Keynes, Hayek and Sraffa : On the Origins of Chapter 17 of The General Theory

Abstract

Despite a number of recent contributions, the connection between the celebrated Keynes-Hayek-Sraffa polemic of the early 1930s and the subsequent development of Keynes’ theoretical views remains unclear. Chapter 17 was, at least in part, a response to Hayek’s critique of The Treatise on Money. The present paper argues, first, that Chapter 17 was written to bolster a critique of the orthodox theory of interest which Keynes himself recognized as unconvincing ; secondly, that Chapter 17 should be viewed, along with the often-overlooked Chapter 16, as part of an unsuccessful effort (initially sparked by the earlier debate) by Keynes to make sense out of Austrian capital theory ; and, finally, that Chapter 17 contains elements of an alternative theory of distribution which is compatible with both his own effective demand mechanism and the classical surplus approach to distribution and price formation.