The Evolution of the "Investment System": Keynes' Theory of Employment and Money Revisited

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Reese, David, ed. "The Legacy of Keynes," Harper and Row, San Francisco, 1987.

Rymes, Thomas. Keynes' Lectures, 1932-35: Notes of a Representative Student (Ann Arbour: The University of Michigan Press, 1989).

Shackle, G.L.S. The Years of High Theory (Cambridge: Cambridge University Press, 1967).

Tarshis, Lorie. "Review of Allan Meltzer's Keynes' Monetary Theory: A Different Interpretation," Journal of Economic The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes. The bearing of the foregoing theory on the first of these is obvious (Keynes, 1936, p. 372).

Controversy over both the meaning and contribution of the General Theory has resulted in what David Colander has termed "the what did Keynes really mean sweepstakes" (1990, p. 294). The present contribution to the sweepstakes takes the opening quotation from Keynes' concluding chapter of the General Theory as a basis for outlining an alternative interpretation of the evolution of Keynes' contribution to economic theory and policy. In addition, the outline presented provides an overarching framework that may be used to explain how conflicting interpretations of Keynes work have arisen.(1) As Lorie Tarshis has noted "Keynes was not one author, he was many" (1990, p. 1203). In both the breadth of topics covered and methods employed to evaluated economic questions, Keynes was both versatile and eclectic. That he has been interpreted as having presented a disequilibrium theory (Leijonhufvud, 1968), a long-run equilibrium theory (Amadeo, 1989; Milgate and Eatwell, 1983) and that he shifted from sequential analysis in the Treatise to an equilibrium approach in the General Theory (Kohn, 1986) should not be surprising given the standard joke circulating in 1931 that "where five economists are gathered together there will be six conflicting opinions and two of them will be held by Keynes" (qtd. in Clarke, 1988, pp. 231-2). This was not the result of confusion, but rather reflective of Keynes' ability to adapt his policy prescriptions to the changing economic circumstances.(2)

Notwithstanding his apparent tendency to shift policy positions, the argument presented below suggests that there was a fundamental consistency underlying the research pursued by Keynes. It is argued that Keynes perceived a fundamental institutional and motivational difference between the theory developed by the classical school of economics and the actual monetary economy that policy makers sought to influence. This evolution in monetary institutions led to the formation of an inherently unstable economy -- points effectively reiterated by Minsky (1975) and Vicarelli (1984). Keynes consistently argued for a stable price level in order to ensure that entrepreneurs could reasonably form expectations that would lead to maximal employment and growth. As Meltzer (1988) has recently suggested, the long-run nature of Keynes' policy prescriptions was, in part, designed to minimize the deviation between the long-term rate of interest and the socially optimal rate of interest that would bring about full employment. It cannot be over emphasized, however, that it was the new set of monetary institutions and the potential "liquidity fetish" that these institutions permitted that constituted a central theme in Keynes' writings.

Given the central role played by money in our monetary economy, Keynes attempted to revise traditional quantity theory of money in terms of entrepreneurs' and consumers' expectations concerning money profits and incomes. The development of his monetary theory of production was an attempt to forge a link between the microtheoretic decision process of individual agents and the macroeconomic effects that changes in expectations would bring about. Many have argued that Keynes broke with the Quantity Theory after the Treatise (see Kahn, 1984). …