Guide Money, Uncertainty and Time (Routledge International Studies in Money and Banking)

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Chapter 18 of the General Theory Keynes is used as a case study to provide an answer to this question. It restates an innovative theory of employment and income, together with the original methodology that grounds it. Part II is concerned with the theoretical elements of Post Keynesian economics. It builds on the particular nature of the link between theory and methodology in Keynes and Post Keynesian economics discussed in Part I. It deals with the notions of rationality, probability relations and knowledge and their applications to the modern Post Keynesian theory of unemployment and the monetary circuit theory.


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Probability relations provide a rational assessment of the relative degree of belief attached to alternative propositions, whereas the weight of argument measures the evidential base of these degrees of belief. These two components of probability theory allow for a general theory of individual knowledge, which includes the cases of certainty and risk as well as the case of uncertainty. Chapter 5 uses this original general theory of individual knowledge to enrich the theory of unemployment and the monetary circuit theory in Post Keynesian economics.

When the evidential base of the degrees of belief is inconclusive, a probability relation cannot be conceived. This means that there is nothing to guide individuals in their practical decisionmaking. This situation describes the notion of uncertainty on which the demand for a liquid store of wealth is based. In these circumstances money 10 Money, uncertainty and time becomes a bottomless sink of purchasing power, with the result that the economic system may settle in equilibrium at a level that falls a long way short of generating full employment.

Similarly, when there is some evidential base for the degrees of belief, a probability relation can be conceived. However, given the incompleteness of the evidential base, this means that the probability relation is an unreliable guide to decision-making. This describes a different, but no less important, notion of uncertainty. In this case uncertainty is related to the existence of institutions, contracts and a final means of payment that helps to meet and alleviate the problems of exchanging goods and services, when agents face the genuine possibility of defaulting on their obligations.

In other words, money, contracts and institutions define the context of modern production and speculative processes. It is concerned with the vagueness of human knowledge, the organic nature of economic phenomena and their significance for the use of dynamic methods in monetary theory.

It deals with the Horizontalist and the Structuralist analyses of endogenous money and the possibility of encompassing these analyses into a more general theory. In Chapter 6 some of the writings on money and time of the early Hicks, as well as of the late and more critical Hicks, are discussed. In particular, the original distinction between a single-period theory and a continuation theory is explored. The former aims at simple and stable relationships that may be obscured, or at best difficult to disentangle, once all the complexities of the modern monetary economies are considered.

A single period analysis is based on the simplifying assumption that within the period considered agents hold constant expectations.

This assumption helps to interpret real causal structures as temporally stable, though not inherently predictable, and in this way it helps to detect mechanisms and tendencies regulating actual events. A continuation theory is the natural complement to a single-period theory. It is concerned with the effects of the events of a single period upon expectations and plans that themselves determine the events of successive single periods.

In other words, a continuation theory is the study of linkages between single periods. This original methodological distinction is used in Chapter 8 to analyse the most prominent and often controversial features of the modern endogenous money theory, namely the debit—credit nature of modern money, the role of the banking system in the production and accumulation process and the origin of recent financial innovations. An overview of the modern endogenous money theory is provided in Chapter 7.

The chapter starts with an analysis of the Horizontalist also called accommodationist approach, which historically represents the first wave of modern contributions to the endogenous Introduction 11 money theory. These two tenets are explored through an analysis of the balance sheets of commercial banks and the central bank. Next, it follows a discussion of the Structuralist analysis, which has clarified and refined some features of the Horizontalist analysis. From the perspective defended in this book, the Structuralist analysis is in fact a natural development of the early Horizontalist theory of the endogenous money.

The Structuralist analysis retains the abovestated two original tenets of endogenous money theory, but these tenets are now interpreted in the light of a more explicit consideration of the liquidity preference of the agents involved in the money supply process, namely households, firms, commercial banks and the central bank. The complementary nature of the Horizontalist and the Structuralist analyses of endogenous money are further explored, with the help of an original fourpanel diagram, in Chapter 8.

As mentioned above, the methodological distinction between a single period analysis and a continuation analysis introduced in Chapter 6 is now used to lend support to the argument that the Horizontalist and the Structuralist analyses can be encompassed into a more general theory of endogenous money. From this perspective, the current disagreements between Horizontalists and Structuralists stem from the particular assumptions made about the general state of expectations of economic agents.

Horizontalists rely upon a single period analysis that is built on the assumption that the state of expectations of all agents involved in the money supply process is constant. This assumption enables the specification of stable functional relationships that continuously changing expectations would make very laborious to specify.

On the other hand, Structuralists depend on a continuation framework that explicitly takes account of the fact that the state of expectations of agents may change in the light of realised events. In this way, Structuralists are able to tackle controversial issues related to shifting monetary policies, the liquidity preference of banks and the loans-deposits nexus that are overlooked by Horizontalists.

Whether the Horizontalist analysis or the Structuralist analysis is more useful or relevant depends on the purpose of the analysis, and which assumption about the general state of expectations of economic agents is more realistic in the situation analysed.

1. Metaphysics

In other words, it is perfectly proper, and in fact recommended, to use say Horizontalist analysis to study the reserve market in reasonably stable economic and financial conditions, and the Structuralist analysis when conditions are unstable and continuously changing. It has also been argued that starting from its origin in the middle s the Keynesian dissent has assumed a variety of forms and meanings, including IS-LM Keynesianism, Disequilibrium Keynesianism, New Keynesianism and Post Keynesianism.

Drawing on recently published biographies of Keynes e. Davidson , Dostaler and new historical accounts of early Post Keynesian contributions e.

The quest for speed in payments

King , also Harcourt , Pasinetti , this chapter examines the origins and the historical development of dissent in Post Keynesian economics. The distinction between the romantic age and the age of uncertainty is proposed. The former describes the period of optimism and excitement of the s and s, when Post Keynesian economics was seen as a comprehensive theoretical system alternative to the dominant Neoclassical paradigm. The end of this period was marked by an increasing awareness of the importance of the methodological features of the new paradigm.

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Post Keynesian economics was still viewed as possessing the potential to become an alternative to the dominant paradigm, but the transformation came to be considered more fundamental than initially envisaged. Post Keynesian economics had now to be an alternative theoretical and methodological paradigm to Neoclassical economics. This awareness of the methodological features of Post Keynesian economics initiated a period of doubt and deep internal divisions, the age of uncertainty, which still exists today.

The chapter concludes discussing what lessons can be learned from the successes and failures of the romantic age and the age of uncertainty. At around the same time, Roy Harrod was attempting to construct a dynamic macroeconomic model. The LSE graduate and staff member but soon-converted Keynesian, Nicholas Kaldor, also made several somewhat brief contributions to the development of Post Keynesian economics Thirlwall Furthermore, he explored the role of the relative shares of wages and profits in maintaining macroeconomic stability Kaldor Similar questions were also at the heart of the work of the Polish economist Michal Kalecki.

He had already made important contributions to the theory of economic fluctuations before the publication of the General Theory Kalecki , orig. During the Second World War, and especially throughout the postwar period, these initial efforts at the theory of growth, and the long-period implications of the principle of effective demand continued.

Linked to this work, there was an increasing focus on the income distribution in an economy with two separate economic groups: workers, who receive wages, and capitalists, who receive profits. Again, for his theory of employment Keynes did not need a theory of distribution. For a thorough and thoughtful account of the evolution of Post Keynesian economics, from its origins in the interpretations of the General Theory Keynes to the present, see King , and the related discussion of the book in Davidson , and Post Keynesianism Dissent in Keynesian economics 17 that they could not separate growth from distribution issues.

The suspicion was that post-war growth had not overcome absolute poverty: rather it seemed to have increased it. Growth and distribution were thus seen as being intimately related. This rate depends on the increase in the working population and on the increase in output-per-head due to technical progress. Thus, she argued, Gn can be, and indeed is, affected by policy-making and aggregate demand Robinson The core of the book is the idea that chances and changes in the development of an economy depend partly on technical progress and partly on social institutions and political power.

Unfortunately, the book did not make much impact on the economics profession; neither did her Essays in the Theory of Economic Growth Robinson The first part of the paper is a profound critique of the Neoclassical theory of distribution showing that the marginal productivity theory of factor pricing and distribution is based on assumptions that are both unrealistic and too restrictive.

The core argument is that, as long as prices are flexible and the marginal propensity to save out of profits is greater than the propensity to save out of wages, investment determines the relationship between wages and profits. Furthermore, with the additional assumption that the share of investment in income is constant, the share of profits will also remain constant over time. Again, starting off with an initial critique of Neoclassical growth theory, Kaldor tried to show that 18 Money, uncertainty and time steady growth equilibrium is inconsistent with a less-than-full employment condition.

In fact, as a result of underemployment, changes in the relationship between wages and prices would follow such that profit and real wage shares would be made consistent with steady growth. One of the main deficiencies of this model and its further modification e. Kaldor and Mirrlees is the highly aggregative level of analysis with quasiexclusive focus on the manufacturing sector.

For this reason, as explained by his biographer Thirlwall , from onwards Kaldor adopted a sectoral approach to his writings on economic growth see, for example, Kaldor , a.