A quick summary of Chapter 1 follows in this post.
Rogers notes that the post-WWII neoclassical synthesis attempted to reconcile the theories of Wicksell and Walras with Keynes’ General Theory, but the result was either incoherent Wicksellian theory or a Walrasian theory that does not have a proper role for money (Rogers 1989: xvii).
In essence, modern neoclassical monetary theory is divided into two strands, as follows:
(1) Wicksellian/neo-Wicksellian general equilibrium theory, andThe Wicksellian/neo-Wicksellian general equilibrium theory is subject to devastating problems through the Cambridge Capital critique, for Wicksell’s capital theory is the basis of his idea of the natural rate of interest, and once Wicksell’s capital theory is exploded, his natural rate of interest concept is also destroyed (Rogers 1989: 5).
(2) neo-Walrasian general equilibrium theory.
Since the natural rate of interest is also the fundamental basis of classical loanable funds theory, the latter too must fall (Rogers 1989: 5), a point missed by economists who have interpreted Keynes’ work like Kohn (1986) and Leijonhufvud (1981).
Rogers (1989: 5) contends that neo-Walrasian models do not use the Wicksellian concept of capital, but are utterly flawed by the way they assume money away and effectively reduce to models of perfect barter (Rogers 1989: 5).
Various strands of neoclassical theory (even the neoclassical Keynesian tradition) draw on either the Wicksellian or neo-Walrasian traditions but both are equally flawed.
Neoclassical monetary theory, in all forms, is real analysis because non-monetary factors are what determine long-period equilibrium positions and money is reduced to a neutral veil in the long run (Rogers 1989: 4), and even if monetarists and neoclassical Keynesians are willing to recognise the short-run non-neutrality of money, they remain fixated on the unrealistic long-run implications of their general equilibrium models (Rogers 1989: 7).
Moreover, even credit money – the predominant form of money in modern economies – is reduced to having the same properties as commodity money in general equilibrium models (Rogers 1989: 4). This is a serious mistake, for credit is not a commodity and the Wicksellian natural rate of interest is worthless, except as a purely logical concept in an empirically irrelevant abstract model with one commodity (Rogers 1989: 10).
A genuine monetary theory, by contrast, sees money as fundamentally non-neutral, and real and monetary forces will determine any long period equilibrium positions (Rogers 1989: 4, 8).
The key is that the money rate of interest in a modern economy with credit money cannot be usefully explained by means of either classical or neoclassical theory (Rogers 1989: 9), and must be seen as an exogenous variable (Rogers 1989: 12).
Rogers (1989: 10–11) adopts Marshallian partial equilibrium analysis and what he calls a “monetary equilibrium” approach which describes the relationship between the rate of interest and the marginal efficiencies of all assets: in short, a “monetary equilibrium” is equality between the rate of interest and the marginal efficiency of capital (Rogers 1989: 11).
In this model, the long-term money rate of interest sets the rate of return to which other marginal efficiencies adjust in the long run, and the money rate of interest plays a significant role in the production of capital goods, and hence on aggregate investment and the level of employment (Rogers 1989: 12). Since in the market economy, there is no mechanism that will adjust the exogenous rate of interest to the right investment level to create effective demand and full employment, the rate of interest must be determined by government monetary policy (Rogers 1989: 13).
Rogers’ model is dependent on Keynes’ General Theory and Kregel (1983), but differs from other Post Keynesian models, and assumes an initial static equilibrium model in which short and long period expectations are realised (Rogers 1989: 14).
But one should note the problems even with Keynes’ analytical model – and by implication with Rogers’ own – that some Post Keynesians have identified:
(1) the marginal efficiency of capital (MEC) idea. Keynes, in developing the MEC, failed to free himself from the neoclassical marginal productivity of capital (King 2002: 209). As Joan Robinson notes,It seems to me that one must read Rogers’ Money, Interest and Capital with these caveats in mind too.“[sc. Keynes] made a fatal mistake in offering a quasi-long-period definition of the inducement to invest as the ‘marginal efficiency of capital’, that is, the profit that will be realised on the increment to the stock of capital that results from current investment and, still worse, identified the profitability of capital with its social utility. This was an element in the old doctrine from which he failed to escape. He had an alternative concept of the inducement to invest as the expected future return on sums of finance to be devoted to investment. Minsky (1976) points out that he did not seem to recognise the difference between the two formulations. If he had stuck to his short-period brief, he would have used only the second.” (Robinson 1979: 179–180).The MEC seems to suggest that there exists a rate of interest which is low enough to induce full utilization of capital goods. But this is just smuggling in the Wicksellian natural rate of interest, when Keynes had wanted to abandon the natural rate.
A number of Post Keynesians reject the MEC, because it is based on the neoclassical or marginalist theory of distribution.
(2) Keynes did not sufficiently stress the role of uncertainty and expectations in undermining the coordinating role of interest rates (King 2002: 14). In Chapter 18 of the General Theory, Keynes played down the role of uncertainty (which he had stressed in Chapter 12) and, if he had really maintained the crucial role of uncertainty as he did later in Keynes (1937), this would have “ruled out any stable functional relationship between investment and the interest rate” (King 2002: 14). The door was thereby left open for neoclassical synthesis Keynesians to reformulate the General Theory as a general equilibrium model where the interest rate has a pivotal role (King 2002: 14).
Keynes, J. M. 1937. “The General Theory of Employment,” Quarterly Journal of Economics 51: 209–223.
Kohn, M. G. 1986. “Monetary Analysis, the Equilibrium Method and Keynes’s General Theory,” Journal of Political Economy 94.6: 1191–1224.
Kregel, J. A. 1983. “Effective Demand: Origins and Development of the Notion,” in J. A. Kregel (ed.), Effective Demand and International Economic Relations. Macmillan, London. 50–68.
Leijonhufvud, Axel. 1981. “The Wicksell Connection: Variations on a Theme,” in Axel Leijonhufvud, Information and Coordination: Essays in Macroeconomic Theory. Oxford University Press, New York. 131–202.
Rogers, C. 1989. Money, Interest and Capital: A Study in the Foundations of Monetary Theory. Cambridge University Press, Cambridge.