From one - PowerPoint Presentation

Slide1

From one ‘Octo’ to another: My take on the GT at 80

Victoria Chick

UCLSlide2

Why read this old book?‘If you want new economic thinking, read old books.’

(Hoang Nguyen,

Rethinking

Economics)

‘I now see your position:

The General Theory

is not the end; it is the beginning.’ (

E

nglebert

Stockhammer

on my review of his book with

Eckhard

Hein.Slide3

History and theoryThe economy evolves; theory follows history with a long and variable lag.

Theory devised to explain a particular conjuncture can become obsolete.

Is the GT obsolete? How much can we use today?

(The mainstream would say its

technique

is out of date; different criterion.)Slide4

Four main theoretical contributions of GT

The principle of effective demand (PED)

The theory of investment: I =

I(

mec

,

r)

Causal priority of investment (I



S

)

Liquidity preference (LP)

(Note I haven’t said THE four…)Slide5

How the system worksQuick recap:

Producers’ expectations of the level of activity and supply conditions determine output, prices and employment.

F

ull employment only by a fluke

Consumption

is governed by aggregate income.

Investment

is made on the expectation of profit for the life of the

investment

if that stream (discounted) exceeds

the interest rate.

The

interest rate is determined by liquidity preference, which

depends on the needs of exchange and expectations

of future interest rates

(



capital gains or losses on financial

assets).Slide6

Almost pure flow theoryOnly liquidity preference deals with stocks of financial assets

‘The’ interest rate hides a complex story about the sources of finance and funding. The financial counterparts of the income

flows are

not explored. Slide7

Implicit assumptions – features of the British economy between the Wars:

A

capitalist, industrial economy producing, on the whole, useful goods.

There is scope for productive increase in real capital in traditional industries(K<K*)

There is little consumer credit [C= C(Y)]

Banks lend to finance investment. Loans are generally paid back.

Bank credit is well controlled; the money supply is pretty stable

Prices show cycles but no long-term trend

Trade is important but there is no systematic imbalance of payments

Slide8

First challenge, 1970sInflation, then stagflation, but that was a challenge to

Samuelsonian

‘Keynesians’, who assumed fixed prices.

Ch

21 can perfectly well explain stagflation.

An inflationary trend, however, is a problem for

G

T. Not well accounted for.Slide9

Major changes starting early 1970sGlobalisation

De-industrialisation

Privatisation/deregulation

Competition, ‘

financialisation

’



the new banking business model

Will expand on these but mostly the last (banking)

Neoliberalism a challenge not only to Keynes’s economics but to his philosophySlide10

GlobalisationWages: International

pressures.

Footloose real capital

International banking, central banks lose a large measure of control.

GT assumes closed economySlide11

De-industrialisationCorollary of mobile capital and international wage-competition?

Or is it that K is approaching or has even reached K*

in traditional

industries

and

we have underinvested in

green and hi-tech technology

, etc.)

BUT: Hi-tech uses very little capital and does not employ much labour, given its value (

A

dair Turner,

Paul

Mason). Robots – may re-industrialise UK but who will capture the gains?Slide12

Privatisation/deregulation

Role of the state in economic affairs discredited by neoliberals. ‘Picking winners’. No industrial policy. ‘Light regulation’.

Regulatory capture.

Worst features of capitalism no longer in check. ‘Moral decay’. Predatory capitalism.

Cf. Keynes’s vision of benign capitalism, many firms acting in the public interest even though private.Slide13

Competition, ‘financialisation’ and the new banking business model

Returns greater in finance (cause or consequence of de-industrialisation?)



overweening importance of finance in British economy

Competition and Credit Control

 banks took up mortgage lending, corporates used internal finance or went to the capital markets to finance as well as to fund investment.

Implications for GT: investment no longer has the same position as the key to growth. I  S in serious question. Banks produce asset inflation, not rising GDP. Debt repackaged and sold; banks do not monitor performance of loans; no ‘revolving fund’.Slide14

Summary: What stands; what must be redevelopedPED.

Still true that firms will not produce if they don’t expect buyers, but the fault-line between aggregates is no longer so clear: consumption was financed by income flows and investment by bank debt. The role of debt has now changed and affects consumption and asset prices. (Steve Keen, Jan Toporowski, Adair Turner

)

Investment:

Still important to distinguish between the rate of return to capital and the rate of interest, and the role of expectations and animal spirits in the former. But the source of finance has changed, and this affects the role of I in the

macroeconomy

, including the I

 S causality.Slide15

Summary, continued

LP:

Liquidity preference neds broadening out to include the LP of banks (Dow and Dow) and firms. Both groups are sitting on piles of cash at the moment – something Keynes could not have envisaged.

LP not mentioned in

Skidelsky’s

Return of the Master.

Nesvetailova’s

The Liquidity Illusion

recognises its importance in the financial

crisis.

Development needed:

Recognise the

changed lending

pattern of banks, reassess their role, bring assets into the analysis.

Consider

deindustrialisation

, wage competition, capital satiety, etc.

Shift of focus: power and inequality: how have the rich captured gains?Slide16

ConclusionKeynes’s method

shows the

way:

Start with the economy as it is. Acknowledge time and uncertainty, the ubiquity of money

etc

(Skidelsky concluded in his British Academy speech on the anniversary of GT’s publication that it was the method that would endure.)

Although as

theory

parts of GT are (in my view) obsolete, it is still the best

beginning.

It is not the end.