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Mark G. Hayes, The Economics of Keynes: A New Guide to The General Theory (Cheltenham and Northampton: Edward Elgar, 2006) pp.xvi, 257, ￡25, ISBN 13:978-1-84720-082-2. Toshiaki Hirai (Sophia University) I. Readers may feel bewildered by a unique composition of the book: short texts and long appendices with almost equal (around 115) pages. Moreover, each appendix comprises several sections, each of which is cross-referenced both in text and appendix which will make readers have some difficulty in understanding what the author intends to argue. The book is subtitled “A New Guide to The General Theory”. Readers might expect that the book is an easily understandable introduction for those who have not read, but would like to read the General Theory. In fact this is not the case. The book should be called, by its nature, a “guide” for the author’s own interpretation of the General Theory. The author tries to show readers what he regards as the essence of the General Theory, without reference to other interpretations so far made — to take only two examples, Gordon ed. (1970) in which the then leading economists showed their own interpretations of the General Theory, and Leijonhufvud (1968). The book does not also deal with Keynes’s other main writings such as A Tract on Monetary Reform and the Treatise (1930). Readers are asked to have the General Theory beside him/her, for the author, in his argumentation, mentions pages only of the General Theory. This will make readers who do not read it have some difficulty. To repeat, the book is fully occupied with the author’s interpretation of the General Theory and is written for those who are familiar with the General Theory. II. Now let us see the substance of the book. As the essence of the General Theory, in the reviewer’s understanding, two points are presented: one is concerned with an equilibrium analysis, and the other with expectations and liquidity. My aim has been to show more clearly how Keynes extended Marshall’s theory of supply and demand, or competitive equilibrium, to take account of the true nature of the monetary production economy … The major corollary is that equilibrium analysis in economics can be rigorous … only in a given state of expectation, which for most purposes means only at a point in time (p.206). It should be kept in mind that the above includes four “propositions of The General Theory” (p.1) — equilibrium, competition, money and expectation (the rest is liquidity). In the reviewer’s view Keynes sees the market economy as possessing two contrasting potentialities: (i) stability, certainty and simplicity; (ii) instability, uncertainty and complexity. His fundamental perception of the market economy can be summarized as follows: “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 (Hirai, 2008, pp.180-181). The reviewer with this understanding can agree to the author’s above interpretation. Equilibrium Analysis The author emphasises that “[t]he core of The General Theory must be understood as an equilibrium theory” (p.4). Here, according to him, equilibrium has two meanings: (i) it should be grasped in the “mechanical” sense (see pp.3 and 75); (ii) it should follow Marshall’s tradition (see p.175). He is thus critical of a view regarding the General Theory as a long-run theory (see pp.206 and 221). The argument for this can be found, at least, at two places. Firstly, Chapter 3 comes, for the author regards it as “the core of the book” (p.54). … Keynes extends Marshall’s analysis of competitive supply and demand from partial to system equilibrium, by introducing the principle of effective demand (p.60). The author’s unique position is seen when he says that “the point of effective demand is a short-period equilibrium position” (p.59), for “short-period” here is defined as extremely brief period – as daily basis or a point in time, to which the reviewer does not agree. Since Keynes’s short period is his day, …, this means that aggregate demand and supply are in static equilibrium at all times (every day) (p.59). Secondly, the author talks about “the equilibrium sub-system of the General Theory” (p.175), admitting “IS-LM model” interpretation: … section I of G..T.’s Chapter 18 describes a set of simultaneous equations …. Although Hick’s claim to have Keynes’s blessing for IS-LM is controversial, Keynes undoubtedly assented to the interpretation (p.175). “Sub-system” means that the three independent variables (the propensity to consume, the state of long-term expectation and the preference for liquidity) go “beyond the reach of equilibrium analysis”. The three independent variables are closely related to expectation and uncertainty (another feature of the General Theory) emphasized by the author. That is why he describes Ch.18 “as a short-term equilibrium model nested within a larger open system, in which comparisons of different positions of static equilibrium of the model can be made, but which cannot itself be modelled in equilibrium terms” (p.176. Underlines are the revierwer’s). Throughout the book Keynes is regarded as the person who extends Marshallian theory. No attention (see. pp.70-72 and 84) is paid to the fact Keynes criticises the classical dichotomy and Say’s law advocated by Marshall as well as both Marshall’s theory of interest and quantity theory. That is why he regarded Marshall as a classical economist, and put forward a theory of underemployment equilibrium. The author’s argument concerning the relationship between the two misses this fact. Expectations and Liquidity Let us turn to another point emphasized by the author throughout the book: expectations and liquidity (the fourth and fifth propositions of The General Theory). Though the author develops variety of arguments in this field, we will confine, due to lack of space, to the main point. In Ch.4 the author explains, as the feature of The General Theory, “Keynes’s three macroeconomic functions” (the propensity to consume, the schedules of liquidity preference and marginal efficiency of capital) and “his system of classification” (consumption goods and a larger compartment composed of money, bonds and capital assets), arguing that “the common foundation … [of them] is our uncertainty about the future” (p.140. See also p.144). In this argument the author stresses Ch.17, “The Essential Properties of Interest and Money”, in which a broader definition of liquidity preference (“Liquidity means more than convertibility and includes the degree to which the value of an asset, …, is independent of changes in the state of long-term expectation” [p.151]) and the above two schedules (cf. p.143) are argued. The author emphasizes, above all, the rate of interest in this respect. … the rate of interest has a life of its own, based on our well-founded distrust of forecasts of the long-term future and on the security offered by money, as the store of value least affected by changes in such forecasts (p.154). In the reviewer’s view, Ch.17 is very important in understanding The General Theory. However, it occupies a unique position, for the argument there is developed in terms of stocks of all assets, and “the price of each asset is held under perfect competition at the equilibrium point where the net advantage … from holding any asset is the same” (p.140), while in the rest of The General Theory argument is developed in terms of flow (income, saving and investment). There is no guarantee that the stock equilibrium, in which, because of money’s liquidity, money rules the roost and under-employment equilibrium occurs, should be compatible with the flow equilibrium, at which the level of employment is determined (in Ch.3 or Ch.18). The two cannot be compatible, for the time in the case of stock equilibrium is long (capital asset is changeable) while the time in the case of flow equilibrium is short (capital is assumed to be fixed). This point is not considered in this book in spite of the fact that various concepts of period are distinguished. III. The book proceeds so that each “Book” of The General Theory is explained in good order. The pages are almost occupied with the author’s own interpretations so that it might not be easy for readers to follow them. What is unique is that 50 pages are spent for interpreting Book II “Definitions and Ideas” of The General Theory for the following reason. Book II of The General Theory addresses fundamental issues which modern theorists have continued to debate, apparently without realising that Keynes has already resolved them. Most seriously, the Classical microeconomic foundations of macroeconomics are already there in The General Theory itself (p.83). Ch.5 “Expectation as Determining Output and Employment”, above all, is considered to be important, for the author argues that it contains the elements of Keynes’s treatment of time, upon which depends the rest of the theoretical structure, including his concepts of equilibrium, the state of expectation, effective demand and income. On the other hand, Book III, “The Propensity to Consume”, is considered to be unimportant (see p.126). Book IV is regarded very highly, among others, Ch.17 as we saw above. IV. The author says in Epilogue that “The purpose of this book has been to set forth a perspective on The General Theory which resolves many puzzeles and paradoxes that have been found in it by other writers over 70 years, and enables the reader to appreciate its intellectual coherence and true significance” (p.221). This purpose is, by the nature of things, an extremely difficult task. Any reader, who has neither read The General Theory nor is familiar with the post-war development of macroeconomics, is not put in a position of how he/she should evaluate this book in relation to The General Theory, in which the author’s own interpretation is exclusively shown. Any reader, who has read and studied it, has got his/her understanding of The General Theory, and has seen what kinds of interpretations of it have been put forward. He or she might show consent in some places, and disagree in other places of this book, as this reviewer did. After all, any reader is forced to face The General Theory per se and evaluate it by himself/herself. As the author said in Preface, “this book will draw some fire, although I trust also some support, from both schools (the Classical School and Post Keynesian School)” (p.xi). References Clower, R., 1965. The Keynesian counterrevolution: a theoretical appraisal. In F. Hahn and F. Bechling ed. The theory of interest rates. London: Macmillan, p.103-25. Gordon, J. ed., Milton Friedman’s monetary framework. Chicago: University of Chicago Press, 1970. Hirai, T., 2008. Keynes’s theoretical development – from the Tract to the General Theory, London and New York: Routledge. Leijonhufvud, A., 1968. On Keynesian economics and the economics of Keynes. Oxford: Oxford University Press. |
