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.

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.

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)

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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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Keynes’s General Theory: Seventy-Five Years Later, ed. by Thomas Cate, Edward Elgar, 2012, x+348 pp.

                Keynes’s General Theory:

 Seventy-Five Years Later, ed. by Thomas Cate,

 Edward Elgar, 2012, x+348 pp.

Toshiaki Hirai

(Sophia University, Tokyo & President of Keynes Society Japan)

Seventy-Five years have passed since the publication of General Theory (1936. Hereafter GT). Over this period, evaluation of the work has gone through a dramatic series of ups and downs, and for every GT anniversary, the 10^th, 20^th …, books have appeared evaluating it from various points of view. The book reviewed here marks the 75th anniversary.

Two points might be worth mentioning in advance. To begin with, almost all the papers see GT as containing essentials for understanding the present economy or reconstructing macroeconomics, so the book is “Pro-Keynesian”. Secondly, the book presents diverse points of view on GT.

The book is composed of 15 chapters. We will examine them, identifying four types on the basis of common features, adding very brief comments due to lack of space.

Type 1: Chapters Focused on GT

Focus on Institutions ― In Chapter 1, Asensio maintains that GT provides a wealth of concepts on institutions and equilibrium. Institutions and conventional behaviors endow an economic system with structural stabilizers such as law, regulations, monetary contracts, which contribute to its convergence toward equilibrium at any given time, while excluding intrinsic indeterminateness. This anchoring works through attraction of the market interest rate towards a conventionally expected interest rate, the resistance of money wages to a fall, and so forth. He attributes the chapter to Post-Keynesianism (it reminds me of GT, Ch.18-3 in which four stabilizers for underemployment equilibrium are mentioned) .

Maverick Stance ― In Chapters 2 and 12 each author puts forward 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 practically neglected in both theory and policy. The Neo-Classical Synthesis and New Keynesianism as its modern version wrongly took Keynes’s theory as “economics of rigidity”, while Post-Keynesians failed to grasp Keynes’s achievements, rejecting the Marshallian framework and deviating from the mainstream. Keynes’s principle of effective demand is a theory of employment as a restatement of Marshallian equilibrium theory, which takes both time and money into consideration. He also stresses the significance of liquidity for GT.

I wonder just to what degree this interpretation of GT is unique as compared with the one, for example, by the Neo-Classical Synthesis.

  In Chapter 12, Hamouda starts with putting forward his interpretation, criticizing Post Keynesians. Firstly, he insists that A Treatise on Money (1930. Hereafter TM) should not be neglected, for TM and GT should be regarded as one. He maintains that the neglect of TM in economics has lead economists to misunderstand GT. In his argument, the Keynesian Revolution occurred in TM rather than GT. Secondly, his analysis of GT is based essentially on the aggregate demand and supply theory in Chapter 3 of GT, placing the emphasis on the marginal efficiency of capital as well.

  I think that much of the importance of TM lies in enabling to trace how Keynes changed his theory from it to GT and see the manuscript written at the end of 1932 as a turning point from TM to GT. Incidentally, this chapter is the only one to deal with TM in the book.

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 a philosopher of ordinary language (rather than logical atomism). Based on this, he maintains that GT develops the themes of “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 lies in a principle 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. They maintain 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, according to them, as a precursor constructing a nested vision of Keynes.

  One cannot help wondering 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 with 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 limitations of neoclassical capital theory. The other is rectification of Keynes’s principle of effective demand, which was spoiled by neoclassical marginalism, through adoption of a (Sraffian) “supermultiplier” model together with Kaldor’s “Verdoon Law”.

Monetary Stance – In Chapter 13 Rochon takes the Horizontalist approach. In this regard, he evaluates 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 the problem of endogeneity between banks and central bank, although the direction in which Keynes moved is the same as the Horizontalists took later.  

  I wonder if he judges GT a failure because of the liquidity preference theory.

  In Chapter 15 Wray mentions two alternative approaches to money – market efficiency enhancement approach, and state creation approach (Chartalism) ― and claims that his stance (neo-Chartalism), which regards money as public monopoly, should update Keynes’s view on chartal money. I am inclined to agree with Wray’s view in regard to “the difference between the actions of central banks and treasuries” together with “many potential problems” (p.337), which is a central problem with which the present world economy is faced.

　　

Type 3: Chapters on Development of Postwar Macroeconomics

Positive Evaluation ― In Chapter 7, Lazzetti=Ohanian stress the influences initiated by GT. The framework it provided was taken up by 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 forecasting models are similar to Keynesian models in the 1960s, including the Philips curve and management of aggregate demand. The Keynesian vision provides the framework for policy implementation in the context of a central bank’s behavior aiming at achieving a low unemployment rate and stability of the price level. Thus a central bank (in this condition) is unlikely to give way to pessimism. The authors are sure that GT will continue to find strong support among policy makers.

  It is my opinion 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 to 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.

The first striking point is that DeVroey categorizes the IS-LM approach and New Keynesian model mark II as a Marshallian approach, while classifying the New Keynesian models of the coordination failures type and New Classical models as a Walrasian approach. To my understanding, the IS-LM approach and its extended version incorporating many equations belong to a Walrasian approach (see Patinkin), while the New Classical models are not Walrasian, for they assume a representative agent. Secondly, I see no future for macroeconomics along the lines of the New Classicals, who use utility maximization of a representative agent over an infinite period, rational expectations and the calibration method. These assumptions are of no use in analyzing the real world which has experienced unstable financial globalization over the last two decades.

Long-run Post Keynesian Stance ― In Chapter 6, Docherty states that Monetarism turned out to be unsuccessful, and that the vindication of Keynes was rapidly provided by the New Keynesians and the Post Keynesians. That said, he points out two differences between the two: (i) the difference in causality structure; (ii) the long-run features in the Post Keynesians are similar to the short-run ones in the New Keynesians. He emphasizes that economics should move in the direction of the Post-Keynesian approach, which analyzes macroeconomic policy on short run and long run issues.

  I cannot help wondering why New Classical macroeconomics, which has triumphed over Keynesianism in these two decades, is not referred to at all.

Response to GT from Soviet and Western Marxism ― In Chapter 11, Dostaler discusses the relation between Keynes and Marx – destruction of the foundation of Ricardian economics on which Marxian economics is built, the relation in terms of “Monetary Theory of Production”, the familiarity in terms of “love of money” - , followed by Keynes’s view on the Soviet Union, and the impact of GT on Western Marxism as well as in the Soviet bloc.

What attracts me most here – the only chapter argued in the context of political regime change – is the great up-and-down swing in evaluation of GT/Keynes in the Soviet bloc as well as among Western Marxists. This is a theme that merits more extensive investigation – also in relation to the Japanese Marxists.

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, to the extent that one might have an impression of a neutral stance.

  What is striking is that they maintain the methodological similarities, and argue that Keynes just “moved away” from, without rejecting, the quantity theory of money.

　　　　　　　　　　　　Type 4:  Others

New Theories in the Previous Period ― In Chapter 5, Dimand points out that many theories thought to have been currently invented were, in fact, developed some time before, but failed to find due attention, even among scholars simply (e.g. Minsky’s theory can be found in Fisher’s theory of debt deflation). Among other examples, he considers 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, taking into account these unnoticed achievements.

Emphasis on Interest and Profit - In Chapter14, Smithin maintains that the profit seeking activities of firms are essential for understanding capitalism. However, they are neglected in Neoclassical theory, which cannot therefore constitute an adequate theory of capitalism. He also emphasizes the difference between profit and interest, rejecting the “equalization of the rate of profit”.

I would like to know how this relates to GT.

The book thus offers a great diversity of viewpoints on GT as well as Keynesian economics in general, which might well reflect the present situation in which the “Pro-Keynes” Camp finds itself in, but on the whole it is to be welcomed.

  Finally, there are a few points I would need to make: (i) As far as interpretation of GT is concerned, it should be pursued essentially on primary material as well as Keynes’s publications, and that in their entirety; (ii) The most important task for all Pro-Keynesians is to place GT and Keynes in the context of the present world economy over these two decades.

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.

                                                                                         

 

On Skidelsky’s Keynes and Other Essays: Selected Essays of G.C. Harcourt,

              On Skidelsky’s Keynes and Other Essays:

                   Selected Essays of G.C. Harcourt

Palgrave Macmillan, 2012, pp. xi+342

                                                                                                       Toshiaki Hirai

                                                                                                    (Sophia University)

                                                                 

1. The book under review is composed of many essays written, mainly, in the first decade of this century by Prof. G.C. Harcourt, an eminent economist representing the Cambridge Keynesians; it covers a wide range of related theories, book reviews, intellectual biographies, autobiography, and so forth. Therefore, by its very nature the book deals with diversified themes, which makes it somewhat difficult for a reviewer to decide where the focus should be turned. That said, the author’s fundamental views or stances running through the book are fairly evident, which is why the reviewer has chosen to take up and discuss these views or stances rather freely.

2. Prof. Harcourt’s central messages

The author’s main messages – two messages in this section, and two in the next section - running through the book might be summarized as follows.

(Message 1) The essential path of economics has been traced out by economists M. Kalecki and R. Goodwin, who are most highly evaluated for their ‘cyclical growth approach’ (cf. pp. 221, 230, 323), and N. Kaldor for ‘his cumulative causation processes’, which is explained in terms of ‘two types of wolf pack – convergence or cumulative causation’ (cf. 228, 230, 323). Also recognized as major pathfinders are J. Robinson and P. Sraffa, who are highly praised for construction of the Classical theory of value (cf. 206), and L. Pasinetti.

These economists are presented as the main figures representing the essential course of economics, i.e., the Cambridge Keynesian School (hereafter CK) which developed after the Second World War.

  The CK has conspicuous features. Firstly, it lays its foundations on Ricardo-Sraffa-Marx’s theory of value, in spite of the fact that Keynes praised the Malthusian theory, rejected the Ricardian theory, used a method of equilibrium analysis in various areas, and neglected Marxian theory. (It should be noted that this first feature was not recognizable in the Cambridge of the interwar period.) The author highly evaluates Marx as being on an equal footing with Keynes (cf. Ch.6).

Secondly, the CK claims to be the true successor to Keynes’s theory (cf. section 3 below).

  (Message 2) The wrong direction in economics was taken along the Marshall-Pigou line which, emphasizes equilibrium (the first group of the ‘wolf pack’ analogy) – i.e. the line based on Neo-classical theory (cf. 324). It includes not only the Neo-classical Synthesis but also the New Classical economists (cf. 76) as well as the New Keynesians (cf. 231).

   

We will begin by considering the Neo-classical Synthesis. Such had been the mainstream economics which included Keynesian economics at the macroeconomic level and Walrasian economics as microeconomic component up until the 1970s. The Keynesians who belong to this Synthesis are just called “Keynesians”, represented notably by P. Samuelson, J. Tobin and J.R. Hicks. The IS-LM model is emblematic here. The CK as represented by J. Robinson, Sraffa and Pasinetti criticized the “Keynesians” on various points including the concept of price as index of scarcity, “the need to measure capital in units independent of value and distribution, [and] a method which used comparisons based on differences to analyze processes associated with changes” (324).

Returning to the Neo-classical Synthesis, Keynesian economics gave

rise, in tandem with empirical analysis by means of econometrics,

to the “Keynesian Revolution”, and exerted a great influence not only

on economics, but also on economic policy and social philosophy.

At the level of history of economic thought, the CK was not able to

rule the roost in the world of economics.

  The author points out two phenomena which allowed for the dominance of the Neo-classical Synthesis. One lies in the fact that many economists had been brought up on Samuelson’s textbook, Economics, while Tarshis’s was neglected, which had tragic consequences (cf. 150). The other is that the prevalence of understanding Keynes’s theory in terms of the general equilibrium framework brought about another tragedy (cf. 151).

  Let us now turn to the New Classical economists and the New Keynesians – recent phenomena in macroeconomics. The author seems to sum them up, following J. Robinson, as “Pre-Keynesian theory after Keynes” (cf. 257). The New Classical economics, which has the representative agent with rational expectations, has become the orthodoxy since the 1980s, while the New Keynesian economics has emerged, with its belief in the stickiness of the market mechanism and acceptance of the theoretical tools of the New Classical economics. (The reviewer agrees with the author in holding that they are not useful in capturing the real world.) The author laments that Cambridge has, at present, become a US-clone (cf.219).

 In this connection, we may observe that the Neo-Classical Synthesis, like the “Keynesians”, has disappeared from economics except for introductory courses. Most macroeconomists had become either New-Classical economists or New Keynesians, but the Lehman Shock has shattered confidence in them, and we have since seen a revival of the original Keynes. However, nobody knows how genuine macroeconomics should be constructed.

　With regard to the Post-Keynesians, the book deals solely with the CK. The explanation of, among other things, the CK in Chs.21 and 22 is very instructive.

The 1980s saw the famous Trieste Post-Keynesian Summer Schools underway. The three different strands gathered there: the US Post-Keynesians (Davidson, Minsky), the Cambridge Keynesians (Kaleckians), and the Sraffians (Neo-Ricardians). Their differences led to what came to be known as the “Trieste Problem”. In a word, in Cambridge, through J. Robinson, Kalecki and Srafa, the second and third groups became prevalent (we have so far referred to them as the CK). The author belongs to this group, adopting the so-called “horses for courses” approach, although in this book, unlike some other books of his, he does not specifically dedicate a chapter to this complicated problem.

3. On the Treatise and the General Theory

    (Message 3) The General Theory has the following features (cf.224, 322)

   

Central position of the rate of interest

      Determination of prices different from that of Neo-classical economics

      Analysis by means of aggregate demand and supply functions

      Short-term analysis

      Underemployment equilibrium

      Monetary analysis from the start

   Importance of uncertainty and shifting equilibrium

(Message 4) The Treatise belongs to the Marshall-Pigou line, including the quantity theory (cf. 26, 222. General equilibrium theory is also included here). Keynes then developed quite a new (revolutionary) theory in the General Theory. 

With regard to (Message 3), the reviewer is in total agreement. In my understanding, there are three central themes we can identify as running through the General Theory: Contrasting potentialities ― stability, certainty and simplicity versus instability, uncertainty and complexity; Monetary economics; Underemployment equilibrium as embodying equilibrium, stability, and fluctuation.

As for (Message 4)* , I regard the Treatise as belonging to the Wicksell connection - a new monetary economics, criticizing the quantity theory, the classical dichotomy, and Say’s Law. 

The most significant feature of the Treatise theory might arguably lie in the coexistence of a Wicksellian theory and “Keynes’s own theory”. What characterizes the period up to mid-1932 was that Keynes maintained and improved upon “Keynes’s own theory,” disregarding the Wicksellian theory. Towards the end of 1932, he put forward a new formula for a system of commodity markets in the manuscript entitled “The Parameters of a Monetary Economy”. There emerged the model consisting of a system of simultaneous equations based on the equality of investment and saving in which profits do not relate to the determination of prices and output. This marked a turning point towards the General Theory.

The three 1933 manuscripts constitute the origins of Chapter 3 of the General Theory. They substantially discuss both an equilibrium condition for the level of employment and its stability condition, although no concept appears corresponding to the aggregate supply function of the General Theory.

　By the end of 1933, he had established the following points: a system of determining the level of employment; the consumption function; the fundamental psychological law; the liquidity preference theory; the marginal efficiency of capital; and the multiplier theory. In the spring and summer of 1934, Keynes put forward almost the same theoretical framework as that of the General Theory in the area of consumption and investment theories (the “eve of the General Theory”).

Through these passages, Keynes finally arrived at the General Theory.

*What follows comes from T. Hirai, Keynes’s Theoretical Development

- From the Tract to the General Theory, Routledge, 2008.

4. On Keyes’s Activities in the WW2

The author reviews Skidelsky’s John Maynard Keynes in great detail. There are many instructive points. Here I will confine my attention to XV-XVIII (43-48), which addresses Keynes’s activities during WW2. The author highly evaluates “How to Pay for the War”, noting three significant points (cf.47). He also argues that the defeat of the International Clearing Union (ICU) plan (Keynes’ plan) in favour of the White plan (cf.264) represented a loss for the post-war world.

In this respect, the reviewer would add a further point: we might see the “internationalist” system designer and political pragmatist as two facets of Keynes? I find them constantly appearing in his postwar activities in the commodity problem, the rescue and reconstruction problem, and an international monetary system negotiation. Keynes as a system designer formulated proposals showing excellence at the level of “internationalism”, while, in the process of negotiations, he revealed his capacities as a political pragmatist pursuing the interests of the British Empire.

In the case of the international monetary system, around June 1943 Keynes, in practice, put his own ICU plan aside, and tried to arrive at some sort of compromise by reforming the White plan through monetization of unitas. This effort failed due to the resistance of the US. In the end, Keynes even came round to justifying the White plan on the ground that it was much more crucial to secure financial aid from the US – a justification difficult to understand from the point of view of the ICU plan.

5. On Social Philosophy (Evaluation of Capitalism)

The author argues that democratic socialism as advocated by Kalecki

would be the best way forward. Nevertheless, he acknowledges that the

time for it has passed, so the “mixed economy” (a more humane

economy) should be the second best (cf.267).

He also argues that capitalism should be examined as a cumulative causal relation rather than in terms of the equilibrium point of view, and is highly critical of Neo-liberalism (as the title of Ch.7 shows).

He has been involved in Australian political and economic issues

for many years. He advocates an incomes policy linked to the issues of

pension reform and the labor market. These issues are considered in

relation to Kaleckian theory (cf. 144, 265). He also emphasizes the

Kaleckian dilemma in managing the economy before and after full

employment. (cf. 143, 260-261).

 Unlike the usual academic books, this book contains the author’s biography (his racial identity and situation, activities in the anti-Vietnam Wars, and so forth) and book reviews of many distinguished economists with whom the author has worked together – Pasinetti, Asimakopulos, the latter of which the reviewer found most interesting, and so forth.

To resume my opening remarks, the book is rich in a wide range of topics. For all readers it represents (as indeed it has been for the reviewer) a good opportunity to approach various topics anew through the author's own perspective and views.