Keynes and Hayek: The Money Economy

By G. R. Steele | Go to book overview

5

Macrodisequilibrium

Economists spend most of their time describing and discussing what happens in a position of equilibrium, and they usually affirm that a position of disequilibrium is merely transitory, I want to study what happens during the process of disequilibrium - one which lasts long enough to observe it.

(Keynes [1930] 1981:72)


Wicksell and Keynes and Hayek

When Knut Wicksell died in 1926, Lionel Robbins remarked that 'he was probably less known than any other economist of commensurable rank' (Cochrane and Glahe 1999:21). Yet Wicksell formulated a theory of the rate of interest and the price level that informed much of the subsequent development of monetary theory; and he was the first to become engaged with the dominant twentieth-century preoccupation: the relationship between saving and investment. Although Keynes and Hayek draw upon Wicksell in detailing their particular concerns with monetary adjustments, their paths diverge: whereas 'Wicksell plus Keynes said one thing, Wicksell plus Hayek said quite another' (Hicks 1967b: 204).

In extending the quantity theory to incorporate bank credit money, Wicksell had shown that the interest rate per se has no significance. Rather, the divergence of the actual market rate of interest in relation to an hypothetical natural rate of interest is analytically relevant. From the evidence of prices and interest rates in nineteenth-century Britain, Wicksell had concluded that inflation pressures originate from real shocks. When new demands are driven by wars, new technology and other innovations, investment can exceed saving by the amount of bank credit expansion. By implication, the market rate of interest is prevented from rising to the raised level of the natural rate (that is, the rate that equates the demand for loan capital with the supply of saving; see below).

In Wicksell's analysis, a divergence of the market rate from the natural rate affects prices; and he is credited as 'the first writer to make it clear that the influence of the rate of interest upon the price level operates by its effect on the rate of investment' (Keynes [1930] 1971:177). However, in Wicksell's

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Keynes and Hayek: The Money Economy
Table of contents

Table of contents

  • Title Page v
  • Contents ix
  • Figures and Tables x
  • Preface xi
  • 1 - Introduction 1
  • 2 - Vision in Economics 19
  • 3 - Philosophy and Political Economy 37
  • 4 - Money Issues 61
  • 5 - Macrodisequilibrium 78
  • 6 - Keynes and Senie Macromodels 101
  • 7 - Value Theory and Monetary Theory 117
  • 8 - Capital, Money and Cycles 140
  • 9 - Austrians and Post-Keynesians 160
  • 10 - Economic Guidance 183
  • Notes 205
  • Bibliography 208
  • Index 219
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