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Frontmatter

Money in the Economy

Frontmatter

1. The Institution of Money: An Introduction

Abstract
By examining the reasons for the introduction of money into a non-money-using or ‘barter’ economy, we shall come to appreciate the nature of money, the functions it performs and the economic significance of its use. This exercise will also provide the necessary background for an examination of the characteristics of a monetary economy and a starting-point for subsequent discussion of the Keynesian Revolution and the attacks made upon it by its principal critics. Ultimately it will provide the basis for an understanding of money’s role in a broader social and political context.
Gordon A. Fletcher

2. The Monetary Economy

Abstract
In the previous chapter we introduced an economy in which: commodities are produced for exchange; production and trading plans have to be made on the basis of incomplete information; a system of monetary exchange is employed as a means of overcoming the problems of trade under uncertainty. Further, the use of money makes possible the development of a decentralised advanced economy in which commodity prices are largely market-determined, for economic development and expansion without the operation of the price mechanism would imply the rigid regimentation and loss of individual freedom that is associated with a centrally directed, fully planned economy. That is, while a ‘monetary information system’ is vital to the working of a free economy, it would in principle be possible to dispense with money in a completely planned economy.1
Gordon A. Fletcher

3. Money, Investment and Saving

Abstract
The distinction between the uncertainty world of reality and the purely theoretical world of perfect knowledge is the real meaning behind J. M. Keynes’s proposition that a monetary economy is different from a barter economy. It is a distinction fundamental to his whole approach and central to his assault on ‘classical’ macroeconomics. The ‘monetary economy’ is the real, money-using world of uncertainty. The ‘barter economy’ is the purely abstract world of classical theory in which perfect information ensures that money has no substantive form, so that exchange is in effect direct and the economy is of barter-type. Keynes argued that:
The whole object of the accumulation of Wealth is to produce results, or potential results, at a comparatively distant, and sometimes at an indefinitely distant, date. Thus the fact that our knowledge of the future is fluctuating, vague and uncertain, renders Wealth a peculiarly unsuitable subject for the methods of classical economic theory.1
Gordon A. Fletcher

The Keynesian Revolution and its Critics

Frontmatter

4. Keynes’s Revolution

Abstract
In contrast to the lucid brilliance of much of Keynes’s work, the General Theory is often described as a badly written book. Untidy, lacking a clear design, with ideas not fully thought out and arguments flawed by obscurities, inconsistencies or actual error, etc. — the perceived defects are numerous.1 They are considered either to be evidence of Keynes’s struggles to free himself from orthodoxy or are ascribed to the hasty preparation required to bring the new ideas before a world thought to be in urgent need of them.
Gordon A. Fletcher

5. The Robertsonian Critique

Abstract
In keeping with his philosophy of evolution in economic doctrines, Robertson’s own theories were developed continuously throughout his professional lifetime, with none of the fundamental overturning of previously held views such as marked Keynes’s progress.
Gordon A. Fletcher

6. The Principle of Effective Demand

Abstract
The neutral-money, real-exchange economy of economic orthodoxy is typically encapsulated in a theoretical model which assumes away the uncertainties and foibles of the real world by allowing full information and perfect foresight. With given resources and known wants, it would be possible to formulate plans which would produce optimal results for each individual; while for the economy as a whole a path consistent with equilibrium would be determined from the outset.
Gordon A. Fletcher

7. Keynes’s Theory of Investment and Saving

Abstract
We now turn to the second of the four elements encompassed by Keynes’s treatment of saving and investment, namely, the nature of saving and its relationship to investment.
Gordon A. Fletcher

8. Robertson and Keynes on Investment and Saving

Abstract
From Robertson’s point of view there are two versions of Keynes’s analysis of investment, saving and the rate of interest.
Gordon A. Fletcher

9. The Finance of Investment

Abstract
Keynes attacked the widespread belief that investment is somehow financed by saving. The persistence of this myth must no doubt be attributed partly to its inherent plausibility: that because saving is a withdrawal from the income stream and investment is an injection, and because in equilibrium saving is equal to investment, it seems only commonsense to suppose that that which is saved must supply that which is invested.
Gordon A. Fletcher

10. The Rate of Interest

Abstract
We have now reached the last of the four topics encompassed by Keynes’s treatment of investment and saving.
Gordon A. Fletcher

11. A Monetary Theory of the Rate of Interest

Abstract
In approaching Keynes’s own theory of the rate of interest, there are four points to be kept in mind. The first is that Keynes was driven to seek a new explanation of interest once he realised that classically based theories were involved in logical error and had to be replaced. The second is that in a monetary economy the rate of interest is a monetary phenomenon and derives from the uniqueness of money. The third is that because of its monetary nature the rate of interest exerts a powerful regulatory influence on the level of economic activity. The fourth is that while on a purely mechanical level the interest rate is proximately determined by the available stock of money and the aggregate demand for money, this is so only on the understanding that ‘all influences other than the amount of money are portmanteaued in the liquidity function’.1
Gordon A. Fletcher

12. The Conditions for Money as the Standard

Abstract
We can now bring the argument of the previous chapter together and develop some of its aspects further.
Gordon A. Fletcher

13. The Market Rate of Interest and its Economic Significance

Abstract
An important conclusion follows from Keynes’s view of interest as a monetary phenomenon. That is, because the carrying-costs on money are negligible, the (nominal) rate of interest cannot in practice be negative.1 Or, as Hicks expressed it: ‘If the costs of holding money can be neglected, it will always be profitable to hold money rather than lend it out, if the rate of interest is not greater than zero.’2 In addition, however, ‘institutional and psychological factors are present which set a limit much above zero to the practicable decline in the rate of interest’.3
Gordon A. Fletcher

14. The Keynesian Economic Problem and its Solution

Abstract
Keynes regarded the post-1918 experiences of Great Britain and the USA as actual examples of his thesis that technically advanced, capital-rich economies could suffer depression and privation where they might reasonably expect full employment and prosperity. The factors common to both, which for Keynes explained the apparent anomaly, were that the level of economic activity was dependent almost entirely on the free play of market forces, and that the rate of interest and the marginal efficiency of capital had come into a special relationship with each other such that, in the absence of any purposive management of investment and consumption behaviour, full employment could not be achieved.
Gordon A. Fletcher

The Keynesian Revolution and its Critics

Frontmatter

15. The Consequences of Mr Keynes?

Abstract
The Keynesian Revolution was essentially a revolution of economic principles rather than, say, of policy prescriptions. As a consequence, the criticism of the General Theory which followed its publication in 1936 — and which, as we have seen, found its most telling expression in the work of D.H. Robertson — was directed primarily at the fundamentals of Keynes’s theory. Nevertheless, the conclusions that Keynes derived from his theory were clearly intended to have important implications for policy, and it was on the question of the consequences that were said to flow from the application of Keynes’s ideas that the Keynesian Revolution was ultimately to face its greatest challenge.
Gordon A. Fletcher

16. Monetarism I: The Counter-Revolution

Abstract
Monetarists can be thought of as constituting the majority party among those ranged in opposition to Keynes; as against the Austrians as minority party, whose work is generally less well known. In addition, the monetarist framework of analysis so closely parallels that of Keynes that points of potential conflict are easily identified, and the interesting questions concern the validity of the monetarists’ interpretation of Keynes’s propositions in relation to their own and the provenance of the monetarist model itself, in terms of the relative importance of pre-Keynesian and Keynesian influences.
Gordon A. Fletcher

17. Monetarism II: Monetarism, Keynes and the ‘Keynesians’

Abstract
Though the real challenge to Keynes lay in the ‘invisible’ elements of Friedman’s counter-revolution, the subsequent monetarist — ‘Keynesian’ debate has been conducted entirely in terms of the ‘visible’ elements, which are alternative formulations of empirical relationships that have their counterpart in the ‘Keynesian’ model.
Gordon A. Fletcher

18. Monetarism III: Rational Expectations

Abstract
Having replied at some length to the criticisms of Keynes, both explicit and implicit, contained in the monetarist counter-revolution, we can now look for further support for Keynes in the weaknesses of the monetarist position itself.
Gordon A. Fletcher

19. The Austrians I: Tenets of the Faith

Abstract
Superficially at least, the Austrians have much in common with the monetarists and the two schools are popularly regarded as being synonymous.
Gordon A. Fletcher

20. The Austrians II: Hayek and the Trade Cycle

Abstract
From the Austrian point of view, Keynesian policies provided temporary stimulation of output and employment, but the longer-term effects have been to produce serious inflation and unemployment. The only curious feature is that the predicted consequences were so long delayed. The only solution to the problem is a painful period of readjustment before full employment and stable prices can be achieved through the operation of free-market forces.
Gordon A. Fletcher

21. The Austrians III: Two Routes to Serfdom

Abstract
We have so far dealt with the Austrian challenge to Keynes in terms of economic theory as represented in the Hayekian theory of the trade cycle. We have concluded that this challenge cannot be shown to have succeeded. But, as noted earlier, the peculiar strength of Austrian economics, which exempts it from the tensions inherent in monetarism, lies in its successful integration of technical monetary theory into a general philosophy of society in which money is regarded as a social institution. There is, accordingly, a further challenge to Keynes based upon the broader social and political consequences of the Keynesian Revolution. It is to a consideration of these consequences that we now turn.
Gordon A. Fletcher

22. Employment Policy

Abstract
Frankel’s charge against Keynes, that he sought to use public deceit in monetary policy, by the deliberate use of money illusion in the labour market, carries with it very serious implications. Not only, it is claimed, will the discovery of the bluff lead to inflationary expectations being ‘built in’ to wage claims and other contracts expressed in money terms, but it will also progressively undermine the moral authority of the monetary order itself.1
Gordon A. Fletcher

23. The Keynesian Revolution in Context

Abstract
Though the Keynesian Revolution was a revolution of theory, it was a revolution with a purpose in the real world. Its purpose was to resolve a contradiction in orthodox economics which had been exposed and brought into focus by a particular set of economic circumstances. This is not, however, to argue that Keynes had been misled into advocating egregiously reckless expedients by a ‘very exceptional and almost unique’ episode, as claimed by Hayek;1 or that it was the ‘history-bound analysis’ as pictured by H. G. Johnson.2
Gordon A. Fletcher

24. In Conclusion

Abstract
Much recent criticism of the Keynesian Revolution results from confusion in the minds of the critics between the difficulties that have arisen in the application of Keynes’s ideas, and the core of his theory. The residual problem of application is largely political, in the sense that Keynesian economics is inherently vulnerable to pressures which arise through the political process in a democratic society. But the question remains of whether these problems are more intractable than those which stem from the alternative laissez-faire approach.
Gordon A. Fletcher

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