Money, Banks and Finance in Economic Thought

Keynes’ treatment of dynamics and stability in a monetary economy: from the Treatise on Money to the General Theory

Rivot Sylvie, University of Mulhouse-BETA

It is usually considered that, as one of its main significant defects, Keynes’ General Theory unfortunately embeds a static treatment of the determination of output and employment in a monetary economy. Accordingly, the subsequent dynamic analyses (provided for example by Harrod) are usually considered as significant improvements in comparison to Keynes’ unfluctuating analysis of the effective demand principle. But in our view, by tracing back to the functioning of a monetary economy investigated in Keynes’ Treatise on Money, it seems to us that another view can be argued regarding Keynes’ achievements in his General Theory. The Treatise of Money investigates the fluctuations endured by a monetary economy around its long-term optimal trajectory. At the core of the problem addressed by Keynes in that book one can find the issue of the reasons why the competitive re-equilibrating forces necessarily take time to operate, mainly because of the monetary character of the economies we currently live in. Accordingly, the Treatise of Money provides a theory of short-term fluctuations within a local stability questioning, with mismatches of short-term expectations at the heart of the trouble. Yet, in some occasions Keynes considers that these re-equilibrating forces might not exist and addressed accordingly the issue of the system global stability. As for example the parable of the banana plantation shows, a decentralised market economy might collapse after an external shock (such as a rise in the propensity to save). Yet, the banana parable could hardly be considered as a compelling argument, at the theoretical level of course but also regarding the economic climate faced by Great Britain in the 20s (which the economists of the time tried to rationalise). During that decade, the country neither collapsed nor reached full employment after some time-consuming adjustment process but on the contrary endured a more or less permanent recession. Besides, the deflationary spirals triggered by the 1929 financial crash proved that a monetary economy is not able to restore equilibrium by itself after a large and protracted shock. The intellectual process going from the Treatise on Money towards the General Theory can then be understood as an endeavour to build the case of a monetary economy that can maintain itself in equilibrium at a lower than full employment level of output. Accordingly, the issue of the efficiency of a flexible wage policy is addressed in a dynamic manner in the General Theory Chapter 19 where the attention shifts towards the global stability of the system. The attention is no more for short-term and self-correcting discrepancies with full employment for the General Theory assumes perfect foresight for short term expectations. Instead, the attention shifts dramatically towards the issue of global stability at less than full employment, with the dys-functioning in long-term expectations at the heart of the trouble.


Keywords: macroeconomics, monetary economy, disequilibrium

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