High pressure and black clouds: Keynes and the frequentist theory of probability

The thesis of this paper is that Keynes wrote A Treatise onProbability in opposition to the frequentist theory of probability,systematised by John Venn, which denied any role for probabilityin decision theory. Keynes was interested in finding an alternativeconception of probability that could be utilised as a guideof life. To analyse this point, the paper considers Keynes'scriticisms of frequentist tradition in the two versions of hisFellowship dissertation, and in the published edition of hisTreatise. Keynes's project is then illustrated with the famousexample of whether or not to go out with one's umbrella in thesituation in which the pressure is high and the clouds are black.     

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.     

Barbaric gold and civilised banking: Keynes’s Indian Currency and Finance. A view from the South after 100 years

Indian Currency and Finance (ICF), Keynes first book, remains 100 years after its publication, as relevant today as it was remarkable then. It anticipates many of Keynes key ideas now better associated with his Treatise of Money, and his The General Theory of Employment Interest and Money, as well as many of the central ideas of post-Keynesian economics. Issues such as the inherent instability of the banking and currency system and the importance of appropriate regulation to stabilise them, which Keynes addresses in ICF remain on the minds of analysts and policy makers today. It is a brilliant and prescient exposition by the young Keynes and is highly recommended to a contemporary readership.     

Neglected Implications of Neoclassical Capital-Labour Substitution for Investment Theory: Another Criticism of Say's Law

Abstract

Recent mainstream macroeconomic models take Say's Law for granted. This paper argues that the justification for this assumption is not found in general equilibrium theory but in the ‘neoclassical-synthesis’ (and then monetarist) criticism of Keynes, which relies in a fundamental way on a treatment of investment that turns out to depend not only on neoclassical capital-labour substitution (called into questioned by the Cambridge controversies) but also on an assumption of full labour employment that on the contrary should be a result of the analysis. This paper first criticizes the attempt to justify a negative interest-elastic investment function through adjustment costs, that is, without relying on traditional neoclassical capital-labour substitution, with special attention on the treatment in Romer's advanced textbook. Then it proceeds to its new contribution, the demonstration that an endogenous determination of labour employment raises questions about the capacity of decreases in the real wage to raise employment even accepting neoclassical capital-labour substitution, because when the latter is correctly understood the rate of interest does not suffice to determine investment; hence, there is an inevitable role for the accelerator (and Say's Law is thereby undermined). This was perceived by Dornbusch and Fischer but they did not realize that then reductions of real wages will reduce investment instead of raising it. Thus, the ‘neoclassical synthesis’ reply to Keynes is undermined even apart from the inconsistencies of neoclassical capital theory. So the paper exposes a deficiency of the neoclassical arguments in support of a tendency toward full employment, additional to the inconsistencies revealed by the capital critique.     

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.     

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.     

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.     

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.     

Keynes’s view of deficits and functional finance: a Modern Monetary Theory perspective

Abstract

The immediate aftermath of the global financial crisis (GFC) was characterised by a resurgence of interest in the work of Keynes. Fiscal policy became at least temporarily acceptable again, in turn leading to government deficits and debt, as a proportion of GDP, reaching levels not seen since before the onset of the neoliberal period. Keynes’s own pronouncements on deficit financing generated renewed interest. Despite the strength of the neoclassical counterattack – which has been relatively successful in reassessing the crisis as a government failure – confidence in orthodox economics has not been fully restored, at least outside the confines of academia. Although the hopes of heterodox economists – that the GFC might mark the beginning of the end of the neoclassical hegemony – have not been realised, the upswing in interest in Keynes’s views has not entirely died away. This paper considers Keynes’s views of deficits and debt and then looks at the controversial area of Keynes’s position vis-à-vis functional finance. The paper concludes by considering how Modern Monetary Theory might increase our understanding of the nature of deficits and debt and thus provide valuable insights which might underpin the use of fiscal policy to pursue public purpose.     

NOTES FOR CONTRIBUTORS

Abstract

This paper reconstructs the academic figure of Sraffa at the University of Cambridge as it emerges from his papers, his correspondence with the economists with whom he had special relations, and the official documents of the University, in particular in connection with his role in the Faculty of Economics and Politics, to which he belonged from 1927 to 1965. It presents a detailed examination of the various posts held by Sraffa at the University as Lecturer, Assistant Director of Research, Member of the Degree Committee, Examiner, Member of the Faculty Board, as co-founder of The Department of Applied Economics, Elector to the Chairs of Political Economy, Industrial Relations and Economics, Member of King's College and finally as Fellow of Trinity College. Moreover, the relationship with his fellow economists in Cambridge, in particular Keynes, Kahn, Kaldor and Joan Robinson is also examined and assessed.

The broad conclusion of the paper is that Sraffa's relationship with Cambridge University was complex, contradictory and intense, and should be seen within the broader context of the ambiguous relations Sraffa had with academia in general.     

Keynes,Ricardo and the classical theory of interest

Keynes made harsh and repeated attacks on the work of Ricardo, blaming him particulary for what Keynes called the ‘classical theory’ of interest. Garegnani and others argue that Keynes' criticisms of the classical theory of interest apply to later neoclassical writers, but not to Ricardo. This paper re-examines Keynes' criticisms. It argues that Keynes attacked Ricardoapos;s theory of interest despite his awareness that Ricardo did not hold the ‘classical theory’. Moreover, Keynes not only expressed sympathy for Ricardo's understanding of interest, but his criticisms which do apply to Ricardo do not address Ricardo's theory of interest.     

Keynes against Kalecki on economic method

In the past twenty years, there has been considerable debate on the “coherence” of post Keynesian economics, in view of post Keynesian economists’ ambitions to develop a paradigmatic alternative to neoclassical economics. Given the growing importance of methodological aspects in this discussion, this article addresses the differences of approach to economic theory between the fathers of the two most important strands in post Keynesian economics. We thus focus on Keynes’s criticism of Kalecki’s theory of the business cycle and the tensions between Keynes’s logical approach and Kaleki’s formal modeling. We show that in criticizing Kalecki’s theory, Keynes made use of the same methodological criticism (based on detecting logical fallacies in reasoning) he had employed to attack both the classical theory and contemporary “pseudo-mathematical” models. After illustrating these fundamental differences between Keynes and Kalecki about the proper way of doing economics, we draw some conclusions on the possible future evolution of post Keynesian economics.     

Keynes on State and Economic Development

ABSTRACT

This article has two purposes. On the one hand, it develops Keynes’s concept of economic development. On the other hand, it presents Keynes’s ideas about the role of State, chiefly the State Agenda. Keynes believed that the stage of economic development would only be attained if the State Agenda was in practice. In turn, to Keynes the economic development would be a stage in which the economic problems of society have been surpassed, and the motto of the individual behavior has been changed from the love of money to the love of living.     

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     

Beauty contested: how much of Keynes' remains in behavioural economics' beauty contests?

Abstract

In one of the most famous passages of the economic literature, John Maynard Keynes likens the stock market to a beauty contest (BC), in which the winners are those who anticipate the average opinion. In behavioural economics there have recently been attempts at investigating the BC experimentally. We argue that there exist important differences between Keynes' and behavioural economics' BCs. We identify several types of BCs and propose a taxonomy. We also suggest that, in spite of these differences, Keynes' theory of decision under uncertainty is central to understanding the actual behaviour observed in experimental BCs.     

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.     

Hayek and the Great Depression of 1929: Did he really change his mind?

The aim of this research is to establish whether, and if so in what way, Hayek changed his mind about the Great Depression of 1929.The work is divided into two parts. In the first part, I present the ‘early’ Hayek of the 1930s. Hayek was the great rival of Keynes. Both explained the Great Depression, applying opposing business cycle theories. For Keynes, the crisis was caused by an excess of saving over investment; for Hayek, on the contrary, by an excess of investment over saving. In the early 1930s, Röpke attempted a synthesis, positing that a recession due to overinvestment can degenerate, as in 1929, into a depression caused by oversaving. Hayek examined and rejected Röpke's theory. In the second part, I present the ‘later’ Hayek of the 1970s. After years of silence and solitude, Hayek was unexpectedly awarded the Nobel Memorial Prize in Economics, precisely for the contribution he made in the 1930s to the theory of the business cycle. Hayek returned to his pursuit of the ghost of Keynes, debated with his friend and rival Friedman, re-examined Röpke's special case and, according to Haberler, changed his mind. In my conclusion, I attempt to resolve the dilemma.     

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.     

Great Recession and Macroeconomic Theory: A Useless Crisis?

ABSTRACT

The global financial crisis of 2007–08 and the subsequent Great Recession have pushed many economists to acknowledge a fundamental limit in the theoretical models elaborated after the monetarist counter-revolution: these models disregard the financial system. The years following the Great Recession have thus been marked by the development of what can be called the ‘Financial Frictions Approach’, a theoretical approach based on the addition of the financial system to the New Keynesian DSGE model. The results of this line of research are beginning to appear also in macroeconomics textbooks. Significant examples are the publication of the seventh edition of Blanchard’s textbook, and the publication of the third edition of the textbook co-authored by Blanchard, Amighini and Giavazzi. The objective of this work is twofold: (i) to show that the new model presented by Blanchard, Amighini and Giavazzi, which reflects the results of the ‘Financial Frictions Approach’, does not allow to elaborate a coherent explanation of the Great Recession and (ii) to present the pillars of an alternative theoretical model based on the lessons of Keynes, Schumpeter and Minsky.