Patinkin as a reader of Keynes’ General Theory: Are wage cuts a good remedy to unemployment?1

Abstract

This paper analyses Patinkin's appraisal of Keynes’ concept of involuntary unemployment while focusing on his reading of the General Theory Chapter 19. On several critical issues, Patinkin departs from Keynes’ original matters of concerns. He leans against an individual criterion for unemployment and implicitly endorses Wicksell's understanding of voluntary unemployment as chosen leisure. His appraisal of involuntary unemployment as a disequilibrium phenomenon ultimately relies on nominal rigidities and assumes the existence of a competitive adjustment process. On all these three critical points, Patinkin departs from Keynes but also initiates the contemporary New Keynesian programme that went even further from Keynes.     

A tale of two traditions: Pierre Force's Self-interest before Adam Smith

Abstract

The paper compares different strands of New Keynesian Economics with regard to Keynes' original work. Two issues are analysed in detail. First, the explanations provided by Keynes and New Keynesians of nominal and real wage behaviour. Second, the different theories concerning the ability of flexible nominal wages in assuring full employment. It is argued that, although involuntary unemployment is a central problem both in Keynes' and New Keynesians' views, referring to the role of nominal and real wages in explaining unemployment, New Keynesians theories present important features that differ, sometimes substantially, from the concepts developed by Keynes in his General Theory.     

The logic of Keynes' criticism of the Classical model

The Classics' remedy for unemployment was to lower money wages. Keynes opposes this remedy. Therefore, in The General Theory, he aims at building a model in which a fall in money wages may not cause an increase in employment. Most of the interpretations of Keynes identified this aim, but did not attach enough importance to it. Reading The General Theory in the light of this aim, we discover what Keynes' logic of elaboration is, then what Keynes' ideas about voluntary or involuntary unemployment are.     

Tournaments, minimum wage, and money non-neutrality

To reconstruct the micro-foundation of Keynesian macro-economics, the efficiency wage theory has generally been considered a success in providing a plausible explanation for the existence of involuntary unemployment. However, little has been said about how monetary policy causes fluctuations in aggregate employment and output in the efficiency wage theory. This paper extends Lin and Yang’s [Econ. Inq. 39 (2001) 644] shirking-type efficiency wage model with tournaments to account for money non-neutrality. A distinct feature of our model is that, due to the adoption of tournaments, there will be a hierarchical wage structure rather than a flat wage in the economy. As will be argued, the labor market characterized in this paper is in a sense a reversion to Keynes’ General Theory, but also an improvement upon it.     

Some Misunderstood Aspects of the Final Chapter of Keynes’s General Theory

ABSTRACT

Some seriously misunderstood issues arise in three paragraphs in the last chapter of Keynes’s General Theory concerning the relationship between his theory and orthodox theory. That these passages permit a form of theoretical reconciliation is a view shared by prominent commentators of opposing persuasions. Joan Robinson and John Eatwell strongly criticised Keynes for inconsistency and for opening the door to neoclassical elements that undermine his theorising, while Paul Samuelson made Keynes’s comments the foundation of his textbook neoclassical synthesis. The reconciliation view, however, is based on hasty non-contextual readings and is mistaken. More careful analysis leads to three conclusions: neither internal inconsistency nor neoclassical appeasement exists; Keynes’s paragraphs are aligned with the theoretical positions previously advanced in the General Theory; and what is actually deployed is a complementarity view relating his macro-theory to one particular part of orthodox micro-theory. Rejecting the dominant view, however, does not remove the issue of the absence in Keynes’s work of an adequately exposited micro-theory to accompany his macro-theory.     

Lucas on involuntary unemployment

The aim of this paper is to examine critically Lucas' argumentsagainst Keynes's General Theory and in particular against Keynes'sconcept of involuntary unemployment. It comprises two main parts.In the first part of the paper, the author questions Lucas'sclaim that Keynes betrayed the equilibrium discipline by freeinghimself from the postulates of optimising behaviour and marketclearing. In the second part, Lucas’ three arguments againstthe involuntary unemployment concept are discussed—first,that there is no rationale for drawing a distinction betweentwo sorts of unemployment; second, that every economic outcomefeatures the voluntary and the involuntary jointly; and third,that alternatives to unemployment are always present.     

The Fault Line between Keynes and the Cambridge Keynesians: A Review Essay

This essay reviews Michael Ambrosi's important but neglected book on the formative period of Keynesian economics. The book traces the evolution of a Cambridge macroeconomic tradition running from Marshall and Pigou to Keynes, and interprets The General Theory as a response to Pigou's analysis of unemployment. Ambrosi also argues that Keynes's disciples, Richard Kahn, Nicholas Kaldor and Joan Robinson, were, in the 1930s, wedded to a Pigovian methodology and did not immediately recognise that Keynes had redefined the meaning of equilibrium in The General Theory. Keynes's attempt to redefine the analytical basis of neoclassical economics was thwarted, not merely by the neoclassical synthesis, but by those who claimed to be the inheritors and guardians of his vision.     

On the monetary nature of the interest rate in a Keynes–Schumpeter perspective

Abstract

Keynes, in the General Theory, explains the monetary nature of the interest rate by means of the liquidity preference theory. The objective of this article is twofold. The first objective is to point out the limits of the liquidity preference theory. The fundamental limitation of this theory is that it does not allow to realize the intent declared by Keynes in 1933 to elaborate a monetary theory of production The second objective is to present a more solid theory of the monetary nature of the interest rate. It will be shown that an essential element of this explanation is Schumpeter’s analysis of the role of bank money in a capitalist economy. In fact, this analysis represents a fundamental tool to explain the characteristics that, according to Keynes, distinguish a monetary economy from a real-exchange economy     

Market forms and effective demand: Keynesian results with perfect competition ∗

In recent years there has been a flourishing of models with microfoundations based on imperfect (or monopolistic) competition that claim to yield Keynesian results which, it is held, are incompatible with perfect competi-tion. The paper shows that Keynes’s results do not depend on market forms but are contingent on his treatment of investment. In Keynes’s analysis, the existence of underemployment equilibria is demonstrated regardless of the assumed market form. Far from taking into account the importance of investment, recent models with ‘Keynesian results’ ignore investment altogether.

The article argues that if the investment demand function, with its distinctive characteristics, is removed, involuntary unemployment can be explained only by imperfections or rigidities that prevent producers from pushing their supply up to the level of full employment. A conclusion that Keynes wanted to avoid.

The introduction of a hypothesis of market forms different from imperfect competition may be useful in order to develop macroeconomics along more realistic lines, however, as the conclusions of the paper suggest, this hypothesis loses its analytical power if made separately from a satisfactory treatment of investment.     

A note on the speculative demand for money

In the General Theory, Keynes argued that expectations about future bond prices tend to be “sticky”. A rise in bond prices causes more investors to “join the bear brigade” and so increases the aggregate demand for money. Since Tobin's classic article on liquidity preference, this explanation of the downward sloping demand for money curve has largely disappeared from the literature. This note introduces sticky expectations into the Tobin framework. It shows that the existence of such stickiness does not necessarily cause the demand for money to be more elastic because investors have expectations about the variance of future bond prices as well as about their mean. A sufficient condition for a more elastic demand for money under sticky expectations is that the Pratt-Arrow coefficient of relative risk aversion be either constant or decreasing in wealth.     

The Propagation of Keynesian Thinking in Australia: E. R. Walker 1933-36*

Walker attended Cambridge in the early 1930s when Keynes was moving toward an expenditure-oriented explanation of output and employment but had yet to break through to his theory of effective demand. In conveying this thinking to an Australian audience through 1933-35, and in setting up as a Keynesian critic of depression policy, Walker raised the level of local discourse upon the unemployment problem. In 1936, too, he was quick to novelty in the General Theory; but now others were to carry forward the intellectual revolution that was consummated in war and post-war planning.     

Revolution and counter-revolution: two views of unemployment

There is a view in economics that Keynes did not have a microeconomictheory underpinning his explanation of macroeconomics. For example,Friedman (1970) even goes so far as to maintain that pricesare arbitrary in Keyne's approach to economics. The conclusionwhich follows from this critique of Keynes is that Keynesianeconomics cannot explain the occurrence of unemployment in amarket economy except by invoking ad hoc assumptions. It isargued in this paper that the above critique is based on a misunderstandingof the focus of the Keynesian explanation of unemployment. Thefocus in Keynes is not choice, but exclusion from choice. Inconventional microeconomics, the concept of choice is not consideredproblematic. The observation that a particular action is takenis confused with the view that the action is voluntarily chosen.The Keynesian explanation entails an exploration of what theconcept of voluntary choice means.     

Joan Robinson and the three cambridge revolutions

Joan Robinson's association with three Cambridge ‘revolutions’—imperfect competition, effective demand and capital theory—is examined in the context of her personal and intellectual partnership with Richard Kahn, John Maynard Keynes and Piero Sraffa. Initially, imperfect competition appeared to have successfully extended marginal analysis to all market forms. It also allowed Richard Kahn and Joan Robinson to persuade Keynes to present the main argument of The General Theory in terms of aggregate demand and aggregate supply. By the early 1950s, however, Joan Robinson had rejected the Marshallian methodology and had become a strenuous censor of neoclassical theory. In this paper the origin of her critique is traced to her reading of Sraffa's Introduction to Ricardo's Principles.     

Comment: Lucas on involuntary unemployment

Keynes distinguishes three concepts: voluntary, frictional and(Keynesian) involuntary unemployment. Frictional unemploymentis a Classical form of involuntary unemployment (not voluntary,as Lucas suggests), and reflects the Marshallian, rather thanWalrasian, treatment of time and equilibrium. Lucas contradictsboth Keynes and Pigou in asserting that there are always immediatevacancies for unskilled labour, and abstracts from the veryproblem that Keynes seeks to address. If voluntary unemploymentis re-defined appropriately, as De Vroey helpfully suggestselsewhere, the prefix ‘involuntary’ is dispensable,not because all unemployment is voluntary, as Lucas would haveit, but because it is all involuntary.     

The Comparative Statics of Effective Demand

Keynes introduces the term ‘effective demand’ in Chapter 3 of the General Theory as designating the point of intersection of two functions: the ‘aggregate demand function’ (D) and the ‘aggregate supply function’ (Z). For the first time in the literature, I here use specific functional forms for the D and Z functions and run numerical simulations which allow study of the comparative statics of the model in the face of various ‘shocks’. The demonstration of how the D/Z model actually works will hopefully prove useful for future students of the economics of Keynes.     

The Keynesian Features of Graziani's Monetary Theory of Production and Some Unresolved Issues

Abstract

The aim of this article is twofold. First, it seeks to verify the elements of affinity between Graziani's approach to the Monetary Theory of Production and Keynes’ Treatise on Money and his General Theory. It is shown that two important theoretical elements, from the Treatise on Money, enter Graziani's basic schema, namely the view of endogenous money supply and the distribution process. At the same time, uncertainty and aggregate demand—conceived as a crucial variable in the General Theory—can play a significant role in the basic schema of the Monetary Theory of Production. Second, the article sets out a critical reconstruction of Graziani's basic schema emphasising the existence of ‘open issues’– such as bank behaviour and the ‘paradox of profits’—relating to internal and external inconsistencies.     

Keynes’ Preface to the German Edition of the General Theory: Nazi Sympathies or Methodological Empathies?

In the (1936) preface to the German edition of The General Theory of Employment, Interest and Money, Keynes contrasts his methodology with that of Classical laissez-faire economics. He also compares and contrasts his methodology with German economics, which members of the German Historical School had heavily influenced. Unfortunately, some view Keynes as arguing in this Preface that his theory could more deductively apply to fascism than to laissez-faire economies. This would suggest an endorsement of Nazism. Of course, any support offered for Nazism should be condemned. However, instead of displaying Nazi sympathies, this paper argues that the Preface more likely supports the widespread methodological rejection in German economics of deducing laissez-faire outcomes from Classical postulates. Furthermore, Keynes criticizes the more inductive approach of many German economists, and states that he provides them with the theoretical framework which they could deductively apply to their totalitarian economy. Keynes should be read as arguing that his theoretical framework would prove more applicable to a totalitarian system than would a theory based on Classical laissez-faire economics. Comments in the Preface which seem to some to support Nazism should be taken, then, as support for the applicability of his theory to such a system. Keynes’ methodological arguments in the prefaces to the other editions, which reflect his overall methodological approach in the General Theory, his familiarity with German economics, his support for liberal economic and political institutions, and his anti-Nazism, all support this alternative interpretation. An earlier version of this paper was presented at the Midwest Economics Association Meetings in Chicago on March 16, 2008.     

Mr Keynes,the Classics and the new Keynesians: A suggested formalisation

Abstract

The paper suggests a new Keynesian model of the General Theory. A reduced form entails a diagram with three curves relating employment and the real wage, which represent the two fundamental classical postulates and the principle of effective demand. This diagram illustrates better than IS–LM the generality of Keynes's theory, clarifying the distinction between voluntary and involuntary unemployment. Other significant features are the role of the distribution of expected interest rates among heterogeneous agents, whether dispersed or concentrated, in shaping the LM curve, as well as the role of wage competitiveness constraints as a foundation of Keynes's relative wage hypothesis.     

Augusto Graziani and the Marx-Schumpeter-Keynes ‘Cycle of Money Capital’: A Personal Look at the Early Italian Circuitism from an Insider

ABSTRACT

The paper goes back to the origins of the theory of the monetary circuit in its Italian incarnation. Focus is on the evolution of Augusto Graziani's thinking between mid-1970s and mid-1980s, considering: (i) how Graziani connected (positively or polemically) with Keynesianism and Post-Keynesianism, both in its Cambridge and US incarnations; (ii) how Graziani interpreted the contributions of Keynes proposing a continuity between the Treatise on Money, the General Theory, and the articles on finance published after the 1936 book; (iii) how beneath the research programme of Italian circuitism (Graziani) we may recognise a peculiar Marxian inspiration, later on pursued for a while by some participants to the Seminar in Monetary Theory that Graziani coordinated in Naples (1981–85). Since the mid-1970s Graziani — who already had a profound knowledge of Neoclassical Theory; and who was deeply aware of the role of institutions — developed more and more his heretical stance into what we may label as a ‘structural Keynesian' approach, inserting Keynes’ views about finance to production and effective demand into a Schumpeterian vision of the capitalist process, and leading to Marxian conclusions about value and distribution. The early forays into circuitism by Graziani were not only critical towards the Neoclassical Synthesis, Monetarism, or New Classical Macroeconomics. They were also grounded in an intense confrontation with other contemporary heterodox currents. The outcome was the construction of an original scheme of thought which amounted to nothing less than a macro-monetary theory of capitalist production.