This chapter is a wild ride, often verging on incoherence but sometimes falling into brilliance. In any case it is hard to follow.
The first page or two of this chapter presages Tobin's "q theory" and the notion that differential rates of return determine additions to the capital stock (or lack thereof). The theory of irreversible investment, and the corresponding notion of option value, has made q theory obsolete although not in a way which damaged Keynesian theory. Quite the contrary.
The end of section i notes that the rate of interest, as used to evaluate capitalized streams of future income, has to come in part from outside the market for capital goods themselves. This whole section will make more sense once you've read the notorious chapter 17. Maybe the claims are true as stated in this chapter (all relations are those of general equilibrium in the final analysis), but what Keynes actually meant here is not so obviously true. He is hinting at the notion that a liquidity trap can halt new investment and that the rate of return on money can "rule the roost." When and whether this can be true is a central question for contemporary macro and we will return to it.
Parts of section ii hint at the later "reswitching" debates in capital theory and in this section Keynes is drawing upon Irving Fisher's notes on the problem. He's again getting at the claim that a purely "real" (non-monetary), partial equilibrium theory of interest won't carry much explanatory power. I don't think he is wielding the right weapon here.
Section iii pokes a hole in the Fisher Effect. Keynes points out that if expectations of inflation induce a higher nominal interest rate, why don't those same expectations cause prices to go up now? This adjustment, by the way, would eliminate the nominal premium on the rate of interest. This simple yet powerful point doesn't get the attention it ought to. Storage costs for goods and services may eliminate this paradox but perhaps not completely. It is striking how few economists have thought this problem through.
The chapter ends with a blizzard of arguments about the importance of expectations.
Whew! Overall this chapter supports my view that Keynes was obsessed with capital theory and had deep ideas on the topic. But in terms of understanding the overall argument of the GT, if you can follow chapter 17 (ha), you needn't worry too much about all the difficult arguments and passages here.
Your comment on the Fisher effect is interesting. It is true that once and for all changes in the money supply should produce once and for all changes in (flexible) commodity prices, and hence no Fisher effect, as we understand the concept today. But this is not a flaw in Fisher’s theory, as permanent changes in the growth rate of the money supply will produce permanent changes in the growth rate of prices, and arbitragers cannot take advantage of these expected price changes (as nominal rates rise equally.) There is no flaw in Fisher effect theory, it’s just that Keynes never envisioned a permanent change in the expected growth rate of money, as such a thing was nearly impossible on commodity money regimes. And he lived under commodity money regimes, or once and for all, unexpected, transition periods (like 1931 in Britain, 1933 in the U.S.) his entire life. Meltzer wondered why Keynes never advocated a high enough trend rate of inflation to eliminate liquidity traps. I’ve never heard a good answer. Do the post-Keynesians have one?
We need to read Chap 12 as well. I think that Scott’s point depends on assumptions about long term expectations. Keynes seems to reject the Fisher Effect in his Treatise V2, p202-3.
Die US-Notenbank weckt Hoffnung auf ein Ende der schwersten Rezession seit Jahrzehnten. Den Leitzins aber lässt sie unverändert.
Die US-Notenbank weckt Hoffnungen auf Licht am Ende des düsteren Konjunkturtunnels. Zwar sei die größte Volkswirtschaft der Welt in den vergangenen Wochen weiter geschrumpft, doch habe sich das Tempo scheinbar verlangsamt, teilte die Federal Reserve (Fed) am Mittwoch mit.
Ein Hoffnungsschimmer auch an der amerikanischen Verbraucherfront: Zwar drückten Arbeitslosigkeit, gesunkener Wohlstand und schwierige Kreditbedingungen weiterhin auf die Kauflaune. Doch gebe es bei den Verbraucherausgaben “Zeichen der Stabilisierung”, hieß es von der Fed nach der turnusgemäßen Sitzung ihres Offenmarktausschusses.
Die Fed sei zuversichtlich, dass die Maßnahmen zur Stützung des Finanzsektors Wirkung zeigten und dazu beitragen, dass sich “schrittweise” wieder Wachstum einstelle. Inflationsrisiken sieht die US-Notenbank zunächst nicht am Horizont – im Gegenteil. Der Preisauftrieb könne sogar “für einige Zeit” unterhalb der Rate bleiben, die gut für das Wirtschaftswachstum seien.
thanks for good post and nice blog.
Among the ranks of economists, there exists a propensity to label any theoretical results which, for some reason or another, throw up a market failure of some sort which can be improved upon by policy as “Keynesian”. What makes this particularly unfortunate is that this might imply that The General Theory of Employment, Interest and Money, the formidable 1936 treatise by John Maynard Keynes, was nothing more than an anthology of policy conclusions to be applied to cases of market failures or, more simplistically, a manifesto for government intervention.
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