in the economics discipline. Victoria Chick was once more in the middle of different views as to how the economy worked, but still her ideas were in their gestation period.

In 1963 she took an Assistant Lectureship at UCL, and was promoted to Lecturer during the following year. She was then moving away from international economics to monetary theory and macroeconomics. Her book, The Theory of Monetary Policy, grew out of her teaching, a clear indication that she takes seriously the ideal of blending teaching with research; she continues an old tradition of publishing new material as ‘lectures’ – a commendable way to teach. The book was a conscious attempt to impose an order on monetary theory, an order which by comparison to international economics was sadly lacking at that time. That she did extremely well.

The approach of The Theory of Monetary Policy was in fact simultaneously sympathetic to and critical of Keynesians and monetarists alike. Ultimately, though, she rejected both schools of thought as theoretically inadequate. Inevitably, the IS-LM apparatus, the accepted framework of monetary debate, had to go as well. She had uncovered a logical inconsistency in the model which was connected with its static method. The suggestion was not well received either by the Anglo-American journals or by her own colleagues. Nonetheless, she persisted and the relevant paper was published, some five years after its drafting.

As these ideas were falling into place, she attended the 1971 meeting of the American Economic Association in New Orleans, where Joan Robinson gave her famous Ely Lecture, ‘The Second Crisis in Economics’. At that gathering Joan Robinson and Paul Davidson called a meeting of like-minded people, which gave Victoria Chick great courage in discovering that she was not alone and thus provided her with a tremendous impetus to carry on.

Publishing The Theory of Monetary Policy had created a vacuum: mainstream macroeconomics had been shown to be inadequate. Perhaps as a belated response to Hyman Minsky's earlier attempt, at Berkeley, to teach her Keynes's General Theory (see her Macroeconomics after Keynes, p. viii), she returned to that book and began teaching it to her undergraduate students and developing her views in the process. When she felt that she had a coherent and systematic story to tell, she published Macroeconomics after Keynes. With this book Victoria Chick made a major contribution to post-Keynesian thinking. As will become clear from the rest of this introduction and the papers that follow in the two volumes, she had already made her distinctive mark on post-Keynesian thought. Macroeconomics after Keynes consolidated her position as one of the more important and regular contributors to the attempt to complete and elucidate the post-Keynesian paradigm. She was promoted to Reader in 1984 and to Professor in 1993.

During the time Victoria Chick has spent at UCL, she supervised a great number of Ph.D. students, many of whom are represented in the two volumes. Victoria Chick has also taught at a number of universities throughout the world. These include McGil1 University in Canada, University of California at Berkeley and at Santa Cruz in the USA, Aarhus University in Denmark, University of Southampton in the UK, University of Burgundy, Dijon in France, and the Catholic University of Louvain in Belgium. As well as visiting universities, she spent a summer at the Federal Reserve Bank of New York and eighteen months at the Reserve Bank of Australia in Sydney. More recently (September–March, 2000–1) she has been appointed Bundesbank Professor of International Monetary Economics tenable at the Free University, Berlin.

Victoria Chick has been an active member of two British Study Groups, funded by the ESRC: she served on the Committee of the influential Money Study Group for many years; and she and Philip Arestis initiated and jointly chaired for many years the active and successful post-Keynesian Economics Study Group. Victoria Chick has also served as a member on the editorial board of the Review of Political Economy (1987–93), European Journal of Political Economy (1985–94) and Metroeconomica (1994-present). During the period 1991–6 she was elected and served on the Council of the Royal Economic Society (RES). Over the period 1994–6 she served on the Executive Committee of the RES.

Many of the issues raised by Vicky still remain unresolved, particularly those in monetary theory. Victoria Chick has an outstanding capacity to analyse critically the logical foundations of theoretical structures and to uncover hidden assumptions. Her analysis goes beyond the level of theory to that of method, where many of the apparent differences between theories have their source. She analyses theories on their own terms, yet she does not hesitate to point out where she regards these terms as unduly limiting with respect to real-world issues and to suggest more fruitful lines of enquiry. Nor does she hesitate to criticise Keynes's framework, with which she is most strongly identified.

Although Victoria Chick's own methodological approach has much in common with that of Keynes, she has an emphasis which he left largely implicit: the historical particularity of theories, that is the fact that different types of abstraction may be better suited to some historical periods than others. This approach encourages the fair-mindedness with which Victoria Chick explores different theoretical approaches for useful theories to deal with particular problems. She is not afraid to state her views on each theory, and on how it is used: views which are founded on a high standard of scholarship. The value of this aspect of Victoria Chick's work really cannot be emphasised enough.

We are grateful to Vicky's many colleagues and friends who responded so positively to our request to contribute to this volume. We apologise to the many more that have not been approached – this was entirely due to lack of space. We are also grateful to Taylor and Francis Publishers, and especially to Allan Jarvis, who responded so promptly and enthusiastically to our request to publish the two volumes.

2

THE ‘GREAT INFLATION’, 1520–1640: EARLY VIEWS ON ENDOGENOUS MONEY¹

Philip Arestis and Peter Howells

1. Introduction

It is a curious characteristic of most ideas which have to fight for acceptance that there comes a stage when it is felt that precedents help the cause. Thus, in recent years, many expositions of endogenous money pointed out variously: that endogeneity was not a radically new idea but that, per contra, it had been a theme in the two debates in the late eighteenth and early nineteenth centuries between the bullionists and the anti-bullionists and later between the banking and currency schools; that Keynes was really an endogenous money man even though in the General Theory he took the money supply to be given; and that it was all accepted by the Radcliffe Committee in 1958.

In this chapter we shall show that arguments over the endogeneity of money predate the late-eighteenth/early-nineteenth century by some considerable time, surfacing in one of the earliest documented monetary upheavals in Europe, the ‘great inflation’ of the seventeenth century. There appears to have been some scope for endogeneity, even in the very earliest ‘stages of banking’ (Chick 1986, 1993).

This chapter is organised as follows. In Section 2, we discuss aspects of the ‘great inflation’ as it was experienced in the UK between approximately 1520 and 1640, concentrating upon contemporary explanations for the rise in prices. This will show, firstly, that there was a clear division of opinion between commentators, some of whom felt that the appearance (exogenously) of specie, particularly from the New World, was responsible for the rise in prices, while others argued that prices were being driven upward by internal pressures, particularly of population, resulting in frequent shortages of money to which the imports of gold and silver were a response.

Section 3 attempts to offer a modern interpretation of the inflation experience between 1520 and 1640. It concentrates on the possibility that that inflation episode was an endogenous phenomenon. It argues that while it is well known that contemporary analysis of European monetary upheavals in the fifteenth and sixteenth centuries recognised the possibility that specie inflows were, exogenous, causing prices to rise, this was based upon doubtful empirics and confused theory. By contrast, there were alternative views which recognised that monetary growth was induced by demand pressures. In the light of current scholarship, such views were well founded.

Finally, Section 4 summarises and concludes.

2. Inflation in Tudor and Stuart England

‘At its simplest, the price history of the four or five centuries before 1700 may be described as two periods of marked and prolonged inflation either side of a fifteenth century characterised by stagnant, or even falling, prices’ (Mayhew 1995: 238). From about 1520, a steady upward trend emerged by the end of which, in the 1640s, the general price level had increased about fivefold (Phelps-Brown and Hopkins 1956).² All the difficulties confronting the construction and interpretation of modern price indices are inevitably increased when we try to chart movements so far in the distant past. But there is no doubt that prices generally rose quite dramatically in this period and that while we might quibble about starting and ending dates, the period was remarkable when compared with the era of price stability which preceded it.

Inevitably, such a distinctive period has captured the attention of historians and much of their analysis has been conducted within a modern theoretical framework, which can be seen in particular in the way in which explanations incline towards either the ‘monetary’ or the ‘real’ (Outhwaite 1982; Mayhew 1995; Wrigley and Schofield 1989; Volckart 1997).

More interesting for us, however, are the contemporary reactions and explanations. Contemporary comment on the ‘great inflation’ was well aware of the possibility that monetary developments might be responsible for the upward price trend. The idea was promoted in two forms: currency debasement³ and the inflow of specie.

The first, which was fashionable in the middle years of the sixteenth century, shortly after the inflation got under way, was an argument that the systematic debasement of the currency under Henry VIII was largely responsible.⁴ One contemporary source for this view is the treatise, originally written by John Hales in 1549, titled A Discourse of the Common Weal of this Realm of England. However, it was not printed until 1581 with significant modifications which we shall come to later. The Discourse is constructed as a dialogue between a ‘Doctor’, as the source of wisdom and a ‘Knight’ posing the questions as an intelligent layman. In a famous passage, the Doctor says:

… and now I must come to that thinge…which I take to be the cheife cause of all this dearth of thinges, and of the manifest impoverishment of this Realme, and might in breife time be the distruction of the same, yf it be not the rathere remedyede, that is the basinge or rather corruptinge of oure coine and treasure…

(Tawney and Power 1953, III: 305)⁵

When the Knight asks ‘Now what remedie for all these thinges?’, he is told that ‘ …all the coyne nowe curraunte should be after a certayne day not currant’ and the Doctor explains at length the principles to be established in the restoration of the coinage (Tawney and Power 1953, III: 308).

The difficulty with the debasement argument was that steps were taken to restore the value of the currency in 1560 and 1561 and yet prices continued to rise. Significantly, therefore, in the printed, 158...

Table of contents

• Cover
• Half Title
• ROUTLEDGE FRONTIERS OF POLITICAL ECONOMY
• Full Title
• Copyright
• CONTENTS
• List of figures
• List of tables
• List of contributors
• 1 Introduction: On Chick's life as an academic
• 2 The “Great Inflation”, 1520–1640: Early views on endogenous money
• 3 The endogeneity of money
• 4 The transmission mechanism with endogenous money
• 5 Economic policy with endogenous money
• 6 Victoria Chick and the Theory of the Monetary Circuit: An enlightening debate
• 7 Keynes, money and modern macroeconomics
• 8 “The stages” of financial development, financial liberalization and growth in developing economies: In tribute to Victoria Chick
• 9 On Keynes's concept of the revolving fund of finance
• 10 On a post-Keynesian stream from France and Italy: the Circuit approach
• 11 IS–LM and macroeconomics after Keynes
• 12 On Keynes and Chick on prices in modern capitalism
• 13 Aggregate demand policy in the long run
• 14 The investment decision in Keynes's thought
• 15 Aggregate demand, effective demand, and aggregate supply in the open economy
• 16 Some myths about Phillips's curve
• 17 Transitional steady states: A contradiction in terms?
• 18 Unemployment in a small open economy
• 19 Why do macroeconomists disagree on the consequences of the Euro?
• 20 The fate of key currencies: DM, sterling and the Euro
• Victoria Chick's publications
• Index