Published by EH.Net (April 2013)

Jesper Jespersen and Mogens Ove Madsen, editors, Keynes?s General Theory for Today: Contemporary Perspectives. Cheltenham, UK: Edward Elgar, 2012. x + 237 pp. $110 (hardcover), ISBN: 978-1-78100-951-2.

Reviewed for EH.Net by Paul Davidson, Department of Economics, University of Tennessee.

This volume presents twelve papers that relate Keynes?s General Theory to the world we live in today.? The papers were delivered at a conference held in 2011 at Roskilde University in Denmark.

A sage once said ?A classic is a book everyone cites but no one has read or understood.?? For at least five of the authors in this volume, the General Theory is a classic in the sense of the sage?s terminology.

For M.G. Hayes the General Theory is ?a neglected work.? Hayes claims that the followers of Keynes ?sought to rebuild economic theory on entirely different foundations? than classical theory. Hayes fails to recognize Keynes?s argument that the classical theory is a special case of his general theory and therefore has the same foundation except that classical theory adds some fundamental axioms to Keynes?s foundation. For Hayes the difference is that Keynes uses the concept of ?equilibrium in a highly original and unique fashion? where the key variables are in ?continuous equilibrium? (pp. 17-18). Classical theory sees unemployment as caused by an exogenous shock ? but Hayes does not recognize that monopoly power by labor or firms may cause unemployment in the classical theory.? Hayes claims that fixity/sticky prices are not ?rigidities preventing adjustment? to an exogenous shock in classical theory (p. 20). For Hayes the General Theory is not ?compatible with monopolistic competition?; Keynes ?assumes perfect competition? (p. 21). Yet, Davidson (2011a) has demonstrated that Keynes?s aggregate supply function can be constructed for either a perfectly competitive economy or one with any degree of monopolistic competition and still give the same ?involuntary unemployment? outcomes. Perfect competition is not a necessary condition for understanding that the point of effective demand as the intersection of the economy?s aggregate demand function and its aggregate supply function can be at less than full employment.

Hayes states Keynes?s concept of liquidity is bound up with the state of expectations and the historical nature of time (p. 26). Unfortunately, he does not explicitly recognize that liquidity demand arises because market production and exchange transactions are always organized on the basis of money contracts; and therefore liquidity is needed to meet expected (and unexpected) contractual obligations.

James Galbraith comes much closer to understanding Keynes?s General Theory.? Galbraith laments that governmental or international agencies do not have ?any serious discussion of contract law.? Court enforcement of such contractual obligations (p. 32) is the essence of the market system.? Galbraith sees fraud as the basis of the financial collapse of 2007-08. ?Absolute liquidity preference is the incurable consequence of overwhelming financial fraud? (p. 34).? For Galbraith Keynes?s General Theory is not the sage?s concept of a classic.

Teodoro Togati states that Keynes?s General Theory will not come back into fashion without ?substantial amendment? (p. 40). Togati recognizes the market system can only work if there is ?law enforcement? but fails to specify the enforcement of money contracts as the essence of a money using economy. Togati uses unhelpful terminology involving modern/post-modern technology where there can be ?endogenous changes in collective confidence and income and wealth distribution? (p. 51).? However, he apparently does not recognize that his discussion promotes the rejection of the classical ergodic axiom ? one of the three axioms of classical theory that Keynes overthrew in his recognition of uncertainly and economic decision making. Togati attacks Samuelson?s desire to build a universal model, while failing to recognize that Samuelson (1969) required imposing the ergodic axiom to make economics a science. Yet he lauds Samuelson for his ?emphasis on the realism of assumptions? (p. 47). Togati declares, incorrectly and in contrast to Keynes, that ?simple reference to basic postulates is not the decisive criterion? (p. 48). Clearly then, for Togati, the General Theory is a classic.

In addition, Togati erroneously states that Keynes?s ?True Model [is] for example in terms of a fixed price IS-LM model? (p. 54). Apparently, Togati does not realize that Hicks (1980-81) ? the creator of this IS-LM model ? has denounced it as not representative of the General Theory.

Michael Laine argues that the only difference between classical theory and heterodoxy stems from an ?epistemological tenet? (p. 60). Nevertheless, he blasts mainstream theory, while recognizing that for ?Keynes, economics pertains to a nonergodic world? (p. 61). Clearly Laine gets the message of the General Theory.

Anna Carabelli states that as a scholar for thirty years, she still has not acquired a ?complete understanding? of Keynes?s General Theory.? The problem with classical economics ?is its unwillingness to make explicit those tacit assumptions? that make real variables independent from changes in the value of money (p. 84).? Yet Carabelli does not indicate what postulates Keynes was objecting to in classical theory.? Instead for Carabelli it is the complexity of the economic structure and not the uncertainty of future events that is the most promising line to explore (p. 87).

Mogens Ove Madsen, like Carabelli, emphasizes complexity as the cause of uncertainty in the system (p. 98). Madsen tries to tie Keynes to the philosopher McTaggart rather than to G.C. Moore, although Keynes in his published writings indicates Moore was the big influence on his thought.? There is little here to explain the relevance of the General Theory.

Stephen Voss emphasizes uncertainty and financial crisis. Unfortunately he links uncertainly to Nassim Taleb?s Black Swan: The Impact of the Highly Improbable ? where the latter is an epistemological concept rather than Keynes?s ontological concept.? Voss tries to compare Knight?s concept of uncertainty with Keynes?s.? For Knight uncertainty ?is a lack of information? about the predetermined future. Black swan events involve a lack of information because they are so far out in the tail of the probability distribution that statisticians have not collected sufficient information about what can happen in the tail. Uncertainty can be eliminated if one can get enough information about the tails of the probability distribution (p. 115).

Voss recognizes Davidson?s interpretation of uncertainty in Keynes as involving a nonergodic system. He then compares it to Taleb?s black swan concept ?where the black swan is an epistemological of such a low probability there is not enough evidence collected to identify the black swan?s probability. Voss recognizes that in the second edition of his book Taleb had to face the question of whether uncertainty black swans were an epistemological or an ontological (non-ergodic) phenomenon. Taleb?s response was this is a distinction without any practical difference. Yet Voss recognizes that in an ergodic system the future is predetermined, while in a nonergodic system the future can be created by human actions including financial regulations (p. 121).

Voss then points out the Chicago School economic theory reduces uncertainty to quantifiable risks and has encouraged entrepreneurs and banks to calculate their credit risks via a Value at Risk profile (p. 122).? This presumes an ergodic system has led to a shadow banking system that hastened the 2007 financial collapse. If Keynes?s General Theory nonergodic system is accepted, then regulation is a necessary institutional structure to try to prevent financial disasters.? Voss notes that the 1990’s collapse of Long Term Capital Management confirmed that ergodic models are wrong. Why are these models still being used? Voss suggests it is habit and convenience as well as the suggestion that this approach using a computer and a mass of statistical data appears to be scientific and objective.

Jesper Jespersen recognizes that most textbooks try to fit Keynes into a general equilibrium system without mentioning uncertainty. The novelty in the General Theory is, according to Jespersen, an independent role for the aggregate demand function. He points out that Hicks? IS-LM models tried to put the General Theory into a general equilibrium framework; but Jesperson ? like Togati ? does not recognize that thirty years ago Hicks conceded that IS-LM does not capture Keynes?s General Theory.

Jespersen attributes household uncertainty to an epistemological problem since no individual can access complete information about future. For profit-seeking firms, Jespersen declares, uncertainly is an ?ontological condition? (pp.138-40). Unfortunately, Jespersen does not tie this ontological uncertainty into the need for liquidity to meet possible, but often uncertain, money contractual commitments.

Elisabetta De Antoni tries to fit the General Theory into a Minsky type analysis. Unfortunately, as De Antoni notes, Minsky?s analysis is one of a cyclical model, while Keynes?s analysis is one that suggests that an economic system can be permanently stuck with significant unemployment. Accordingly she declares ?In short, the crisis is financial in Minsky and real in Keynes. … With this, Minsky banished many important issues raised in The General Theory? (p. 153-54).? Minsky?s entire focus is on Chapter 12 of the General Theory.

Noemi Levy-Orlik recognizes that investment is a matter of finance and that money has some ?very special characteristics? (p. 169). In chapter 17 of the General Theory the essential properties of money are specified as 1) a zero elasticity of production and 2) a zero elasticity of substitution between money and all liquid assets with real goods.? What is surprising is that almost no economists have called attention to what Keynes called these ?essential properties.?

Levy-Orlik also notes that Keynes did not discuss in the General Theory the finance motive for demanding liquidity but added this motive in 1937.? As someone who almost a half century ago (Davidson 1965) wrote about the finance motive and how it integrates the monetary system with the demand for real capital assets, it is rewarding for me to see that someone else has finally recognized the importance of the finance motive ? and its implications for money endogenity and nonneutrality.
Gregor Semienuk, Till van Treeck and Achim Truger try to translate the General Theory?s implications for the Euro area crisis. They correctly indicate that the Euro problem is the lack of external balance between the countries of the Euro zone, with the peripheral PIGS [Portugal, Italy, Greece, and Spain] running significant and persistent payments deficits with Germany. The persistent export surplus of Germany leads to increased unemployment in the PIGS.? In turn, the PIGS nations react to increased unemployment through automatic stabilizer fiscal policy and stimulus policies, thereby running large government deficits which become assets held by German banks and population.? Hence, borrowing a page from the ?Keynes Plan? presented at Bretton Woods, the authors indicate the solution to the Euro problem rests with the surplus nation, Germany, spending more on imports from the PIGS and not on the PIGS engaging in more austerity.
Jorge Uxo, Jesus Paul, and Eladio Febrero also discuss the Euro problem as a problem caused by the large surplus Euro countries, such as Germany, running export surpluses. Germany explicitly pursued an export-oriented growth strategy (p. 208) based on stagnating domestic demand and holding down wages.? Their recommendation is that the large Euro export surplus countries have the major responsibility of solving the problem by expanding domestic aggregate demand and permitting wages to rise.? These authors quote Davidson (2011b) for the need for an IMCU (International Monetary Clearing Union) which would have institutional rules that require nations running persistent external export surplus to get rid of such surplus. They note the main problem with this solution is a political one and not an economic one.


Paul Davidson (1965), ?Keynes?s Finance Motive,? Oxford Economic Papers, reprinted in Money and Employment, The Collected Writings of Paul Davidson, Vol. 1, edited by L. Davidson, New York: Macmillan, 1990.

Paul Davidson (2011a), Post Keynesian Macroeconomic Theory, second edition, Cheltenham, UK: Edward Elgar.

Paul Davidson (2011b), ?The Keynes Solution for Preventing Global Imbalances,? paper presented at conference on ?From Crisis to Growth?? The Challenge of Imbalances, Debt, and Limited Resources.?

J.R. Hicks (1980-81), ?ISLM: An Explanation,? Journal of Post Keynesian Economics, 3.

Paul A. Samuelson (1969), ?Classical and Neoclassical Theory? in Monetary Theory, edited by R.W. Clower, London: Penguin.

Paul Davidson is Editor of the Journal of Post Keynesian Economics and author of The Keynes Solution: The Path to Global Economic Prosperity.
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