Keynes on the Theory of the Rate of Interest

I have been writing recently about Keynes and his theory of the rate of interest (here, here, here, and here). Perhaps unjustly – but perhaps not — I attribute to him a theory in which the rate of interest is determined exclusively by monetary forces: the interaction of the liquidity preference of the public with the policy of the monetary authorities. In other words, the rate of interest, at least as an approximation, can be modeled in terms of a single market for holding money, the demand to hold money reflecting the liquidity preference of the public and the stock of money being directly controlled by the monetary authority. Because liquidity preference is a function of the rate of interest, the rate of interest adjusts until the stock of money made available by the monetary authority is held willingly by the public.

I have been struggling with Keynes’s liquidity preference theory of interest, which evidently led him to deny the Fisher effect, thus denying that there is a margin of substitution between holding money and holding real assets, because he explicitly recognizes in Chapter 17 of the General Theory that there is a margin of substitution between money and real assets, the expected net returns from holding all assets (including expected appreciation and the net service flows generated by the assets) being equal in equilibrium. And it was that logic which led Keynes to one of his most important pre-General Theory contributions — the covered-interest-arbitrage theorem in chapter 3 of his Tract on Monetary Reform. The equality of expected returns on all assets was the key to Irving Fisher’s 1896 derivation of the Fisher Effect in Appreciation and Interest, restated in 1907 in The Rate of Interest, and in 1930 in The Theory of Interest.

Fisher never asserted that there is complete adjustment of nominal interest rates to expected inflation, actually providing empirical evidence that the adjustment of nominal rates to inflation was only partial, but he did show that in equilibrium a difference in the expected rate of appreciation between alternative assets must correspond to differences in the rates of interest on loans contracted in terms of the two assets. Now there is a difference between the static relationship between the interest rates for two loans contracted in terms of two different assets and a dynamic adjustment in time to a change in the expected rate of appreciation or depreciation of a given asset. The dynamic adjustment does not necessarily coincide with the static relationship.

It is also interesting, as I pointed out in a recent post, that when criticizing the orthodox theory of the rate of interest in the General Theory, Keynes focused not on Fisher, but on his teacher Alfred Marshall as the authoritative representative of the orthodox theory of interest, criticizing Fisher only for the Fisher effect. Keynes reserved is comprehensive criticism for Marshall, attributing to Marshall the notion that rate of interest adjusts to equalize savings and investment. Keynes acknowledged that he could not find textual support in Marshall’s writings for this idea, merely citing his own prior belief that the rate of interest performs that function, consequently attributing a similar belief to Marshall. But even if Marshall did mistakenly believe that the rate of interest adjusts to equalize savings and investment, it does not follow that the orthodox theory of interest is wrong; it just means that Marshall had a defective understanding of the theory. Just because most physicists in the 18th century believed in the phlogiston theory of fire does not prove that classical physics was wrong; it only means that classical physicists had an imperfect understanding of the theory. And if Keynes wanted to establish the content of the most authoritative version of the orthodox theory of interest, he should have been citing Fisher not Marshall.

That is why I wanted to have a look at a not very well known paper by Keynes called “The Theory of the Rate of Interest,” written for a 1937 festschrift in honor of Irving Fisher, The Lessons of Monetary Experience. Keynes began the paper with the following footnote attached to the title acknowledging Fisher as the outstanding authority on the orthodox theory of interest.

I have thought it suitable to offer a short note on this subject in honor of Irving Fisher, since his earliest [presumably Appreciation and Interest, Fisher’s doctoral dissertation] and latest [presumably The Theory of Interest] have been concerned with it, and since during the whole of the thirty years that I have been studying economics he has been the outstanding authority on this problem. (p. 145)

The paper is mostly devoted to spelling out and discussing six propositions that Keynes believes distill the essentials of the orthodox theory of interest. The first four of these propositions Keynes regards as unassailable, but the last two, he maintains, reflect very special, empirically false, assumptions. He therefore replaces them with two substitute propositions, whose implications differ radically from those of orthodox theory. Here are the first four propositions.

1 Interest on money means precisely what the books on arithmetic say it means. . . . [I]t is simply the premium obtainable on current cash over deferred cash, so that it measures the marginal preference . . . for holding cash in hand over cash for deferred delivery. No one would pay this premium unless the possession of cash served some purpose, i.e., has some efficiency. Thus, we can conveniently say that interest on money measures the marginal efficiency of money in terms of itself as a unit.

2 Money is not peculiar in having a marginal efficiency measured in terms of itself. . . . [N]ormally capital assets of all kinds have a positive marginal efficiency measured in terms of themselves. If we know the relation between the present and expected prices of an asset in terms of money we can convert the measure of its marginal efficiency into a measure of its marginal efficiency in terms of money by means of a formula which I have given in my General Theory, p. 227.

3 The effort to obtain the best advantage from the possession of wealth will set up a tendency for capital assets to exchange in equilibrium, at values proportional to their marginal efficiencies in terms of a common unit. . . . [I]f r is the money rate of interest . . . and y is the marginal efficiency of a capital asset A in terms of money, then A will exchange in terms of money at a price such as to make y = r.

4 If the demand price of our capital asset A . . . is not less than its replacement cost, new investment in A will take place, the scale of such investment depending on the capacity available for the production of A, i.e., on its elasticity of supply, and on the rate at which y, its marginal efficiency, declines as the amount of new investment in A increases. At a scale of new investment at which the marginal cost of producing A is equal to its demand price as above, we have a position of equilibrium. Thus the price system resulting from the relationships between the marginal efficiencies of different capital assets including money, measured in terms of a common unit, determines the aggregate rate of investment. (p. 145-46)

Keynes sums up the import of his first four propositions as follows:

These proposition are not . . . inconsistent with the orthodox theory . . . or open to doubt. They establish that relative prices . . . and the scale of output move until the marginal efficiencies of all kinds of assets are equal when measured in a common unit and . . . that the marginal efficiency of capital is equal to the rate of interest. But they tell us nothing as to the forces which determine what this common level of marginal efficiency will tend to be. It is when we proceed to this further discussion that my argument diverges from the orthodox argument.

Here is how Keynes describes the divergence between the orthodox theory and his theory:

[T]he orthodox theory maintains that the forces which determine the common value of the marginal efficiency of various assets are independent of money, which has . . . no autonomous influence, and that prices move until the marginal efficiency of money, i.e., the rate of interest, falls into line with the common value of the marginal efficiency of other assets as determined by other forces. My theory . . . maintains that this is a special case and that over a wide range of possible cases almost the opposite is true, namely, that the marginal efficiency of money is determined by forces partly appropriate to itself, and that prices move until the marginal efficiency of other assets fall into line with the rate of interest. (p. 147)

I find Keynes’s description of the difference between the orthodox theory and his own both insightful and problematic. Keynes notes correctly that the orthodox theory, abstracting from all monetary influences, treats the rate of interest as a rate of intertemporal exchange, applicable to exchange between any asset today and any asset in the future, adjusted for differences in rates of appreciation, and in net service flows, across assets. So Keynes was right: the orthodox theory is a special case, corresponding to the special assumptions required for full intertemporal equilibrium. And Keynes was right to emphasize the limitations of the orthodox theory.

But while drawing a sharp contrast between his theory and the orthodox theory (“over a wide range of possible cases almost the opposite is true”), Keynes, to qualify his disagreement, deploys the italicized (by me) weasel words, but without explaining how his seemingly flat rejection of the orthodox theory requires qualification. It is certainly reasonable to say “that the marginal efficiency of capital is determined by forces partly appropriate to itself.” But I don’t see how it follows from that premise “that prices move until the marginal efficiency of other assets fall into line with the rate of interest.” Equilibrium is reached when marginal efficiencies (adjusted for differences in expected rates of appreciation and in net services flows) of all assets are equal, but rejecting the orthodox notion that the marginal efficiency of money adjusts to the common marginal efficiency of all other assets does not establish that the causality is reversed: that the marginal efficiencies of all non-money assets must adjust to whatever the marginal efficiency of money happens to be. The reverse causality also seems like a special case; the general case, it would seem, would be one in which causality could operate, depending on circumstances, in either direction or both directions. An argument about the direction of causality would have been appropriate, but none is made. Keynes just moves on to propositions 5 and 6.

5 The marginal efficiency of money in terms of itself has the peculiarity that it is independent of its quantity. . . . This is a consequence of the Quantity Theory of Money . . . Thus, unless we import considerations from outside, the money rate of interest is indeterminate, for the demand schedule for money is a function solely of its supply [sic, presumably Keynes meant to say “quantity”]. Nevertheless, a determinate value for r can be derived from the condition that the value of an asset A, of which the marginal efficiency in terms of money is y, must be such that y = r. For provided that we know the scale of investment, we know y and the value of A, and hence we can deduce r. In other words, the rate of interest depends on the marginal efficiency of capital assets other than money. This must, however, be supplemented by another proposition; for it requires that we should already know the scale of investment. (p. 147-48)

I pause here, because I am confused. Keynes alludes to the proposition that the neutrality of money implies that any nominal interest rate is compatible with any real interest rate provided that the rate of inflation is correctly anticipated, though without articulating the proposition correctly. Despite getting off to a shaky start with a sloppy allusion to the Fisher effect, Keynes is right in observing that the neutrality of money and the independence of the real rate of interest from monetary factors are extreme assumptions. Given that monetary neutrality is consistent with any nominal interest rate, Keynes then tries to show how the orthodox theory pins down the nominal interest rate. And his attempt does not seem successful; he asserts that the money rate of interest can be deduced from the marginal efficiency of some capital asset A in terms of money. But that marginal efficiency cannot be deduced without knowledge, or an expectation, of the future value of the asset. Instead of couching his analysis in terms of the current and (expected) future values of the asset, i.e., instead of following Fisher’s 1896 own-rate analysis, Keynes brings up the scale of investment in A: “This must . . . be supplemented by another proposition; for it requires that we should already know the scale of investment.” Aside from not knowing what “this” and “it” are referring to, I don’t understand how the scale of investment is relevant to a determination of the marginal efficiency of the capital asset in question.

Now for Keynes’s final proposition:

6 The scale of investment will not reach its equilibrium level until the point is reached at which the elasticity of supply of output as a whole has fallen to zero. (p. 148)

The puzzle only deepens here because proposition 5 is referring to the scale of investment in a particular asset A while proposition 6 seems to be referring to the scale of investment in the aggregate. It is neither a necessary nor a sufficient condition for an equilibrium scale of investment in a particular capital asset to obtain that the elasticity of supply of output as a whole be zero. So the connection between propositions 5 and 6 seems tenuous and superficial. Does Keynes mean to say that, according to orthodox theory, the equality of advantage to asset holders between different kinds of assets cannot be achieved unless the elasticity of supply for output as a whole is zero? Keynes then offers a synthetic restatement of orthodox theory.

The equilibrium rate of aggregate investment, corresponding to the level of output for a further increase in which the elasticity of supply is zero, depends on the readiness of the public to save. But this in turn depends on the rate of interest. Thus for each level of the rate of interest we have a given quantity of saving. This quantity of saving determines the scale of investment. The scale of investment settles the marginal efficiency of capital, to which the rate of interest must be equal. Our system is therefore determinate. To each possible value of the rate of interest there corresponds a given volume of saving; and to each possible value of the marginal efficiency of capital there corresponds a given volume of investment. Now the rate of interest and the marginal efficiency of capital must be equal. Thus the position of equilibrium is given by that common value of the rate of interest and of the marginal efficiency of capital at which saving determined by the former is equal to the investment determined by the latter. (Id.)

This restatement of orthodox theory is remarkably disconnected from the six propositions that Keynes has just identified as the bedrock of the orthodox theory of interest. The word “saving” or “save” is not even mentioned in any of Keynes’s six propositions, so the notion that the orthodox theory asserts that the rate of interest adjusts to equalize saving and investment is inconsistent with his own rendering of the orthodox theory. The rhetorical point that Keynes seems to be making in the form of a strictly analytical discussion is that the orthodox theory held that the equilibrium of an economic system occurs at the rate of interest that equalizes savings and investment at a level of output and income consistent with full employment. Where Keynes was misguided was in characterizing the mechanism by which this equilibrium is reached as an adjustment in the nominal rate of interest. A full equilibrium is achieved by way of a vector of prices (and expected prices) consistent with equilibrium, the rate of interest being implicit in the intertemporal structure of a price vector. Keynes was working with a simplistic misconception of what the rate of interest actually represents and how it affects economic activity.

In place of propositions 5 and 6, which Keynes dismisses as special factual assumptions, he proposes two alternative propositions:

5* The marginal efficiency of money in terms of itself is . . . a function of its quantity (though not of its quantity alone), just as in the case of capital assets.

6* Aggregate investment may reach its equilibrium rate under proposition (4) above, before the elasticity of supply of output as a whole has fallen to zero. (Id.)

So in substituting 5* for 5, all Keynes did was discard a proposition that few if any economists — certainly not Fisher — upholding the orthodox theory ever would have accepted as a factual assertion. The two paragraphs that Keynes devotes to refuting proposition 5 can be safely ignored at almost zero cost. Turning to proposition 6, Keynes restates it as follows:

A zero elasticity of supply for output as a whole means that an increase of demand in terms of money will lead to no change in output; that is to say, prices will rise in the same proportion as the money demand [i.e., nominal aggregate demand, not the demand to hold money] rises. Inflation will have no effect on output or employment, but only on prices. (pp. 149-50)

So, propositions 5 and 6 turn out to be equivalent assertions that money is neutral. Having devoted two separate propositions to identify the orthodox theory of interest with the idea that money is neutral, Keynes spells out the lessons he draws from his reconstruction of the orthodox theory of the rate of interest.

If I am right, the orthodox theory is wholly inapplicable to such problems as those of unemployment and the trade cycle, or, indeed, to any of the day-to-day problems of ordinary life. Nevertheless it is often in fact applied to such problems. . . .

It leads to considerable difficulties to regard the marginal efficiency of money as wholly different in character from the marginal efficiency of other assets. Equilibrium requires . . . that the prices of different kinds of assets measured in the same unit move until their marginal efficiencies measured in that unit are equal. But if the marginal efficiency of money in terms of itself is always equal to the marginal efficiency of other assets, irrespective of the price of the latter, the whole price system in terms of money becomes indeterminate. (150-52)

Keynes is attacking a strawman here, because, even given the extreme assumptions about the neutrality of money that hardly anyone – and certainly not Fisher – accepted as factual, the equality between the marginal efficiency of money and the marginal efficiency of other assets is an equilibrium condition, not an identity, so the charge of indeterminacy is mistaken, as Keynes himself unwittingly acknowledges thereafter.

It is the elements of elasticity (a) in the desire to hold inactive balances and (b) in the supply of output as a whole, which permits a reasonable measure of stability in prices. If these elasticities are zero there is a necessity for the whole body of prices and wages to respond immediately to every change in the quantity of money. (p. 152)

So Keynes is acknowledging that the whole price system in terms of money in not indeterminate, just excessively volatile. But let’s hear him out.

This assumes a state of affairs very different from that in which we live. For the two elasticities named above are highly characteristic of the real world; and the assumption that both of them are zero assumes away three-quarters of the problems in which we are interested. (Id.)

Undoubtedly true, but neither Fisher nor most other economists who accepted the orthodox theory of the rate of interest believed either that money is always neutral or that we live in a world of perpetually full employment. Nor did Keynes show that the theoretical resources of orthodox theory were insufficient to analyze situations of less than full employment. The most obvious example of such an analysis, of course, is one in which a restrictive monetary policy, by creating an excess demand for money, raises the liquidity premium, causing the marginal efficiency of money to exceed the marginal efficiency of other assets, in which case asset prices must fall to restore the equality between the marginal efficiencies of assets and of money.

In principle, the adjustment might be relatively smooth, but if the fall of asset prices triggers bankruptcies or other forms of financial distress, and if the increase in interest rates affects spending flows, the fall in asset prices and in spending flows may become cumulative causing a general downward spiral in income and output. Such an analysis is entirely compatible with orthodox theory even if the orthodox theory, in its emphasis on equilibrium, seems very far removed from the messy dynamic adjustment associated with a sudden increase in liquidity preference.

16 Responses to “Keynes on the Theory of the Rate of Interest”


  1. 1 Lord December 18, 2015 at 12:03 pm

    I don’t know about earlier economists, but neoclassical ones always assume equilibrium and full employment, at every point. That is what it means when they say workers reservation wages are too high and it is always a supply problem. We probably shouldn’t ascribe more to them than they ascribe themselves, as hard as it may be to believe.

  2. 2 Miguel Navascués December 18, 2015 at 12:30 pm

    David, it is a very insightful post, but I has some problems to understand it completely. If I’ve understand you correctly, Keynes assign to the classics a model that is not what classics said really.
    I use to think (and I follow you, as you know) that classic has an interest theory based on an economy without money, or more precisely, with a demand for money as a medium of exchange, not as deposit of value. So, for he classics, there is no monetary instability: all the money demanded is only to expend it immediately (Say) or with the same lag everytime. Money demand is stable. So, the natural interest rate theory of Wicksell (to which Keynes refer to as the theory of the Classics): Saving & Investment determine the interest rate of equilibrium, doesn’t work. If I remember well, that is the change of Keynes from his Treatyse to the GT: the refutation of the Wicksell natural interest rate theory.
    Introducing money make no sense of the analysis based on an fictitious economy of only “coconuts and potatoes”. Money reduce cost of transactions, but it also brings some no minor problems. When money can be used as an asset (I think that is one of the main contribution of Keynes), all the investment theory, financial an real, changes dramatically.
    In your post you criticize Keynes on a text a lot confusing, but I’m not sure that is so relevant in the corpus of Keynes’ ideas.
    Obviusly, I’m not sure. Perhaps I must read your text one more time. But I wouldn’t like very much to change my mind one more time!😉

  3. 3 Philip George December 18, 2015 at 10:24 pm

    “In other words, the rate of interest, at least as an approximation, can be modeled in terms of a single market for holding money, the demand to hold money reflecting the liquidity preference of the public and the stock of money being directly controlled by the monetary authority.”

    That the rate of interest is determined by the stock of money (and that the latter can be controlled by the monetary authority) is not hard to believe. If a person holds a bond valued by the market at $x and paying y% interest the monetary authority can offer to pay the bond-holder a price higher than $x. In so doing it lowers the interest rate to below y%. The fall in interest rates engineered by the Fed during and in the aftermath of the Great Recession shows that this proposition is correct.

    The second proposition: that the interest rate depends on the liquidity preference of the public is problematic because it treats money as one of many competing assets. If you treat money as a medium of exchange you end up with completely different results.

    The liquidity preference theory treats money from the viewpoint of a portfolio manager. A portfolio manager holds a certain quantity of money. If he chooses not to buy capital assets then he holds a higher quantity of money, which is to say that his demand for money is high. The demand for capital assets is inversely proportional to the demand for money.

    Right now, according to Keynesians, the demand for money is high (an application for liquidity preference). So the demand for capital assets should be low. If that were the case then the price of capital assets should be low, and everybody would agree that that is not the case (why else would there be talk of bubbles).

    Now if you treat money as a medium of exchange one does not tie oneself in knots as above. The Fed pumped a huge amount of money into the economy in attempting to lower interest rates. If money is treated as a medium of exchange then in order to buy financial assets you need money, just as you need money to buy real goods and services. And that explains why the prices of financial assets have zoomed. No knots here.

    I have dealt with the subject at length in my book “Macroeconomics Redefined” http://www.amazon.com/dp/B00ZX9O5XQ.

    One consequence is that money growth is getting close to 0%. And when that happens nasty things happen in some asset market or the other. One is certain to occur next year. And a recession may follow after that if the Fed does not do another QE.

  4. 4 JKH December 19, 2015 at 4:06 am

    “…rejecting the orthodox notion that the marginal efficiency of money adjusts to the common marginal efficiency of all other assets does not establish that the causality is reversed: that the marginal efficiencies of all non-money assets must adjust to whatever the marginal efficiency of money happens to be. The reverse causality also seems like a special case; the general case, it would seem, would be one in which causality could operate, depending on circumstances, in either direction or both directions. An argument about the direction of causality would have been appropriate, but none is made.”

    But such an argument is at the guts of chapter 17 of the GT – where he talks about money prevailing over other assets in terms of its own rate of interest being most resistant to decline, due to the inelasticity of (private sector) supply, the absence of carrying cost, and it’s liquidity premium. That makes money the asset with the most “significant” interest rate, and the one that is independent and determining in terms of the causality. All other MECs decline to its level because of its resistance.

  5. 5 JKH December 19, 2015 at 6:15 am

    P.S.

    I think Keynes’ version of “the special case” may include a sudden lowering of the interest rate by increasing the money supply. I think he may refer to something along those lines in chapter 17 but I haven’t checked.

  6. 6 JP Koning December 19, 2015 at 2:05 pm

    David, I’ve really enjoyed your series of posts on Keynes and interest rates.

  7. 7 JKH December 19, 2015 at 11:13 pm

    Regarding my last comment, this is the part of chapter 17 that I was probably thinking of:

    “The significance of the money-rate of interest arises, therefore, out of the combination of the characteristics that …

    the only relief — apart from changes in the marginal efficiency of capital — can come (so long as the propensity towards liquidity is unchanged) from an increase in the quantity of money, or — which is formally the same thing — a rise in the value of money which enables a given quantity to provide increased money-services.”

    However, this next part may be more pertinent to the idea of the “special case”:

    “Since a1 + q1, a2 − c2 andl3 are necessarily equal, and since l3 by hypothesis is either fixed or falling more slowly than q1 or − c2, it follows that a1 and a2 must be rising. In other words, the present money-price of every commodity other than money tends to fall relatively to its expected future price. Hence, if q1and − c2 continue to fall, a point comes at which it is not profitable to produce any of the commodities, unless the cost of production at some future date is expected to rise above the present cost by an amount which will cover the cost of carrying a stock produced now to the date of the prospective higher price.”

    I take that to mean that as equilibrium is appoached, MECS in real terms decline more quickly than MECS in money terms, resulting in an increase in expected asset price appreciation. But if it is also the case that certain costs of production are even lower now relative to that expected appreciation in asset prices, it may remain profitable to produce beyond the normal equilibrium point of pricing.

  8. 8 Egmont Kakarot-Handtke December 20, 2015 at 3:33 am

    Quixotic Keynes exegesis
    Comment on ‘Keynes on the Theory of the Rate of Interest’

    Keynes was a political economist and he said many things on many occasions “It is well known that John Maynard was born anew every morning; for this reason, his colleagues at Bretton Woods commented that he was too intelligent to be consistent.” (Valentino, 1988, p. 239)

    Logical consistency — one essential criterion of science — has never been Keynes’s main concern. Just the contrary, Keynes’s natural habitat has always been the wish-wash zone where “nothing is clear and everything is possible.” (Keynes, 1973, p. 292)

    Accordingly, Keynes has been the most outspoken proponent of the Cambridge School of Loose Verbal Reasoning “Another danger is that you may ‘precise everything away’ and be left with only a comparative poverty of meaning. … Such a problem was avoided, said Keynes, by Marshall who used loose definitions but allowed the reader to infer his meaning from ‘the richness of context’.” (Coates, 2007, p. 87)

    So, here you have it: the reader is allowed to infer his meaning. This invitation to free ink-blot association gave rise to the great palaver about ‘what Keynes really meant’. It should have been clear from the very beginning to every person of average wit and life experience that this palaver could never ever have a worthwhile outcome. And it has not until this very day. Nonetheless, David Glasner heroically carries on with the interpretation of Keynes’s interpretation of what the classicals could have meant.

    The methodological moronism of the Cambridge School of Loose Verbal Reasoning has been carved in stone for the amusement of posterity with this statement: “Marshall followed the maxim: Better to be ambiguous and relevant than precise and irrelevant.” (Colander, 1995, p. 283)

    This phony trade-off exists only in the minds of economists. Science is qua definition precise AND relevant. Because Keynes and the After-Keynesians never understood this they are out of science (2011).

    There is no use to refute Keynes’s employment theory or his theory of interest or the multiplier or the ex ante/ex post equality of I and S or what not. Keynes’s profit theory is provably false, and that is enough. If the core concept profit is false then the whole theoretical superstructure falls apart.*

    Because Keynes has been logically inconsistent the attempt to find out what he really meant has always been a quixotic enterprise. Keynes cannot be saved. There is one passage in the General Theory that is — in contrast to the usual verbiage — formally crystal clear and it says “Income = value of output = consumption + investment. Saving = income – consumption. Therefore saving = investment.” (Keynes, 1973, p. 63) This two-liner is provably false and no amount of interpretation and exegesis can talk this away.**

    That Keynes as political economist produced not much of scientific value is bad but what the neoclassical maximization-and-equilibrium sect has produced then and now is worse. “I consider that Keynes had no real grasp of formal economic theorizing (and also disliked it), and that he consequently left many gaping holes in his theory. I none the less hold that his insights were several orders more profound and realistic than those of his recent critics.” (Hahn, 1982, pp. x-xi)

    What Keynes and Fisher had in common was a false profit theory and this is the worst thing that can happen to an economist. In addition they applied the nonentities constrained optimization and equilibrium. More than 80 years later economists are still occupied with making sense of what had no sense right from the start. Not very efficient all this loose verbal reasoning, to say the least.

    Egmont Kakarot-Handtke

    References
    Coates, J. (2007). The Claims of Common Sense. Moore, Wittgenstein, Keynes and the Social Sciences. Cambridge, New York, NY, etc.: Cambridge University Press.
    Colander, D. (1995). Marshallian General Equilibrium Analysis. Eastern Economic Journal, 21(3): 281–293. URL http://www.jstor.org/stable/40325642.
    Hahn, F. H. (1982). Money and Inflation. Oxford: Blackwell.
    Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL http://ssrn.com/abstract=1966438.
    Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
    Valentino, R. (1988). Discussion. In H. Hanusch (Ed.), Evolutionary Economics. Applications of Schumpeter’s Ideas, pages 238–249. Cambridge, New York, NY, etc.: Cambridge University Press.

    * See ‘How the intelligent non-economist can refute every economist hands down’
    http://axecorg.blogspot.de/2015/12/how-intelligent-non-economist-can.html
    ** See cross-references Refutation of I=S
    http://axecorg.blogspot.de/2015/01/is-cross-references.html

  9. 10 Joel Aaron Freeman December 21, 2015 at 9:26 am

    David, if you were to write a book on the debates between Keynes/Fisher/Hawtrey, I would donate to the kickstarter.

  10. 11 Linda Dee December 21, 2015 at 10:13 am

    All you guys better ignore Egmont. In the best case he is just a troll, trying to confuse you with utter nonsense. In the worst case he is an impostor which begins with his fake affiliation with University of Stuttgart and ends with his ludicrous “theory” (see http://www.axec.org/) which is, by the way, under trademark “protection”😀
    At least he spared this comment section from fake dialogs with his second account…

  11. 13 Miguel Navascués December 21, 2015 at 11:38 am

    I have playing a while with the interest rate (and spread of) series in Saint Louis FED web, and I find no any proof of rational expectation of them on real economy (GDP, Unemployment…). The only facts which seem to correlate quite well is that when unemployment rise or fall a lot from its natural level, Fed fund rate fall or rise until natural level is restablished. So perhaps Keynes was right conceding so high relevance to money interest rate.


  1. 1 Links for 12-19-15 | Economics Blogs Trackback on December 19, 2015 at 12:07 am

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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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