...against fictions and other tall tales

Saturday, 5 March 2011

Keynes's General Theory explained

Post-Keynesian economist, Randall Wray, has authored a fabulous new working paper for the Levy Institute in which he sums up the true significance of Keynes's famous work. In the paper, Wray summarizes the central proposition of the General Theory using a quote from a previous paper he co-wrote with Mathew Forstater:
Entrepreneurs produce what they expect to sell, and there is no reason to presume that the sum of these production decisions is consistent with the full employment level of output either in the short-run or in the long-run.
According to Wray, the proposition applies whether or not there is perfect competition and flexible wages. It holds even when expectations are always fulfilled, and even in a stable environment (p. 7).

The paper also discusses the importance of money in Keynes's framework. In the General Theory, production activities both begin and end with money. As such, the purpose of production for Keynes is money itself. This means that Keynes viewed the General Theory as a monetary theory of production in which money is not neutral. Such an understanding of money is diametrically opposed to the view espoused in mainstream, neoclassical economics in which money is regarded as a simple gimmick used to facilitate transactions between different parties.

The paper is a must read for anyone interested in furthering the public interest and learning about an alternative economic paradigm better suited for addressing the economic problems of the day. It also does an excellent job at explaining the extent to which current mainstream economics is, and will remain, a repositary of failed ideas and a source of inadequate policy prescriptions.

1 comment:

  1. Thanks for the Wray link. I can use it on a term paper. Interesting