Keynes’s “GENERAL THEORY” valid only for modern capitalism?

The modern capitalism interpretation: ............................................................................................ 2 Some evidence in the modern capitalism interpretation: ................................................................. 2 elements of a general theory of employment and potential instability under capitalism: ................. 3 ð A “monetary economy” and the search for pecuniary gains: ................................................... 3 ð Determination of employment in the short period: ................................................................. 3 ð The rudiments of a theory of expenditure and critique of Say’s law: ....................................... 4 ð A more detailed theory of expenditure: .................................................................................. 4 ð Uncertainty, expectation and confidence: ............................................................................... 4 ð Investment, asset choice and liquidity preference: ................................................................... 4 ð Employment and the essential properties of money: ............................................................... 4 ð Potential instability: ................................................................................................................ 5 ð Investments, saving and banking system:................................................................................. 5 conclusion: ..................................................................................................................................... 5

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Keynes’s “GENERAL THEORY” valid only for modern capitalism?

This article focuses on the interpretation that restricts the applicability of Keynes General theory for modern capitalism. It makes his theory specific for the modern capitalist economy rather than for all economic systems. According to this paper, Keynes also developed the fundamental elements of the general theory of unemployment and potential instability under capitalism irrespective of the financial institutions. This paper checks whether Keynes’s theory is more general than the neoclassical theory or is applicable to economic systems other than capitalism. The paper will focus on the interpretation by those who have emphasized the financial institutions’ characteristics.

THE MODERN CAPITALISM INTERPRETATION:
This modernist interpretation revolves around the financial institutions assumed by the Keynes. According to Hyman Minsky Keynes’s general theory is quite relevant to the financially developed capitalist economy. He says that for Classicals and Neoclassicals money is just a medium of exchange whereas for Keynes money also has its speculative demand and Keynes in the general theory assumes a monetary economy with sophisticated financial institutions. Crotty said that wherever there is capitalism, general theory is applicable. He was of the view that Keynes’s general theory takes in expected profitability as an endogenous factor that has an unknown effect on investment demand, creating instability. Putting less emphasis on financial institutions Paul Wells said that the Keynes’s objection to the neoclassical’s theory was that the neoclassical’s theory was more applicable in pre-Recardian days, but not in modern industrial period. Like Minsky, Vercelli also argued that instability depends upon the development of financial institutions. Oliver Favereau shared Keynes’s view that unemployment is caused due to a shift from enterprise to speculation. He argued that uncertainty would have fewer effects if there is less speculation. Whereas Chick argued that general theory depends on 1) investment not being determined by savings, 2) for this to happen banks should be developed enough to lend irrespective of its reserves. 3) This stage only reached in the late nineteenth or early twentieth century. Here Geoff says that this was the only period in which investment preceded savings and general theory applied.

SOME EVIDENCE IN THE MODERN CAPITALISM INTERPRETATION:
There a two significant parts of Keynes’ theory, one is his discussion of the state of long term expectation, and the other is his discussion of the money demand or the liquidity preference. These two are linked with uncertainty; stock exchange creates artificial demand which creates predominance of speculation over enterprise, and contradiction between ownership and management.

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Keynes’s “GENERAL THEORY” valid only for modern capitalism? According to Keynes there are three motives of money demand or liquidity preference; that are for transactions for precautionary measures and for speculation, he was of the view that there is a fourth motive that is for finance. If investment is made in long term debt the loss in subsequently turning it into cash would be more than hording it in cash form for the same time period, Due to the existence of uncertainty as to the future of rate of interest, need for cash arises provided that there exist an organized market for dealing in debts and this is what speculative motive is. It comes from uncertainty and expectations about the future it is most important in transmitting the effects of change in quantity of money. The contradiction between Keynes and the neoclassical was due to the fact that latter ignored the speculative motive of money demand. Here the argument arises that, there exists uncertainty but while presenting the model for speculative demand he ignored the future value of money, while determining the other two by income and this one just by interest rate. In his theory of determination of investment, both the long term expectations and the liquidity preference are included, where the investment makes the most important part of aggregate demand that in turn determines the level of employment through expected future demand. Keynes ideas regarding finance conclude that savings that are strictly taken as a flow have no role in the determination of investment.

ELEMENTS OF A GENERAL THEORY OF EMPLOYMENT AND POTENTIAL INSTABILITY UNDER CAPITALISM:
There are some evidences to characterize this theory as general as it applies to capitalism in general. It gives us a view of industrial district paradigm. Keynes’s views about modern capitalism require a sophisticated institutional setting but these ideas when seen in general theory are found to be entangled with the ideas that are also important but they doesn’t require any institutional settings. These ideas make up the elements of the general theory of employment and potential instability that are applicable under capitalism but do not require any financial institutions for their applicability, and are applicable instead to capitalism in general. ð A “monetary economy” and the search for pecuniary gains:

Keynes theory undertakes monetary economy or entrepreneur economy. According to Keynes the main characteristic of monetary economy is that the firms are always in the search of pecuniary gains the have to gain over what they have started with. Here Keynes and Marx can be seen to converge at a same point that money is important for production despite the nature of the M.C.M transactions. Keynes defined monetary economy as an economy where money is used not merely as a medium of exchange but in which money can change motives and decisions due to its uncertain behavior. No one can predict between two points in time unless having the knowledge of the behavior of money in that time period. ð Determination of employment in the short period:

Employment and production are decided by the firm’s decisions based on their expectations about the future demand. Firms work on short term expectations regarding cost and proceeds, which Page 3 of 5

Keynes’s “GENERAL THEORY” valid only for modern capitalism? shape the aggregate supply and aggregate demand functions respectively. In a closed economy aggregate expected demand is the sum of aggregate expected consumption and aggregate expected investment. The level of employment and the production are the function of these two types of expected expenditures. According to Keynes expectations depend on the most recent expenditure decisions by the consumers and the investors. There can be a state of equilibrium, if their expectations concede with that of the producers, but there may be unemployment accompanied with such an equilibrium state. ð The rudiments of a theory of expenditure and critique of Say’s law:

Keyes substituted Says law as “expenditure creates its own income”. According to him expenditure decisions and production decisions have different determinants. Expenditure decisions depend on the level of employment and production… or do not depend. What Keynes wanted to say was that where on component of aggregate demand varies with employment other does not. Thus contrary to Say’s law, production and employment don’t determine all aggregate demand. ð A more detailed theory of expenditure:

Keynes examined the determinants of aggregate demand in detail. For this purpose he divided aggregate demand in to consumption and investment. Among these two, investment is more autonomous in relation to the current level of investment, being more dependent on long term expectations that are influenced by the uncertainty. ð Uncertainty, expectation and confidence:

The main sources of uncertainty are such matters about which we simply don’t know like war, structural changes due to new technology etc. our long term expectations depend not only on the expectations themselves but also on confidence with which expectations are held. These notions of uncertainty do not depend upon the existence of financial markets. ð Investment, asset choice and liquidity preference:

Investment makes a part of larger process of asset choice. These assets have different characteristics among which is their liquidity. Money when in cash form is called liquid, there are some other assets that are also high in liquidity but require a sophisticated financial setting. To make the discussion independent of the financial institutions only the role of money is taken into account. To compensate the effect of uncertainty liquidity premium is provided that is the interest. There are instances when we hold money due to distrust here the liquidity premium should be enough to invest money rather to hoard it without any use. The amount hoarded is modified through the uncertainty level. Firms can be negatively affected by the liquidity preference of the banking sector in order to fulfill their precautionary motives. ð Employment and the essential properties of money:

Davidson says that there are two properties of money 1) money’s negligible elasticity of production; creation of money doesn’t depend upon the number of people employed to produce it, Page 4 of 5

Keynes’s “GENERAL THEORY” valid only for modern capitalism? thus a high level of liquidity preference doesn’t lead to a high level of employment, 2) money’s low elasticity of substitution; that means that there are no good substitutes for money as a reserve of value. Thus demand for money cannot be replaced by any other liquid asset. ð Potential instability:

Uncertainty in capitalist economy doesn’t arise only by sophisticated market’s speculation but also by the ignorance of the entrepreneur about the future. The financial institutions enhance the potential instability inherent in the capitalist economy. Even if economy is seen in isolation from the financial markets uncertainty, unemployment and instability exist. According to Minsky financial institutions should be separated to make a general theory. ð Investments, saving and banking system:

As explained by Chicks, Keynes ideas about savings and investment are valid if examined in an economy that has no sophisticated financial institutions. Keynes views on the savings and investment are closely related to his discussion of Say’s law. He says that production generates income whereas there is some income that is not generated by the production itself but due to the expenditure that are incurred after finished goods are sold, Whereas, a part of this is generated in the production process. Savings are the excess of income over consumption. They are the residuals. Investment is not determined or financed by savings; it can be financed through other sources. Savings are just referred to as flow, they are just part held in the form of money of the total stock of wealth. It may be increased over the period of time through savings but it itself is not savings. The stock of wealth determines the liquidity or illiquidity of any person. If government expenditures are financed through fiat money it will also allow private investments to grow. To make equilibrium in money market money demand should be created through finance motive.

CONCLUSION:
In the absence of a banking system capable of multiplying deposits, creating credit money, the autonomous investment and other expenditures would certainly be reduced as the growth of the economy will reduce. Although Keynes didn’t clearly disentangled these ideas from the institutionally specific ideas, Keynes have managed to give us the fundamentals of a general theory of unemployment and potential instability that can guide thoughts about any capitalist economy. The institutional setting to which these theoretical propositions apply is at the same time specific and general, because such a general theory is not specific to a more recent stage of capitalism, it would also imply a negative assessment of any policy proposal to solve the unemployment problem by restoring it to the previous or an earlier state of capitalism.

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