Money, Investment and Consumption: Keynes’s Macroeconomics Rethought – O.F. Hamouda

What analysis?

Which disease?

What does it mean to preserve efficiency and freedom?

Read sample pages from the book here

– Most if not all academic research in macroeconomics since 1936 has evolved around asserting or countering Keynesian economics – Most if not all post-war economic policies, guiding first the free-market industrialized economies, then almost all throughout the world were applications of or/and reactions to Keynesianism – The institutional transformations, which have made and shaped the form of the current economic market’s organization (as well its political and social settings), are the result of the influence of the textbook teaching of Keynesian and anti-Keynesian economics to generations of students, which, under the law of large numbers, has become the frame of reference for the public at large. – The gradual changes in societal behaviour (in relation to ethics, trust, commitment, responsibility, duty, etc.) deriving from individual attitudes toward money, investment, and consumption, on the one hand, and effort in production, social cost, and redistribution, on the other, are to a large extent also direct consequences of the post-war Keynesian and anti-Keynesian economic fabric.

What is Keynesianism?
Is Keynes to be found in Keynesianism?
Are the theories of Keynes and the Keynesians the same?
Are Keynesian policies are those of Keynes?

Money, Investment and Consumption is an in-depth and comprehensive study of Keynes’ macro-economic theory as found in his two intertwined contributions, A Treatise on Money and The General Theory of Employment, Interest and Money, contrasted to both the Austrian Theory of Capital, of his harshest critic Hayek, and to the Marshallian Classical theory, in the guise of Hicks’ Keynesian IS-LM. The latter was a historical, unintentional twist with economic and by extension profound social and political consequences.

The analysis reveals – Indeed, Keynes’ writing is difficult, but as Hawtrey put it in his review of A Treatise on Money, Keynes “has a command of language unsurpassed among contemporary economic writers”. The difficulty in reading his writings stems from his use of the language of economics in an unusual manner to convey an alternative theory, or whole new paradigm, in a Kuhnian sense. – Keynes had a complete general theory capable of explaining any phase of the trade cycle — an approach based on a capital theory, as complex if not more so than that of the Austrian School, yet more manageable for macroeconomics, and a theory of money, far more developed than those of his predecessors. – Keynes was a supply theorist, in the sense that for him the economy is production- and not demand-driven. It is the decision to employ and to apply effort into production that generates wealth, which then permits consumption out of income, and not the other way around. – In a monetary economy, it is the availability of finance and the prospect of viable returns which determine the level of employment. – The production of wealth changes with shifts in the uses of resources impacting relative prices and remunerations (or income) of the three participants in the economy: financers, producers, and labourers. The first provide the financial means; the second and third, the effort. – Keynes’ theory is about the causal mechanisms that explain employment and income distribution in the process of producing wealth in all the phases of the trade cycle. – The major economic issue preoccupying Keynes was that people do get thrown out of participation in the creation of wealth and are thus no longer being remunerated. They become involuntarily a burden to the rest of the community. – The question for Keynes was not how to or who should carry the social cost of those involuntary discarded from the process of creating wealth, with handouts or benefits, but most importantly what are the mechanisms which would permit their re-insertion into the production process and the flow of remuneration for effort, like everyone else. – Keynes’ theory of employment and income distribution depends on the simultaneous interaction between the availability of finance, the viability of investment, and the attitude toward consumption out of income. – It is the relative consumption out of income of those employed compared to the unemployed and the real wage adjustments through the transfer of income from one group to another that sustains prices and steers investment. Furthermore, employment depends on the choice of the type of investment; for example, in the declining phase of the cycle, employment is positively related to working capital investment but inversely related to fixed capital investment. Finally, investment depends on the cost of liquidity. – For Keynes, while the activities of production and labour are fairly stable, it is the impact of finance on investment that contains potential for instability. The undesirable tinkering with liquidity causes involuntary unemployment. – It is in the area of finance that Keynes’ so-called interventions are to be found. The function of the banking system must imperatively be dissociated from those of the other financial institutions. It is regulation of the banking system which is most crucial. The sole role of the banks, Central and commercial, (that is the monetary authority) is to adhere at all times to strict rules of providing liquidity to the production industry. – Keynes was not an advocate of big government spending. He was leery of government (i.e., bureaucracy, big or small) and of adverse control of the credit market by financial firms, big or small. – Nowhere did he advocate credit to mass consumption or the expansion of the Keynesians’ Aggregate Demand at any cost. – Keynes and the Keynesians are worlds apart — in their theoretical settings, in the implications of their policy recommendations, and in the visions of the kind of economic organization best suited to improve the production of wealth (growth) with a minimal burden of the social cost of unemployment and yet with equitable income distribution.

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