Octo to another My take on the GT at 80 Victoria Chick UCL Why read this old book If you want new economic thinking read old books Hoang Nguyen Rethinking Economics ID: 578027
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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is out of date; different criterion.)Slide4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.