Classical Macroeconomics: Some Modern Variations and Distortions

Classical Macroeconomics: Some Modern Variations and Distortions

Classical Macroeconomics: Some Modern Variations and Distortions

Classical Macroeconomics: Some Modern Variations and Distortions

Synopsis

The Great Depression and Keynes's definition of economic concepts made it difficult for modern economists to appreciate the classical insights. This book clarifies the classical explanations to resolve the continuing disputes.

Excerpt

The seed for this book was sown in the summer of 1985 when I stumbled upon the fact that Keynes (appendix to chapter 14 of the General Theory) had misinterpreted the classical concept of "capital," and that such misinterpretation was the principal reason for his inability to recognize the validity of the classical theory of interest as restated in Marshall's Principles of Economics, I was then attempting to discover from Keynes's General Theory how he could have given to modern macroeconomics the view that a central banks' money creation would lower interest rates and promote investment and economic growth, quite contrary to what the classical economists, especially Adam Smith and David Ricardo, had emphasized. The inquiry was to enable me elaborate an argument in my 1985 paper, "On the Irrelevance of Neoclassical Economics to the LDCs," countering the views of some leading lights in the field of development economics who were claiming the irrelevance of neoclassical economics to the economies of the less developed countries (LDCs) because of its assumptions of (a) rationality of consumer choice, (b) perfect competition in markets, (c) its prescription of free trade policies, and (d) its prescription of monetary expansion to reduce interest rates and promote investment and growth (Todaro 1982, 1985; Streeten 1983).

I wanted to explain that the failure of monetary expansion policy to lower interest rates and promote investment and economic growth in the LDCs, instead of the inflation that engulfed them, was not a good indicator of the irrelevance of neoclassical economics but that of Keynesian economics. Neoclassical economics interpreted within its historical context, I argued, would rather explain the determination of interest rates by the supply and demand for savings, just as Alfred Marshall did, following the classical economists. I also argued the relevance of free-enterprise policies, including free trade (domestic and foreign), restraint on money (currency) creation, and non-control of interest rates, in place of the interventionist Keynesian policies embraced by development economists at the time. In the end, I was unable to persuade referees of my arguments to have the paper published.

Meanwhile, I searched the literature for evidence of someone else having recognized Keynes's misinterpretation of "capital" in the classical theory of interest. My failure to find such evidence led to my writing a short paper, "Keynes on the Classical Theory of Interest: A Misinterpretation with Significant Consequences,"

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