Loan Negotiations with the US (Draft) ― Faced with a “Financial Dunkirk” Toshiaki Hirai (Sophia University)

Loan Negotiations with the US (Draft) ― Faced with a “Financial Dunkirk” Toshiaki Hirai (Sophia University) It was on August 17, 1945 - immediately after the end of the WWII -  that the Lend-Lease Act (LLA) was abolished. This was a snap  judgment by President Truman, a successor of Roosevelt from April on, indicating the beginning of the so-called “Stage III” with the end of the “Stage II” (the period from the defeat of Germany to that of Japan). Faced with this emergent situation, Clement Attlee, the leader of  the Labour Party, who became a prime minister just in July through an unexpectedly overwhelming victory in the general election, defeating Churchill, held a cabinet meeting on August 23, based on Keynes’s  proposal produced on August 13. Between August 17 and 23, Keynes  wrote a memorandum, “Our Overseas Financial Prospects” (Keynes  [1945]), warning a “financial Dunkirk”. On the next day, the delegation with Keynes as the top for the  negotiation with the U.S. was announced at the Commons. It left for the U.S. on August 27. Concerning a financial negotiation with the U.S., there had been one leading up to the “Anglo-American Mutual Aid Agreement” (February  1942) based on the LLA (March 1941), followed by a further negotiation due to the changed political and economical situation. As Keynes was a representative of these negotiations, his selection above-mentioned  was a natural course of event. What this paper aims at is an examination of the process of the  negotiation which started on late August and came to the conclusion of “The Anglo-American Financial Agreements” (December 6), and an  evaluation of how Keynes showed his stance as a negotiator during this process. 1. Introduction 2. Preparatory Stage: August 1945 2.1 Proposals for Financial Arrangements in the Sterling Area and between the U.S. and the U.K. to Follow after Lend Lease 2.2 Some Highly Preliminary Notes on the Forthcoming Conversations: 9 September 1945 3. Favorable Phase 3.1 Top Committee (U.S.-U.K. Financial and Economic Negotiations Top Committee): September 13― 20 3.2 Favorable Proceeding: September 20 ― October 12 4. Offense and Defense of Tactics and the Stalemate Phase: October 12 ―November 18 5. Confusion and Outcome: November 19 ― December 6 5.1 Organizational Confusion and Lack of Understanding in the US side 5.2 Internal Conflict in the UK Side ― Cabinet Meeting vs. Delegation 5.3 Vinson’s Behavior and The Anglo-American Financial Agreement (December 6) 6. Chilly Response in the UK and Keynes’s Speech at the House of Lords 6.1 Chilly Response 6.2 Keynes’s Speech at the House of Lords 7. Conclusion

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)

History of Economic Ideas (Book Review)

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.

Reparations and Keynes：September 1941 - December 1945 （Draft) Toshiaki Hirai (Sophia Univ.)

Reparations and Keynes：September 1941 - December 1945　（Draft)

Toshiaki Hirai (Sophia Univ.)

1. Introduction

2. Motivator

3. Opening

4. Malkin Committee
4.1 Keynes’s two papers
4.2 Keynes’s explanatory meeting on the Malkin Report － At the State 
Department

5. On the Demolition and Reparations of Germany
5.1 Morgenthau Program (“Program to Prevent Germany from Starting a World War III”)

5.2 Keynes’s response to the Morgenthau Program

6. Keynes’s View thereafter

7. Conclusion

Keynes’s Stance over Commercial Policy ― What Emphasis on “Imports Regulation” and “Bilateralism” Indicate Toshiaki Hirai (Sophia Univ.)

Keynes’s Stance over Commercial Policy （Draft) ― What Emphasis on “Imports Regulation” and “Bilateralism” Indicate Toshiaki Hirai (Sophia Univ.) 1. Introduction 2. Response to Meade’s Proposal on Commercial Union 2.1 Comment:“Project of a Commercial Union” 2.2 Response to: Overton Committee Draft Report 3. Keynes’s Comment and Meade’s Response ― over Imports Regulation and Bilateralism 4. Keynes’s Comment and J.M. Fleming’s Response ― Regulations of Imports vs. ExchangeDepreciation 5. Proceeding Situation within the British Government 6. Keynes’s Messages － from Washington 7. Conclusion Appendix 1. “My Notes on Mr Pasvolsky’s Memo” Appendix 2. “A Proposal for an International Commercial Union”

The Anglo-American Mutual Aid Agreement Viewed through Keynes as a Negotiator

The Anglo-American Mutual Aid Agreement Viewed through Keynes as a Negotiator

    

- Amid the Conflict/Cooperation between the Two Powers

Toshiaki Hirai (Sophia University)

1. Introduction

2. Pre-Lend Lease Act

3. Lend Lease

4. The Financial Negotiation with the US

4.1 The Major Moot Points

4.2 The Process Leading up to the Anglo-American Mutual Aid Agreement

Keynes’s Skeleton Plan (June 21, 1941)
On the latter part of “Article 7”
The Process Thereafter

4.3 Development after the AAM － Changed financial situation of the U.K. (Problem of increased sterling debts)

5. Keynes’s Observations on High Officials and Political Institutions

5.1 The Top Officials

President Roosevelt
Morgenthau, Treasury Secretary
The Feeling of Those Close to the President

5.2 Political Institutions － Fragile Relations between the Departments

6. Conclusion － On Keynes’s stance

[Appendix] Discussion with American Economists

[Abstract]

The main purpose of this paper is to examine the process of negotiation of the mutual aid agreement between the UK and the US during the years 1941 - 1943, and to clarify what sort of stance Keynes as a representative of the UK took throughout it.

Firstly we will explain the Lend Lease Act (March 1941), and proceed to how, after the Act, the UK came to conclude the Anglo-American Mutual Aid Agreement with the US (February 1942) through complicated negotiations. We will then assess Keynes’s fundamental stance, recognizable throughout these negotiations. This problem differs markedly in nature from the problem of the post-war international monetary system. The problem here was how to procure resources from the US amidst the financially and militarily dire situation – quite different from the atmosphere in which proposals for the future could be discussed.

Relations between the UK and the US were basically cooperative, and yet episodes of conflict often occurred due to geopolitical interests. Among other things, the UK took for granted the maintenance of the Sterling Bloc as the symbol of the British Empire, so that even if the UK got aid from the US, it aimed at a financial agreement which should as far as possible not interfere with the Bloc.

The fundamental line which Keynes took in the negotiation runs thus: The UK should always endeavour to keep resources at her own disposal. It is essential that the UK would be ready to preserve its independence by being able to use its own resources at any time when necessary. Keynes himself took maintenance of the Sterling Bloc for granted.

Loan Negotiations with the US (Draft) ― August 1945 – December Toshiaki Hirai (Sophia University)

                   

Loan Negotiations with the US (Draft)
― August 1945 – December

Toshiaki Hirai (Sophia University)

[Abstract]

It was on August 17, 1945 immediately after the end of the WWII that the Lend-Lease Act (LLA) was abolished. This was a snap judgment by President Truman, indicating the beginning of the so-called “Stage III”, ending the “Stage II (the period from the defeat of Germany to that of Japan). [*In the UK the Labour Party won the election, and Attlee became PM in July (-Oct. 1951), defeating Churchill. In the US Roosevelt died in April.]
  Faced with this emergent situation, the British Government held a cabinet meeting on August 23, based on Keynes’s proposal produced on August 13. Keynes himself attended it.
  On the next day, the delegation with Keynes as the top to the US was announced at the Commons. The delegation left for the US on August 27. 
  Concerning a financial negotiation with the US, there had been a negotiation leading up to the Anglo-American Mutual Aid Agreement (Feb. 1942) based on the Lend Lease Act (March 1941), followed by a further negotiation due to the change in political and economical situation. As Keynes was a representative of these negotiations, his selection above-mentioned was a natural course of event.
  What this chapter aims at is an examination of the process of the negotiation which run from late August in which a loan negotiation with the US started to the conclusion of “The Anglo-American Financial Agreements”1, and an evaluation of how Keynes showed his stance as a negotiator during these processes.

TOB

1. Introduction
2. Preparatory Stage: August

2.1  Proposals for Financial Arrangements in the Sterling Area
   and between the U.S. and the U.K. to Follow after Lend Lease

2.2 Some Highly Preliminary Notes on the Forthcoming Conversations: 9 September 1945

3. Favorable Phase

3.1 Top Committee (U.S.-U.K. Financial and Economic Negotiations Top Committee): September 13― 20

3.2 Favorable Proceeding: September 20 ― October 12

4. Offense and Defense of Tactics and the Stalemate Phase: October 12 ―November 18
5. Confusion and Outcome: November 19 ― December 6

5.1 Organizational Confusion and Lack of Understanding 
in the US side

5.2 Internal Conflict in the UK Side ― Cabinet Meeting vs. Delegation

5.3 Vinson’s Behavior and The Anglo-American Financial Agreement
   (December 6)

6. Chilly Response in the UK and Keynes’s Speech at the House of Lords

6.1 Chilly Response

6.2 Keynes’s Speech at the House of Lords

7. Conclusion 

                         

Keynes and his Battles. By Gilles Dostaler. Cheltenham (UK) and Northampton (USA): Edward Elgar Publishing Ltd., 2007. vi; 374 pp. Toshiaki Hirai (Sophia University)

Keynes and his Battles. By Gilles Dostaler. Cheltenham (UK) and Northampton (USA):

Edward Elgar Publishing Ltd., 2007. vi; 374 pp.

Toshiaki Hirai

(Sophia University)

So far no economist has emerged to surpass Keynes in the impact he has had not only in economics but in other fields as well. That phenomenon of powerful economic theory and social philosophy that came to be called the “Keynesian Revolution” is the most widely-recognized aspect of his extraordinary reach, but it does not stand alone as his only major achievement.

              As a young economist Keynes contributed to the development of philosophy and logic under the influence of G.E. Moore and Bertrand Russell. He was an intellectual leader in the Liberal party and a central figure in the Bloomsbury Group. He was, moreover, an eloquent and inexhaustible debater, celebrated, among other rhetorical coups, for his denunciation of the Versailles Treaty. His wide-ranging activities included patronizing the arts in earnest, managing insurance companies, and taking on responsibility for the financial management of King’s College. He also played a leading part in designing the new world order after the Second World War. And, surprisingly enough, he was able to pursue many of these activities simultaneously. His interests seemed to extend in every direction, and his brain worked at an extraordinary rate.

              This book brilliantly analyzes and describes Keynes the human, bringing light to bear on his manifold activities and looking at Keynes’s life in terms of persistence and continuity rather than inconsistency and discontinuity. A list of the chapter headings provides some idea of the scope of this volume: 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. In this space, however, I can only discuss a few of the many thought-provoking topics that are included.  

***

The so-called “secret” society of the Apostles and later the Bloomsbury Group had a profound influence on Keynes’s way of thinking and, indeed, on many aspects of his way of life. First, like his friends Lytton Strachey and Leonard Woolf, among others, he was greatly impressed by the ethics of G.E. Moore. That influence can be seen in the two areas of Keynes’s ethics and his work on probability. Starting his study on probalility with  his critique of chapter 5, “Ethics in Relation to Conduct”, of Moore’s Principia Ethica, Keynes wrote a dissertation for his King’s College fellowship, and that work was finally published in 1921 as A Treatise on Probability. The author places emphasis on uncertainty as immeasurable. (He is right, and yet, in my perspective, Keynes defines probability as a degree of rational belief between propositions which should be objective, and tries to prove induction in terms of pure logic.)

              Second, Keynes was deeply involved in the Bloomsbury Group, which generated a new culture in literature, painting, and beyond. The members shared Moore’s “religion,” were anti-utilitarian, and rejected the discrimination against women that still prevailed at the time. It was a group that fused the Apostles’ mindset with the artistic values of Post-Impressionism and the new movement in literature. The members were, in essence, individualistic liberals, exalting human relations and beauty and disregarding social conventions. This spirit of the Group was deep enough to support a miraculously enduring friendship in spite of its extremely complicated relationship, which is vividly and brilliantly described in the book.

***

From his early youth Keynes showed a great interest in politics, as demonstrated, for example, by his stance on the Boer War. When the First World War broke out, Keynes was asked to join the Treasury. He accepted, despite the fact that at the time he was very busy trying to get his Probability published, with the help of Russell and Broad. He ended up suspending that effort, and consequently he had to wait eight more years to see his book published.

              The war, which was to change the world fundamentally, caused a severe tension between Keynes and the rest of the Bloomsbury group. And yet he demonstrated his ability and showing confidence as a high official, leading the UK through the tough negotiation with the USA in finance. But finally he was deeply disappointed with the development of the Paris Peace Conference, and made proposals for reconstructing Europe along lines of the “Grand Scheme”.

              In the 1920s Keynes was heavily involved in the Liberal Party through management of the Nation and Athenaeum, the Liberal Summer School, and so forth. He advocated “New Liberalism” – the mid-way path between liberalism and socialism. However, his political activities took a convoluted path, reflecting the political situation then reigning in the UK. He belonged to the Asquith camp, but later turned toward Lloyd-George. After the fatal defeat of the Liberal Party, Keynes moved toward the Labour Party, and indeed his socio-philosophical and economic ideas were to show up in the thinking of young Labour Party politicians such as Dalton and Gaitskell. Eventually, however, he became a Liberal Party member in the House of Lords. These activities and the complicated political changes Keynes experienced are brilliantly portrayed in this book.

***

In my view The General Theory sees the market economy as possessing two contrasting aspects: (1) stability, certainty, and simplicity; and (2) instability, uncertainty, and complexity. Keynes’s fundamental perception of the market economy can be summarized as: The market society is stable in the sense that it can remain in “underemployment equilibrium”, but if it goes beyond a certain limit, it becomes unstable.

              In the book reviewed aspect (2) is stressed, while aspect (1) is somewhat overlooked (The author argues that aspect (2) can be traced to The Probability). The author is correct to some degree, and yet I would add that The General Theory would never have won such success had it been lacking in aspect (1). In fact Keynes brought aspect (1) to the fore whenever he expressed his view in the field of economic policy.

***

              This volume might have more benefited by referring to Keynes’s colleagues, such as Robertson and Hawtrey, for they were not classified by Keynes as “classical economists.” But this might be a task for another volume. The book is very readable, and it is a valuable and contribution to understanding Keynes as a human being endowed with extraordinary and multifaceted talents.

Keynes as a planner and negotiator Toshiaki Hirai (Sophia University)

　

Keynes as a planner and negotiator 　　　　　　　　　　　　　　　　　　　　　　　　Toshiaki Hirai (Sophia University) 1. The starting point 2. The International Clearing Union (the Keynes plan) 　　2.1. The process up until the Keynes plan 　　2.2. Principal features of the Keynes plan 3. The International Stabilization Fund (the White Plan) 　　3.1. UNSF: White Plan [Ia] 　　3.2. BRD: White Plan [Ib] 4. The two plans compared 　　 　　4.1. Awkward relationship 　　4.2. The ICU plan as publicized 　　4.3. The two plans reviewed 5. The integration process between the two plans 　　5.1. Monetisation of unitas 　　5.2. The final phase of the negotiations 6. The Atlantic City, Bretton Woods and Savannah conferences 7. Keynes’s stance shown in the international monetary system 8. Addenda 　　8.1. Relief and reconstruction 　　8.2. Commodity problem

Book Review: 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)

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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.

Book Review: Keynes and his Battles. By Gilles Dostaler. Cheltenham (UK) and Northampton (USA): Edward Elgar Publishing Ltd., 2007. vi; 374 pp. Toshiaki Hirai (Sophia University)

• 2018/6/4(月) 午後 8:36
 
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Keynes and his Battles. By Gilles Dostaler. Cheltenham (UK) and Northampton (USA): Edward Elgar Publishing Ltd., 2007. vi; 374 pp. Toshiaki Hirai (Sophia University) So far no economist has emerged to surpass Keynes in the impact he has had not only in economics but in other fields as well. That phenomenon of powerful economic theory and social philosophy that came to be called the “Keynesian Revolution” is the most widely-recognized aspect of his extraordinary reach, but it does not stand alone as his only major achievement. As a young economist Keynes contributed to the development of philosophy and logic under the influence of G.E. Moore and Bertrand Russell. He was an intellectual leader in the Liberal party and a central figure in the Bloomsbury Group. He was, moreover, an eloquent and inexhaustible debater, celebrated, among other rhetorical coups, for his denunciation of the Versailles Treaty. His wide-ranging activities included patronizing the arts in earnest, managing insurance companies, and taking on responsibility for the financial management of King’s College. He also played a leading part in designing the new world order after the Second World War. And, surprisingly enough, he was able to pursue many of these activities simultaneously. His interests seemed to extend in every direction, and his brain worked at an extraordinary rate. This book brilliantly analyzes and describes Keynes the human, bringing light to bear on his manifold activities and looking at Keynes’s life in terms of persistence and continuity rather than inconsistency and discontinuity. A list of the chapter headings provides some idea of the scope of this volume: 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. In this space, however, I can only discuss a few of the many thought-provoking topics that are included. *** The so-called “secret” society of the Apostles and later the Bloomsbury Group had a profound influence on Keynes’s way of thinking and, indeed, on many aspects of his way of life. First, like his friends Lytton Strachey and Leonard Woolf, among others, he was greatly impressed by the ethics of G.E. Moore. That influence can be seen in the two areas of Keynes’s ethics and his work on probability. Starting his study on probalility with his critique of chapter 5, “Ethics in Relation to Conduct”, of Moore’s Principia Ethica, Keynes wrote a dissertation for his King’s College fellowship, and that work was finally published in 1921 as A Treatise on Probability. The author places emphasis on uncertainty as immeasurable. (He is right, and yet, in my perspective, Keynes defines probability as a degree of rational belief between propositions which should be objective, and tries to prove induction in terms of pure logic.) Second, Keynes was deeply involved in the Bloomsbury Group, which generated a new culture in literature, painting, and beyond. The members shared Moore’s “religion,” were anti-utilitarian, and rejected the discrimination against women that still prevailed at the time. It was a group that fused the Apostles’ mindset with the artistic values of Post-Impressionism and the new movement in literature. The members were, in essence, individualistic liberals, exalting human relations and beauty and disregarding social conventions. This spirit of the Group was deep enough to support a miraculously enduring friendship in spite of its extremely complicated relationship, which is vividly and brilliantly described in the book. *** From his early youth Keynes showed a great interest in politics, as demonstrated, for example, by his stance on the Boer War. When the First World War broke out, Keynes was asked to join the Treasury. He accepted, despite the fact that at the time he was very busy trying to get his Probability published, with the help of Russell and Broad. He ended up suspending that effort, and consequently he had to wait eight more years to see his book published. The war, which was to change the world fundamentally, caused a severe tension between Keynes and the rest of the Bloomsbury group. And yet he demonstrated his ability and showing confidence as a high official, leading the UK through the tough negotiation with the USA in finance. But finally he was deeply disappointed with the development of the Paris Peace Conference, and made proposals for reconstructing Europe along lines of the “Grand Scheme”. In the 1920s Keynes was heavily involved in the Liberal Party through management of the Nation and Athenaeum, the Liberal Summer School, and so forth. He advocated “New Liberalism” – the mid-way path between liberalism and socialism. However, his political activities took a convoluted path, reflecting the political situation then reigning in the UK. He belonged to the Asquith camp, but later turned toward Lloyd-George. After the fatal defeat of the Liberal Party, Keynes moved toward the Labour Party, and indeed his socio-philosophical and economic ideas were to show up in the thinking of young Labour Party politicians such as Dalton and Gaitskell. Eventually, however, he became a Liberal Party member in the House of Lords. These activities and the complicated political changes Keynes experienced are brilliantly portrayed in this book. *** In my view The General Theory sees the market economy as possessing two contrasting aspects: (1) stability, certainty, and simplicity; and (2) instability, uncertainty, and complexity. Keynes’s fundamental perception of the market economy can be summarized as: The market society is stable in the sense that it can remain in “underemployment equilibrium”, but if it goes beyond a certain limit, it becomes unstable. In the book reviewed aspect (2) is stressed, while aspect (1) is somewhat overlooked (The author argues that aspect (2) can be traced to The Probability). The author is correct to some degree, and yet I would add that The General Theory would never have won such success had it been lacking in aspect (1). In fact Keynes brought aspect (1) to the fore whenever he expressed his view in the field of economic policy. *** This volume might have more benefited by referring to Keynes’s colleagues, such as Robertson and Hawtrey, for they were not classified by Keynes as “classical economists.” But this might be a task for another volume. The book is very readable, and it is a valuable and contribution to understanding Keynes as a human being endowed with extraordinary and multifaceted talents.

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