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Keynes and his Battles, Gilles Dostaler, Edward Elgar, Cheltenham (UK) and Northampton (USA), 2007, vi; 374pp

Keynes and his Battles, Gilles Dostaler,

Edward Elgar, Cheltenham (UK) and Northampton (USA), 2007, vi; 374pp

Toshiaki Hirai

I. Introduction

So far we have no economist who surpassed Keynes in terms of profound influences in various fields. The phenomenon in economics and social philosophy known as the “Keynesian Revolution” is the most important among his influences. And yet it occupies no more than a part of his achievements.

  As a youth he contributed to the development of philosophy and logic under the influences of G.E. Moore and Russell. He was an intellectual leader of the Liberal Party. He was a central figure of the Bloomsbury Group. He was a splendid and inexhaustible debater, among which impeachment against the Versailles Treaty is well known. He worked as an enthusiastic patron of the artistic activities. He was engaged in managing insurance companies. He was responsible for the financial management of King’s College. He worked as designer of the world order after the Second World War. Surprisingly enough, many of these activities were simultaneously made. His interest was extended indefinitely and his brain incredibly fast worked with vigorous blood flowing through vessel.

  The book brilliantly analyzes and describes Keynes as a human being by shedding light on these multiple activities, and tries to explain Keynes’s life in terms of persistence and continuity rather than inconsistency and discontinuity. The reviewer will discuss only a few below from many topics which were very interestin (the main chapters runs as follows: Ch.2 Ethics; Ch.3 Knowledge; Ch.4 Politics; Ch.5 War and Peace; Ch.6 Money; Ch.7 Labour; Ch.8 Gold; Ch.9 Art).

  

II. The Apostles and the Bloomsbury Group

The apostles and the Bloomsbury Group made profound influence on Keynes’s way of thinking and living on several points.

 Firstly, he and his friends such as Lytton Strachey, Leonard Woolf, was greatly enchanted by Moore’s Ethics. This can be discerned in two aspects. One concerns Keynes’s ethics. The other concerns Keynes’s work on probability. It started by criticizing Ch.5, “Ethics in relation to conduct” of Moore’s Principia Ethica, was submitted as fellow dissertation of King’s College, and was finally published in 1921 as A Treatise on Probability. The author puts emphasis on uncertainty as unmeasurable. (he is right, and yet the reviewer thinks that Keynes defines probability as a degree of rational belief between the propositions, which should be objective, and tries to prove induction in terms of pure logic).

 Secondly, Keynes was greatly involved in the Bloomsbury Group. The group was a creator of new culture in, among others, literature and painting. It shared Moore’s “religion” and were anti-utilitarians and were critical of women’s discrimination. It was a group in which apostles’ s mind was integrated with artistic value judgment of the Post-Impressionism and new literature movement. The members were, in essence, individualistic liberalists in the sense that they highly rated human relation and beauty, while neglecting the social conventions. This seems to have contributed to the (miraculous) maintenance of friendship among them throughout their lives notwithstanding the occurrence of complicated human and love relations. In the book are these complicated relations vividly described.

III. Political Stance

Since his youth Keynes showed great interest in politics, as is shown by his stance, for example, of the Boer War.

  When the (First World) war occurred, Keynes was asked to join the Treasury. He accepted the offer, in spite of the fact that at that time he was making great efforts for the publication of the Probability with help of Russell and Broad. He broke off this work, which resulted in postponing the publication until eight years later.

  This war was to change the world considerably. It was no exception to Keynes – the tension with the rest of the Bloomsbury group, his ability and confidence as high official in leading the UK in international finance, the tough fight with the USA in negotiation, the deep disappointment with the development of the Paris Peace Conference, his proposal for reconstructing Europe such as the “Grand Scheme”.

  In the 1920s Keynes was greatly involved in the Liberal Party through the management of the Nation and Athenaeum, the Liberal Summer School and so forth. He advocated the New Liberalism – the mid-way house between the Liberalism and Socialism. However, his political activities made a convoluted tour, reflecting the then political situation of the UK. He belonged to the Asquith camp, but later came to approach the Lloyd-George one. After the fatal defeat of the Liberal Party, Keynes moved toward the Labour Party. It should be noted that his socio-philosophical and economic influences manifested themselves among the young politicians such as Dalton and Gaitskell of the Labour Party, although he finally became a Liberal Party member of the House of Lords.

In the book these activities and the complicated political changes of Keynes are brilliantly portrayed.

IV. Economics

In the reviewer’s view The General Theory sees the market economy as possessing two contrasting aspects: (i) stability, certainty and simplicity; (ii) instability, uncertainty and complexity. His fundamental perception of the market economy can be summarized: “The market society is stable in the sense that it can remain in ‘underemployment equilibrium’, but if it goes beyond certain constraints, it becomes unstable”.

  In the book reviewed aspect (i) is stressed, while aspect (ii) is rather overlooked. The author argues that aspect (i) can be traced back to the Probability. If The General Theory had lacked in aspect (i), it would not have won such a success. Moreover, Keynes showed aspect (ii) whenever he advocated economic policy.

  The reviewer wish that this book would have dealt with Keynes’s colleauges such as Robertson and Hawtrey as economist as well as social philosopher, for Robertson and Hawtrey were not classified by Keynes as “classical economists”.

  Again, the book is very readable, and a great contribution to understanding Keynes as a human being endowed with such incredible talents.

(2) 平井俊顕

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Money and Markets: A Doctrinal Approach, Oxon and New York: Routledge, 2007, pp. 252.

　　　　　　　　　　　　　　　Alberto Giacomin and

 　　　　　　　　　　　Maria Cristina Marcuzzo (eds.),

Money and Markets: A Doctrinal Approach,

Oxon and New York: Routledge, 2007, pp. 252.

Toshiaki Hirai

 (Sophia University, Tokyo)

This book brings together a selection from the papers read at the 2004 ESHET conference.

  “What is money and what is market? How should we understand the relation between the two?” – these are fundamental questions for us. In the Seng period (China), the Edo period (Japan), to take but two examples, markets developed fully where goods were exchanged for money.

  The history of economics as social science, however, goes back no more than 230 years. Classical economics ruled the roost in the first half of the 19^th century, followed by neoclassical economics from the third quarter of the century right up to the present day.

  As an alias of neoclassical economics, “catallactics”, shows, this school focuses research on markets where economic agents buy and sell goods. Essentially, it boils down to Walras’s general equilibrium theory (GE), which was to occupy a central place in neoclassical economics. It is a system in which money does not work, so the quantity theory of money was adopted as monetary theory in order to adapt it to the real world. This system has dominated the economics field over many years. Moreover, the so-called New Classical Macroeconomics (NCM), similar to the above system in some respects, has prevailed over the last thirty years in the macroeconomics field.

1. Presentation of Alternative Theories

　　　　

What attracts the reviewer most are six papers in support of theories which come to grips with the economic system from alternative points of view, criticizing GE and/or NCM paradigm.

  In Chapter 2 Goodhart criticizes NCM, arguing that because it tries to construct economic models based on assumptions disregarding reality, it is empirically absurd, lacking in relevance to the real world. He favors the line which Shubik takes, combining theory with the empirical realism. In Chapter 3 Davis stresses ‘socially embedded individuals as a network conception’ envisaged by the complexity theory, differing from the picture of individuals envisaged by GE and game theory.

    In Chapter 4 Israel appeals for the reinstatement of ‘genuine’ game theory. He argues that the axiomatic methodology adopted by GE does not explain actual economic phenomenon and, what is more, that economics had been and is moving in the wrong direction due to (i) Debreu’s elaboration of GE; (ii) the tendency for game theory to be incorporated into GE through ‘Nash equilibrium’; (iii) the argument that cooperative games can be reduced to non-cooperative ones. Israel insists that it is the ‘genuine’ game theory based on cooperative games which von Neumann and Morgenstern aimed at that should be pursued.

In Chapter 5 Heinsohn and Steiger advocate property economics, criticizing the view on the relation between money and markets taken by the classical and neoclassical schools that “First markets emerged. Then money came into being to reduce transaction cost”. They argue that the right of possession is the source from which money and markets derived, stressing the right of possession - a legal right based on which its possessor is endowed with non-physical rights - in all types of economic activities including the right to issue money and the right to procure it (borrowing).

  In Chapter 6, “Money and markets as twin concepts?”, Cartelier answers “in the case of Arrow-Debreu and Neo-Walrasian models the answer should be ‘no’, while in the case of ‘monetary approach’ represented by Shapley-Shubik ‘yes’”.

In GE transaction can be made only in equilibrium and there is no place for money. In the 1970s, moreover, it was demonstrated that the Arrow-Debreu model might not attain equilibrium and global stability – the Sonnenshine-Mantel-Debreu theory. Attention then turned to modeling GE under disequilibrium – the Neo-Walrasian model which reveals the dichotomy between price determination and transaction realization.

In both models Cartelier sees divergence from the actual markets and favors the ‘monetary approach’ of Shapley and Schubik, without this shortcoming.

In Chapter 10 Spahn emphasizes money as a social bookkeeping device, which indicates the following properties in the market economy: (i) the principle of efficiently guided incentives; (ii) the need for money as a medium of payment due to lack of information and mutual trust; (iii) a social mechanism or convention that ensures the overall acceptance of money. Although the view was to come into discredit due to the prevalence of GE, Spahn argues that it merits attention.

To sum up, the above chapters share the perception that the methods of analysis in orthodox economics suffer from fatal shortcomings in analyzing the actual economy. 

2．Various Aspects of Economists

Next we will turn to the chapters focusing on certain economists.

2.1 Certain Theoretical Thought

In Chapter 9 a reappraisal of Jean Bodin, a 16^th-century French thinker, is conducted from the point of view of his theory of money. Blanc argues that Bodin should not be regarded as the founder of the quantity theory of money and that his originality lies in aiming at constructing an ideal system - a part of his theoretical system of sovereignty - which would exclude all forms of false money.

  Chapter 12 offers a reappraisal of Adam Smith’s theory of money. So far Smith’s has been regarded as a convertible paper money theory. Giacomin emphasizes that it should be evaluated, rather, as an inconvertible paper money theory. Smith derived this inspiration from the monetary system in Pennsylvania, America.

  Then come two chapters focusing on Keynes’s ideas.

In Chapter 7 Rossi first states that the international monetary system should be reformed along the lines of the International clearing union plan (the Keynes plan). He then argues that the Keynes plan pays attention only to the ‘money purveyor’ in negligence of the ‘credit purveyor’, and the creation of a genuine monetary system requires two divisions (Rossi stresses Schumacher’s remarks on the Keynes plan).

In Chapter 8, “Price and prejudice”, Simonazzi and Vianello, referring to the deflation which afflicted the Japanese economy, focus on how the ‘prejudice’ that downward flexibility in money wages (and prices) can bring about full employment has survived Keynes’s criticism. On the basis of the ‘dynamic’ argument in chapter 19 of the General Theory, they criticize the ‘static arguments’ (‘prejudice’) developed later, stating that the static arguments neither address the present economic situation nor put forward economic policies to be implemented.

　In Chapter 13 attention turns to Lavington, an economist active in interwar Cambridge. Dangel-Hagnauer and Raybaut emphasize that Lavington’s fundamental view on the market economy is that money exists there right from the beginning and economic agents have a limited capacity to see through the future. Lavington sees entrepreneurs as the most important economic agents. They conduct their business activities in the opacity of a situation in which the future is evolving from the present. He sees that this ‘incalculability’ entails ‘risk and uncertainty’. Well-known is his distinction between risk (decrease in efficiency of production) and uncertainty (irregularity of incomes).

  Lavington, moreover, argues that the market economy, as compared with state socialism, brings about effective production, while, since many entrepreneurs conduct their business activities independently, adjustment in the markets is open to uncertainty; consequently, the market economy can not prevent individual incomes from fluctuating. 

Chapter 14 offers some considerations on Marco Fanno, an Italian economist of the first half of the 20^th century.

The theory of cumulative process developed by Wicksell had a great influence on theoretical economics in the interwar period. It seems to be worth stressing, as Spiller and Pomini argue, that Fanno put forward his own theory of business fluctuations as early as 1912, succeeding Wicksell’s theory critically.

After WW2 Fanno turned his focus on economic growth, which he analyzed applying the ‘progressive economy’ concept and distinguishing three kinds of growth lines, adopting an approach similar to Harrod’s and the Keynesian analysis of economic fluctuations by means of an accelerator factor and multipliers but developing his own analysis by bringing in changes in income distribution.

2.2　Way of Life

In Chapter 11, as the subtitle announces, attention turns to John Law as art collector, monetary theorist and corporate financier.

Law, who was sentenced to death in relation to a duel, fled from London to the Continent, where he came to show an interest in the banking system in Italy and the Netherlands. He rapidly worked out and sent to several governments his financial proposal, which argues that money is not to be regarded as possessing intrinsic value, and that, should it run short, the government can vitalize the economy by printing more paper money. The Law System, as it came to be known, was adopted by France but came to a sorry end with the Mississippi bubble, and Law fled to Venice.

Murphy argues that given his financial innovations in money and the capital market he might well be called the father of corporate finance.

  During his stay in Venice Law collected many works of art. Murphy describes Law as showing keen appreciation, with some interesting episodes.

In Chapter 15 the focus falls on Ezra Pound, a Fascist and anti-Semite who came close to being executed by the US. He came to take an interest in money under the influence of Silvio Gesell. As regards the banking system, however, he waxed increasingly critical as time went by. Pound insisted that interest should be kept at zero, and the state should achieve full employment by printing money.

＊＊＊

The book collects papers which show a wide range of views on “Money and Markets”. The reader has the opportunity, among other things, to encounter various new and stimulating theories which he or she can explore further by following up the references.

Keynes’s General Theory: Seventy-Five Years Later, Toshiaki Hirai

                Keynes’s General Theory:

 Seventy-Five Years Later, ed. by Thomas Cate Edward Elgar, 2012, x+348 pp.

                                                     

                                       Toshiaki Hirai

Seventy-Five years have passed since the publication of General Theory (1936. Hereafter GT). Over this period, its evaluation has dramatically had ups and downs, and every time GT marked the 10^th, 20^th … anniversary, there appeared books evaluating it from various points of view. The book reviewed belongs to the 75th one.

In advance, two points might be worth mentioning. One is that almost all the papers regard GT as containing essentials for understanding the present economy or constructing macroeconomics, so the book is “Pro-Keynesian”. The other is that the book presents diverse points of view of GT.

The book is composed of 15 chapters. The reviewer would examine it, identifying four types according to common features.

Type 1: Chapters Focused on GT

Focus on Institutions ― In Chapter 1, Asensio maintains that GT provides rich concepts of institution and equilibrium. Institutions and conventional behaviors provides an economic system with structural stabilizers such as law, regulation, monetary contract, which contribute to its convergence toward equilibrium at any time, while excluding intrinsic indeterminateness. This anchoring works through attraction of market interest rate toward conventionally expected interest rate, the resistance of money wages to fall and so forth. Asensio asserts the chapter belongs to Post-Keynesianism (GT, Ch.18-3 mentions four stabilizers for underemployment equilibrium) .

Maverick Stance ― Two papers develops his own interpretation, keeping his distance from both New Keynesians and Post-Keynesians.

In Chapter 2, Hayes states that Keynes’s innovative achievements have been almost neglected in both theory and policy. Neo-Classical Synthesis and New Keynesianism as its modern version wrongly accepted Keynes’s theory as “economics of rigidity”, while Post-Keynesians failed to grasp Keynes’s achievements by refusing Marshallian framework and deviating from the mainstream. Keynes’s theory of effective demand is a theory of employment as restatement of Marshallian equilibrium theory which takes both time and money into consideration. He also stresses the significance of liquidity for GT. (The reviewer is doubtful of how unique interpretation is in comparison with Neo-Classical Synthesis in interpreting GT.)

  In Chapter 12, firstly Hamouda puts forward his own interpretation, criticizing rather types of Post Keynesians. Firstly, he insists that TM should not be neglected, for TM and GT should be regarded as one. He maintains that the negligence of TM in economics has made economists lead to misunderstanding GT. (The reviewer thinks that TM is important in understanding how Keynes changed his theory from TM to GT. In Hamouda’s case, the Keynesian Revolution occurred in TM rather than GT. Incidentally this chapter only deals with TM in the book.) Secondly, his analysis of GT is basically based on the aggregate demand and supply theory in GT’s Chapter 3, putting emphasis on marginal efficiency of capital as well (The reviewer understands that the manuscript written at the end of 1932 is a turning point from TM to GT. See Hirai [2008] Ch.7).

Focus on Uncertainty ― In Chapter 3 (the only chapter focused on uncertainty), Muchlinski argues that Keynes’s philosophical stance is shared with Russell, and Wittgenstein as everyday language philosopher rather than logical atomism one. Based on this, he maintains that GT develops “vagueness” and “state of confidence” under uncertainty in sharp contrast with orthodox economic theory which is based on certainty and rigid deduction. Two questions emerge. One concerns the fact that GT’s main theoretical achievement is a theory of effective demand which shows how employment is determined. This aspect is ignored here. The other concerns the view that A Treatise on Probability runs through GT in full scale. Didn’t Keynes change his philosophical view, accepting Ramsey’s criticism?

Focus on Nested Structure ― In Chapter 8, Ramrattan=Szenberg argues that GT incorporates Classical views in a “nested” way, thus seeing complementarity between GT and the Classical. The authors recognize that Keynes’s idea evolved in a nested way, incorporating marginal analysis as well as macro analysis. They also admire Clower=Leijonhufvud’s non-Walrasian approach as precursor constructing a nested vision of Keynes. (The reviewer wonders if they mean, by the word “nested”, that GT is compatible with both Classicals and Non-Walrasians.)

Type 2: Chapters on Essential Rather Than GT.

Reinforced by Sraffa’s Idea and Kaldor’s Theory ― In Chapter 10, Camara-Neto=Vernengo maintain that in arguing long-run under-employment equilibrium Keynes’s theory needs to be reinforced on two points. One is Sraffa’s criticism of the limitation of neoclassical capital theory. The other is to rectify Keynes’s principle of effective demand spoiled by neoclassical marginalism through adoption of a “supermultiplier” model cum Kaldor’s “Verdoon Law”.

Monetary Stance – One is Chapter 13, in which Rochon stands by Horizontalist. In this regard, he evaluate not so much GT, which assumes the exogeneity of money supply as Keynes’s Economic Journal papers (1937 and 1939). Even there, the author argues, Keynes did not deal with a problem of endogeneity between banks and a central bank, although the direction in which Keynes moved is the same as Horizontalists did later.  

  Another is Chapter 15, in which Wray explains two alternative approaches to money – market efficiency enhancement, and state creation ― and claims that his stance (neo-Chartalist), which regards money as public monopoly, should update Keynes’s argument.

　　　　

Type 3: Chapters on Development of Postwar Macroeconomics

Positive Evaluation ― In Chapter 7, Lazzetti=Ohanian stress the influences initiated by GT. Its framework was provided to economists and policymakers, who collected the time-series data of macro economy and developed econometrics. On these points, the impact of GT was no less important than that of　Kydland=Prescott. They state that the FRB’s forecasting models are similar to Keynesian models in the 1960s, including Philips curve and management of aggregate demand. Keynesian vision provides the framework for policy implementation in the context of a central bank’s behavior attaining low unemployment rate and stability of the price level. Thus a central bank is unlikely to fall into pessimism. They are sure that GT will continue to find strong support among policy makers (The reviewer thinks that without this kind of development the “Keynesian Revolution” would not have taken place. This should be evaluated in a direct fashion.)

Negative Evaluation (The Case for New Classicals) ― In Chapter 4, describing the development of macroeconomics through the present day, DeVroey concludes that macroeconomics from now on should be developed along the direction which New Classicals initiated, declining the return to Keynes - the only chapter against Keynesianism. What attracts the reviewer, firstly, is that he categorizes IS-LM approach, New Keynesian Models mark II as “Marshallian Approach”, while New Keynesian models of the coordination failures type and New Classical models as Walrasian Approach. To the reviewer IS-LM approach and extended version incorporating many equations belong to Walrasian Approach (see Patinkin), while New Classical models are not Walrasian, for they assume a representative agent. Secondly, the reviewer sees no future for macroeconomics along New Classicals, which use utility maximization of a representative agent over an infinite period, rational expectations and calibration method. These assumptions are of no use in analyzing the real world which has experienced unstable financial globalization over the two decades.

Long-run Post Keynesian Stance ― In Chapter 6, Docherty states that Monetarism turned out to be unsuccessful, and soon Keynesian victory has been brought about by New Keynesians and Post Keynesians. That said, he points out two differences between the two: (i) Difference in causality structure; (ii) the long-run features in Post Keynesians are similar to the short-run ones in New Keynesians. He emphasizes that economics should move along Post Keynesian approach which analyzes macroeconomic policy on short run and long run issues. (The reviewer wonders why New Classical macroeconomics, which had won the victory after Monetarism over these two decades is not referred to at all.)

Response to GT from Soviet and Western Marxism ― In Chapter11, Dostaler discusses the relation between Keynes and Marx – destruction of the foundation of Ricardian economics on which Marxian economics is built, the relation in “Monetary Theory of Production”, the familiarity in love of money - , followed by Keynes’s view on Soviet, the impact of GT on Western Marxism as well as that in the Soviet bloc.

What attracts the reviewer most here – the only chapter discussed in the context of political regime change, are as follows: Big up-and-down swing in evaluation of GT/Keynes in the Soviet bloc as well as among Western Marxists. The reviewer thinks that this theme should be examined more extensively including Japan.

Comparison between Keynes and Friedman ― In Chapter 9, Backhouse = Bateman compares Keynes and Friedman, treating the two on equal terms, and mentions similarities and differences in various aspects, so one might have an impression of neutral stance.

  What is striking is that they maintain the methodological similarities, and argue that Keynes just “moved away” from, not renounce, the quantity theory of money.

　　　　　　　　　　　　Type 4:  Others

New Theories in the Previous Period - In Chapter5, Dimand points out the fact that many theories known as currently invented are, in fact, the ones which were developed before ― people including scholars simply do not notice it (e.g. Minsky’s theory can be found in Fisher’s theory of debt deflation). The author, among others, pays attention to Allais’ achievements, only one of which was credited for the Nobel Prize.

  One problem here is how we should explain and evaluate the revolutionary movement in economics in connection with this unnoticed achievements.

Emphasis on Interest and Profit - In Chapter14, profit seeking activities by firms, Smithin maintains, are essential for understanding capitalism. But this is neglected in Neoclassical theory, so it cannot be an adequate theory of capitalism. He also

emphasizes the difference between profit and interest and rejects the “equalization of the rate of profit”. The reviewer would like to know how this is related to GT.

The book, again, reveals diversity and multiple understanding of GT as well as Keynesian economics in general. This tendency might mirror the present situation in which the “Pro-Keynes” Camp is situated. The reviewer believes that as far as GT’s interpretation is concerned, it should be rather pursued based on primary material as well as on Keynes’s publications in its entirety (cf. Hirai [2008] Chs.4-12). Another task for each Pro-Keynesian is to put GT and Keynes in the context of the present world economy after the Lehman Shock (cf. Bateman, Hirai and Marcuzzo [2010]).

References

Bateman, B., Hirai, T. and Marcuzzo, M.C. eds., The Return to Keynes, The Belknap Press of Harvard University Press, 2010.

Hirai, T., Keynes’s Theoretical Development – From the Tract to the General Theory, Routledge, 2008.