Keynes's General Theory, the Rate of Interest and 'Keynesian' Economics

Abstract

Keynes was primarily concerned with monetary policy not fiscal policy. Viewed as a coherent whole, his work was concerned with the appropriate technique and infrastructure for the management of money. More specifically, his rejection of the gold standard led ultimately to his proposal for an international clearing union to support domestic debt-management and monetary policies aimed at cheap money. His ideas became reality. With the start of the great depression, governments across the world began an era of the deliberate management of money. While many others have argued that 'Keynesian' economics is a misrepresentation of Keynes's theory, I therefore argue that 'Keynesian' economics also permitted a gross misrepresentation of his economic policies. The first of two parts is concerned with explaining 'Keynesian' economics as a different theory opposed, and indeed rival, to Keynes's work. Hawtrey made the first contributions, followed by Robertson; Hicks and Modigliani only built on these foundations. The economics profession was willing to turn to this theory to recompense the obvious inadequacies of the classical theory in the wake of the great depression. It was unwilling to entertain the General Theory itself Keynes's response to this rival theory is examined. Lastly the discussion shows how post-war academic debate facilitated the gradual dismantling of the practical measures of monetary reform that Keynes had achieved. The second part of the thesis seeks to re-present Keynes's General Theory as a logical structure aimed at the practical monetary policy conclusions. The steps are as follows: first, the origin and foundation of his theory as monetary economics; second, the 'discovery' of the identity between saving and investment; third, the development of the theories of liquidity preference (why and how cheap money can be set) and of activity as a whole (why cheap money must be set).