Posted by: Dirk | March 22, 2018

Discussion with Ben Fine about Keynes and Keynesianism

Last week, I posted an article about Ben Fine’s excellent book about Marx’s Capital. I criticized two points that were made about Keynes and Keynesianism, mainly these two claims (both are quotes from the book):

  1. “Even in Keynesian economics (and for Keynes himself), where monetary factors are specifically introduced, the rate of profit – represented by the marginal efficiency of capital – is equal to the rate of interest.”
  2. “underlying Keynesianism is the idea that there is a natural or equilibrium full-employment interest rate.”

Ben Fine has replied by email and granted me permission to publish the relevant paragraphs:

Thanks so much for your kind remarks on our book and for taking the trouble to point out what you deem to be a complete mistake in need of correction. However, and understandably, I totally agree with your eloquent and scholarly statement of Keynes’ position. But it does not contradict our own account at all. The first sentence, including Keynes, sets MEC=i. The second only refers to KeynesianISM (and not Keynes although this might be made clearer that he is not to be included although this is at least implicit). For Keynes, there is a much more sophisticated understanding of MEC than for Keynesianism to incorporate future uncertainties and expectations and it is this which is set equal to the rate of interest for investment purposes and not current productivity of existing capital stock or even new physical investment if all could be sold. This is brought out very clearly in my own account of Keynes versus Keynesianism in  Macroeconomics: A Critical Companion, with O. Dimakou, Pluto, 2016

Here we carefully distinguish the MMEC from PMEC, monetary and physical, in order to bring out difference between Keynes and Keynesianism, with MMEC < PMEC !


Taking it up from here, there are two things that I’d like to point out. Regarding the first issue, MEC=i, there is a quote in the General Theory that explicitly deals with the issue in chapter 18 (my highlighting):

There will be an inducement to push the rate of new investment to the point which forces the supply-price of each type of capital-asset to a figure which, taken in conjunction with its prospective yield, brings the marginal efficiency of capital in general to approximate equality with the rate of interest.

Keynes, in chapter 18, restates the General Theory, following chapter 17 on money and interest rates/yields (the issue is confused by Keynes’s use of ‘interest rate’ for both interest rate and yield). It is clear that the MEC is a schedule, not a single value (my highlighting):

The schedule of the marginal efficiency of capital depends, however, partly on the given factors and partly on the prospective yield of capital-assets of different kinds; whilst the rate of interest depends partly on the state of liquidity-preference (i.e. on the liquidity function) and partly on the quantity of money measured in terms of wage-units.

So I cannot agree with the idea that “Keynes, sets MEC=i”. He sets marginal MEC=i. As long as the MEC is above i, investment is forthcoming up until the point where the MEC=i. In teaching, the schedule is drawn as a falling (sometimes in steps) curve in an interest rate / quantity of investment diagram, like here.

Regarding the second issue, Ben Fine refers me to the “the standard IS/LM model in which full employment comes about as long as all markets are sufficiently flexible (hence neoclassical synthesis as accepting Keynes pointed to money markets in particular and interest rate had to fall low enough to generate sufficient investment as cost of capital)”. Even there, I would say, it is not clear that there is one interest rate compatible with full employment. There are many possible IS curves, and for each of them there is one LM curve which would lead us to full employment. Turning things around, for every interest rate (given one LM curve) there is one IS curve that leads to full employment in the model. Therefore, even with complete inflexibility of the interest rate government spending can be adjusted so that full employment is reached. And this is exactly what Keynes argued in his letter to FDR written in 1933 (my highlighting):

Broadly speaking, therefore, an increase of output cannot occur unless by the operation of one or other of three factors. Individuals must be induced to spend more out o their existing incomes; or the business world must be induced, either by increased confidence in the prospects or by a lower rate of interest, to create additional current incomes in the hands of their employees, which is what happens when either the working or the fixed capital of the country is being increased; or public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money. In bad times the first factor cannot be expected to work on a sufficient scale. The second factor will come in as the second wave of attack on the slump after the tide has been turned by the expenditures of public authority. It is, therefore, only from the third factor that we can expect the initial major impulse.

So, Keynes argued that in times when monetary policy would not work as hoped for (so, given that the interest rate is whatever it is), it is government spending that must lead the economy to full employment. A bit further down the text Keynes says that monetary policy should aim at “maintenance of cheap and abundant credit and in particular the reduction of the long-term rates of interest”. Clearly Keynes thinks about combinations of interest rates and levels of government spending that lead to full employment, but it is government spending that is of utmost importance:

In the field of domestic policy, I put in the forefront, for the reasons given above, a large volume of Loan-expenditures under Government auspices.

This, in our years of post-austerity, is why Keynes is still relevant for today. Why Marx is relevant for today you have shown in your book so I need not address this here.


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