Monday, May 6, 2013

Was Keynes always right? A disclaimer

I don't really publish uninformed comments suggesting that the views in this blog are that whatever Keynes said is the word of God, and, hence by definition correct. It is a bit silly, to say the least, since anybody that has read the posts knows that actually the views taken here suggest that the General Theory, in spite of being a great book (for having effective demand) and being essential reading for economists, failed in making the point that effective demand stands in the long run.

The reason, again as noted extensively in the blog, is Keynes' acceptance of the marginalist theory of value and distribution, and its implications on the investment schedule. In other words, Keynes, even though he wanted to get rid of the natural rate, by accepting the inverse relation between investment and the rate of interest, ended up conceding that there would be a level of the rate of interest that would equilibrate it with full employment savings. In other words, a natural rate.

So the point is NOT that Keynes is always right, and everything he said is sacred. In fact, a good chunk of his theoretical framework must be dropped in order to say something coherent, from a logical point of view, and that fits the evidence. Something similar applies to the classical authors.


  1. Great post.

    Would it fair to say that Keynes's mistakes or oversights in the GT include these:

    (1) the assumption of an exogenous money supply;
    (2) the marginal efficiency of capital idea;
    (3) insufficient attention to fundamental uncertainty in Chapter 18. If Keynes had taken uncertainty seriously here, it would have “ruled out any stable functional relationship between investment and the interest rate” (as King, A History of Post Keynesian Economics since 1936, 2002, p. 14, says).

    Also, do you think Keynes accepted that capital was heterogeneous in the GT?

    And did he pay sufficient attention to fixprices?


    1. (1) and (2) are fine. You could also add liquidity preference in (1). For several reasons. There is no need for a well behaved demand schedule for money, which mimics, without any good reason, marginalist demand curves in general. And it's far from clear that all agents always want liquidity. Besides, if money is endogenous it hardly makes sense to distinguish supply and demand for money. On uncertainty, Keynes actually gave it quite a lot of relevance in ch. 12, on long period expectations. I don't think that he dismisses it in 18 or 19 for that matter. Perhaps by those latter chapters he is in a context in which uncertainty is framed within a set of given conventions and institutions, so instability is less of a problem. What you end up having is a sub-optimal situation that is fairly stable.

    2. Not sure how much Keynes understood the problems of capital. But the Marginal Efficiency of Capital is aggregate and measured in monetary terms.

      His discussion of flex prices is in ch 19. His point was that if prices were flex, things would be even worse.

      But Joan Robinson notes that according to Shove Keynes never spent the five minutes necessary to learn the theory of value. His price theory was non existent.

  2. I want to know more about Keynes. Can someone suggest some books that update Keynes' theories "in order to say something coherent, from a logical point of view, and that fits the evidence?"