The Point of Effective Demand

Abstract

Keynes's principle of effective demand conceives competitive equilibrium in terms of the choices of entrepreneurs, investors and consumers, rather than of the optimal allocation of factors of production. In The General Theory, effective demand is distinguished from aggregate demand and from income, expected or realised, and there is no suggestion that equilibrium means the convergence of expectations. Reconsideration of Keynes's use of time and equilibrium periods leads to the conclusion that he treats employment as in continuous equilibrium, at the point of effective demand, determined by the state of expectation, the correctness of which is strictly irrelevant. The nature of the equilibrium represented by the point of effective demand is here described, not in terms of the multiplier, but in terms of the continuous equilibrium of supply and demand in short-term forward markets. This reading is faithful to Keynes's conception of aggregate demand as dependent upon the expectations of entrepreneurs, and it resolves the meaning of his ‘long-period employment.’ Formal appendices identify the differences between Keynes and Walras and the nature of the multiplier. The paper concludes that the Keynesian cross and ‘Swedish’ analysis should be abandoned, and the Walrasian conception recognised as only the limiting case of general competitive equilibrium in a monetary economy.     

Creative Destruction or Regressive Stagnation? Comments on articles by Paul Davidson and James Galbraith

In considering the relevance of Keynesian economics in the late twentieth century, there are two questions to be asked: first, to what extent do ‘Keynes's insights’ help in analysing the world today; and secondly, to what extent does the ‘globalisation’ of the world economy, affect the implementation and efficacy of Keynesian economic policies. The articles by Galbraith and Davidson tackle these two questions: James Galbraith considers the relevance of Keynesian concepts in analysing the global economy of today, and Paul Davidson discusses Keynesian policies given the changes in the world economy.     

Keynes and probability: An assessment

Abstract

Most interpreters agree that Keynes had a wide-ranging, complex, ‘vision of the world’, which underlies his theoretical contributions. Whenever this is forgotten, as happens in the so-called neoclassical synthesis, not only the original Keynesian spirit goes lost but also, and especially, we lose substantive bricks for our theoretical constructions. The paper considers an important instance of this general rule; namely Keynes's views on the logic of probability, meant as the field concerning human behaviour in an uncertain world (hence connected to, but distinct from, the pure theory of probability, meant as a field of mathematics). The paper begins by recalling the main aspects of the classical and frequentist approaches to probability and the main criticisms they received, pertaining among other things to the limits of their applicability. We then consider Keynes's own views, stressing three aspects: the definition of probability as pertaining to the field of logic, the notion of uncertainty and of the ‘weight of the argument’, the ‘theory of groups’. We then discuss the subjective approach of de Finetti, Ramsey and Savage, and contrast it with Keynes's own views. Finally, we consider the implications of our analysis for the interpretation of Keynes's General Theory, and of his attitude towards econometrics.     

Beyond Culture

This paper suggests that Clark's views regarding the Keynesian Revolution illuminate some of the limitations of the Keynesian orthodoxy that developed after the war, bringing more institutional detail and a greater preoccupation with dynamic analysis. Clark developed the multiplier in dynamic terms and coupled it with the accelerator to provide the framework for business cycle theory. His analysis was not formalized and emphasized time lags and non-linearities, similar to Harrod. In addition, Clark was concerned with the inflationary consequences of Keynesian policies and he was dissatisfied with those mechanical interpretations of the income flow analysis, which came to be known as hydraulic Keynesianism. Clark's policy conclusions emphasized the need of balance between employment creation and price stability, and the need of cooperation between social groups.     

Keynes and India, 1909–1913: a study on foreign investment policy

Abstract

Keynes's work on India before the First World War concentrated on analysis of the gold exchange standard and the stabilization of the rupee external value. Indian monetary arrangements were framed into a plan for foreign investment, implemented by the India Office in London. This policy, which was a typical example of public control over investments, occasioned Keynes's first job as an applied economist. Although neglected by Keynesian scholarship, this learning by doing experience is likely to have played a significant role in the young economist's training and education.     

International Markets and Open Economy Macroeconomics: a Keynesian view

This paper attempts to sketch a Keynesian response to the gap between the reality of international capital markets and the ‘standard paradigm’ of economic theory that underpins the policy model offered to poor countries in relation to their participation in the world economy and their national macroeconomic management. Recent work on imperfect markets, much of it from self-styled ‘New Keynesian’ point of view, implies a substantial modification of this standard paradigm to allow for non-price clearing but this does not appear to to have been integrated with new trade theories, while the implications of systemic volatility and credit rationing behaviour have not been theorized. The paper suggests that a return to Keynes's original approach to investor uncertainty and global demand might not only help to integrate international macroeconomic theory in a plausible manner but also contribute to the foumulation of more desirable policy positions.     

Back to Basics: Remittances in the Keynesian Macroeconomic Framework

This paper examines a remittance multiplier based on the short-run Keynesian equilibrium approach and shows how income may be affected by remittance inflows. We explore this through the equilibrium in the goods and money markets, where remittances can affect both consumption and the demand for real money balances. We present this simple theoretical model utilizing a standard Keynesian framework. The short-run Keynesian equilibrium approach provides insight into how remittances affect output and income, and its potential multiplier effects. The model used is indicative of a positive relationship between the marginal propensity to consume out of remittances and the multiplier. The framework also shows that remittances will have a greater impact if its marginal propensity to consume is greater than that for standard disposable income.     

Keynes,Employment Policy and the Question of Public Debt

This article provides a simple formalization of income–expenditure equilibrium in accordance with the Principle of Effective Demand, but augmented to explicitly incorporate public debt. This is utilized to explore the conditions required for simultaneous achievement of full-employment growth and a sustainable public debt trajectory—the latter understood as stabilization of the ratio of public debt to aggregate income, at some desired level. In the spirit of Keynes's economics, demand-led, full-employment growth, driven by government spending, is reconciled with public debt sustainability so understood. The policy implications, illustrative of Keynes's policy views, are then drawn out.     

Transition from the classical to the Keynesian Perspective

This paper intends to recast the IS-LM to an analytical framework that reflects, more pertinently than the conventional version, Keynes's central analytical message in his General Theory resulting from his secession from the classics. The secession is imagined to be a process of transition from a simple analytical framework of the classics to this recast form of the IS-LM. Moreover the arguments in the paper occasionally touch on certain misleading conventional views pertaining to the issues.     

The econometric challenge to Keynes: arguments and contradictions in the early debates about a late issue *

The paper investigates the discussions between Keynesians and ‘reconcilers’ about the interpretation of the ‘General Theory’, and the effect of the transformation of economics during the thirties as the outcome of that discussion. It highlights the contribution of some of the first econometriians, who argued for a new view of economics as an exact science based on mechanical models and mathematically defined theories, while supporting planning rather than the indirect steering devices suggested by Keynes.

The inroduction of this type of mathematical models in the framework of Keynesian macro–policies is related to two major events: the Oxford meeting of the Econometric Society in which the IS-LM model emerged, and the Cambridge meeting dedicated to the discussion of Tinbergen's work on business cycles.

The framework, antecedents and consequences of Keynes-Tinbergen debate on the role of econometrics is here assessed on the basis of unpublished documental evidence. Although most of the econometricians took sides with tinbergen against Keynes's scepticism on the use of formal models and simple representations in macroeconomics, several of them, including the more influential of the then young mathematically inclined economists, shared some of the basic elements of the critique. These discussions among Frisch, Tinbergen, Lange, Divisia, Roos, Marschak and others are reviewed in the paper and related to the evolution of the Cambridge group itself.     

Friedman and Keynes: divergences and convergences *

Milton Friedman claims to have succeeded the Keynesian revolution with a counter-revolution which, incorporating certain features of Keynes's thought, triumphed at the end of the 1960s. This paper presents a general assessment of the relationship between these thinkers, in the domain of politics, methodology and economics, the emphasis being put on Friedman's reading of Keynes. In many places, Friedman stresses the convergences between his vision and Keynes's, as against the latter's Walrasian disciples. However, despite certain points of agreement at the methodological level, the two authors are radically opposed in terms of political vision and economic analysis.     

Lange's 1938 model: dynamics and the “optimum propensity to consume”

Abstract

Oskar Lange's 1938 article “The Rate of Interest and the Optimum Propensity to Consume” is usually associated with the original IS-LM approach of the late 1930s. However, Lange's article was not only an attempt to illuminate Keynes's main innovations but the first part of a wide project that included the development of a theory of economic evolution. This paper aims at showing that Lange's article can help in illuminating critical aspects of this project: in particular, Lange's idea that a synthesis between Kaldor's and Kalecki's theories and that of Schumpeter, might have been possible and that it represented (in intentions) a “modern” and consistent reconstruction of the Marxist theory of the business cycle. Section 2 clarifies Lange's early reflection on dynamics. Section 3 centres on Lange's 1938 static model and indicates the effects of a change of saving on investment. Section 4 suggests a dynamic reconstruction from which are addressed important arguments raised by Lange in a series of papers written between 1934 and 1942.     

Pasinetti,Keynes and the multiplier

This paper explores the relationship between the Keynesian multiplier and Pasinetti's model of pure production. Key assumptions of Pasinetti's model are its multisectoral structure, the definition of all income as a reward to labouring activities and, as a consequence, the operation of a pure labour theory of value. A translation between these models is effected by introducing investment as an exogenous determinant. By drawing from Keynes to apply his concept of the wage unit, it is possible to aggregate from Pasinetti's multisectoral model to a genuinely macroeconomic multiplier. This provides a way of using the scalar Keynesian multiplier without making the restrictive one-commodity assumption. In addition, this formal demonstration enhances our understanding of the relationship between the wage unit and the labour theory of value. Finally, critics have argued that Pasinetti downgrades the importance of institutional analysis; in contrast, the derivation of a scalar Keynesian multiplier contributes to an understanding of how relevant Pasinetti's approach is to the analysis of a monetary production economy.     

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.     

Whither Keynesian probability? Impolite techniques for decision-making

The critical literature on Keynes has provided extensive analysis of why individual agents may find convenient to adopt a “conventional judgement”, and what he meant by “polite techniques” used to save their faces as “rational, economic men.” This paper concentrates instead on impolite techniques of thought suited to deal with Keynesian uncertainty. The paper suggests that the thread going from Keynes's Treatise on Probability to the General Theory and its defence provides a positive analysis of decision-making under uncertainty, and that placing emphasis on this positive analysis simply means adhering to Keynes's long-standing commitment to a (surely peculiar) probabilistic set-up.     

Keynes's realisms

Abstract

Some authors pointed to a realist orientation in Keynes's thought. However, since ‘realism’ is a wide and sometimes equivocal term, one may ask what kind of realism Keynes's realism is. This paper argues that Keynes held to an ontological, logical–semantic and epistemic realism. Whereas ontological realism has metaphysical connections, logical–semantic realism involves a notion of truth, and epistemological realism presupposes a theory of knowledge. The character of the subject matter circumscribes the scope of this last kind of realism. Epistemological realism is related to the role of intuition and convention in Keynes's thought, the meaning and evolution of which is explained.     

Ricardian equivalence and the intertemporal Keynesian multiplier

We show that Keynesian multiplier effects can be obtained in dynamic optimizing models if one combines both price rigidities and a “non-Ricardian” framework where, due for example to the birth of new agents, Ricardian equivalence does not hold.     

Explaining the aggregate price level with Keynes's principle of effective demand

The mainstream view of Keynes's principle of effective demand is that it states something about quantities—and about quantities only. The principle is held to determine the levels of output and employment in a world not governed by Say's law. This paper argues that the principle of effective demand goes beyond this to explain not only ‘real’ activity levels but also the aggregate price level. A variant of the post-Keynesian D/Z-model is brought together with Marxian reproduction schemes to derive this result.     

Government debt,inflation dynamics and the transmission of fiscal policy shocks

We analyze the influence of the fiscal position on the transmission of government spending shocks in a New Keynesian model. We find that once we allow for positive levels of government debt in the steady state, the size of the fiscal multiplier depends strongly on the horizon at which the multiplier is evaluated. While the long-run effect of a fiscal policy innovation is typically of a similar order of magnitude as in Galí et al. (2007), short-run multipliers differ substantially. The reason for this non-monotonic behavior is the interaction between the dynamics of the inflation rate and the debt level in real terms for sufficiently high levels of government debt in the steady state.     

Introduction: globalisation,governance and development

In 1887 Henry Carter Adams produced a study demonstrating that the ownership of government bonds was heavily concentrated in the hands of a ‘bondholding class’ that lent to and, in Adams's view, controlled the government like dominant shareholders control a corporation. The interests of this bondholding class clashed with the interests of the masses, whose burdensome taxes financed the interest payments on government bonds. Since the late nineteenth century there has been plenty of debate about the ownership of the public debt. But the empirical evidence offered to support the various arguments has been scant. As a result, political economists have few answers to questions first raised by Adams over century ago: how has the pattern of public debt ownership changed? Can we still speak of a powerful ‘bondholding class’? Does public debt redistribute income from taxpayers to public creditors? This article develops a new framework to address these questions. Anchored within a ‘capital as power’ approach, the research indicates a staggering pattern of concentration in the ownership of US public debt in the hands of the top one per cent of US households over the past three decades. Accordingly, the bondholding class is still alive and well in contemporary US capitalism.