On Keynes and the Quantity Theory

Slow posting will continue for quite a while. Backlogged with work. At any rate, I've been reading (almost done now) Richard Davenport-Hines new book on Keynes, Universal Man: The Lives of John Maynard Keynes. Nothing new really. And that should not be a surprise after the biographies by Skidelsky and Moggridge.

There are many little issues here and there, which is inevitable, given Keynes' own contradictions, and the overwhelming number of interpretations of his work. There is one point, which is repeated by Davenport-Hines, based on a monetary interpretation of the development of the Principle of Effective Demand (PED), which I think is completely misguided. He says that: “Keynesian economics developed from its progenitor’s rejection of the quantity theory of money [QTM].” Not really. The theory developed from the rejection of Say's Law. The rejection of the QTM is a side effect.

In fact, in terms of the monetary views, Keynes had moved from the QTM in his Tract in 1923, to a Wicksellian model in his Treatise in 1930, with endogenous money, to having exogenous money, and, in that respect being closer to the QTM, in the General Theory (GT) in 1936. Many posties like the Treatise more than the GT for that reason. I prefer the GT, since it has investment and savings being adjusted by income (PED), rather then the rate of interest. And he at least tries to get rid of the notion of a natural rate of interest in the GT.

Davenport-Hines gets closer to the real contribution of the GT, and the reasons for its development, when quoting Austin Robinson, who said in 1947:
“a great step forward in economic thought when Keynes insisted that we should have a general theory – a theory which was valid not only with full (or near-full) employment, but also with unemployment – and that we should know clearly which of the propositions of economics were universally valid, and which were valid only in conditions in which it might be true that an increase of one activity was possible only at the expense of another activity. In the Cambridge thought of my time I believe that no single forward step has been so important.”
The real revolutionary thing in the GT is that the system does not have a tendency to full utilization of resources, no natural rate.* Full employment is one possibility. That's why his theory was general. What Keynes was trying to reject is the neoclassical version of Say's Law, that implies that changes in the rate of interest guarantee that investment equilibrates to full employment savings.

In fact, changes in aggregate demand, and that would include increases in the exogenous supply of money, would have inflationary consequences with full employment. Keynes' views on inflation remained very conventional, as they had been during the German hyperinflation, based on excess demand.

* To do that requires getting rid of the marginal efficiency of capital, but that's another story.


  1. What do you think of Pasinetti's notion of a "natural" interest rate - one that would be equal to the weighted (by sectoral employment) average of productivity growth, so as to keep a constant value of the lended sums in terms of labor ? Of course the theoretical framework is very different, and I'm not even sure I understand it well. But does it make more sense than the wicksellian rate to you ?

    1. Yep, I did read Pasinetti's work. It is in the same tradition as Ricardo, so to speak, in which the rate of interest is a real variable. I prefer Sraffa's view, as discussed by Pivetti, in which the rate of interest is determined exogenously by the monetary authority. That is also compatible with Keynes conventional (and not psychological) normal rate of interest.


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