John King’s A History of Post Keynesian Economics since 1936, Chapter 1

John King’s wonderful book A History of Post Keynesian Economics since 1936 (2002) is as close as one can get to a reference work on the history of Post Keynesianism.

A summary of Chapter 1 follows.

In Chapter 1, King discusses the reactions to Keynes’ General Theory of Employment, Interest, and Money (1936), which went to the publishers in January 1936 and appeared in print a month later (King 2002: 12).

There was a struggle between Walrasian and non-Walrasian interpretations of the General Theory from the beginning (King 2002: 12).

The core of the General Theory is the principle of effective demand: the level of output and employment are determined by aggregate demand, not the supply-side factors emphasised by neoclassical marginalism (King 2002: 13).

King points to contradictions in the General Theory and the fact that it was not entirely consistent. King also notes that some early drafts of the book were rather more radical than the published version (King 2002: 14–15).

In Chapter 12 of the General Theory, Keynes stressed the role of uncertainty in causing instability in the aggregate level of investment in market economies, and also in thwarting any reliable mechanism by which investment is equated with saving in a full employment equilibrium (King 2002: 13). Keynes thus denied the loanable funds interpretation of the interest rate, and instead argued that interest is a monetary – not a “real” – phenomenon. Interest rates are determined by liquidity preference, not the “real” forces of productivity and thrift (King 2002: 13).

But King (2002: 12) points out that Keynes still equated the real wage with the marginal product of labour (Keynes’ “first classical postulate”), and in Chapter 18 of the General Theory summarised his ideas in a way that glossed over the role of fundamental uncertainty, and allowed subsequent marginalists to reformulate the General Theory as a general equilibrium system where the rate of interest has a crucial equilibrating role (King 2002: 14).

This general equilibrium interpretation, through the IS-LM model, was developed by a number of authors, including David Champernowne, Roy Harrod, James Meade, Brian Reddaway, and John Hicks (King 2002: 15).

There were a number of early reviews of Keynes’ General Theory as follows:

Hicks, J. R. 1936. “Keynes’ Theory of Employment,” The Economic Journal 46.182: 238–253.

Pigou, A. C. 1936. “Mr. J. M. Keynes’ General Theory of Employment, Interest and Money,” Economica n.s. 3.10: 115–132.

Lerner, A P. 1936. “Mr. Keynes’ ‘General Theory of Employment, Interest and Money,’” International Labour Review 34: 435–454.

Kalecki, M. 1936. “Pare uwag o teorii Keynesa,” Ekonomista 3: 18–26.

Targetti, F. and Kinda-Hass, B. 1982 [1936]. “Kalecki’s Review of Keynes’ General Theory” [translation of Kalecki 1936], Australian Economic Papers 21: 244–260.

Reddaway, W. B. 1936. “General Theory of Employment, Interest and Money,” Economic Record 12: 28–36.

Townshend, Hugh. 1937. “Liquidity-Premium and the Theory of Value,” The Economic Journal 47.185: 157–169.

Many had a tendency to interpret the General Theory within the neoclassical tradition.

In contrast to this were those like Joan Robinson, Nicholas Kaldor and Hugh Townshend who started to develop the view that the General Theory was a revolutionary work, and not a “special case” of neoclassical theory (King 2002: 18).

Paradoxically, King finds that the roles of Robinson and Kaldor in pursuing a non-neoclassical approach to the General Theory in the 1930s were considerably less clear-cut than modern Post Keynesians might think (King 2002: 18–22). King even concludes that by the late 1930s “the battle lines between the neoclassicals and the [sc. early] Post Keynesians were far from clearly drawn” (King 2002: 30).

For example, Kaldor’s repudiation of general equilibrium theory as a legitimate method for interpreting the General Theory was rather slow, even though he early on developed an endogenous money theory and critique of neoclassical capital theory that took him “halfway” to the issues of the Cambridge capital controversies (King 2002: 23–24).

And King remarks that the first edition of Joan Robinson’s Introduction to the Theory of Employment (1937) could be regarded as the “original bastard Keynesian text” (King 2002: 25).

An important exception, however, appears to be Hugh Townshend. In Townshend (1937), he attacked the idea of any long-run tendency to equilibrium and criticised John Hicks and his use of a version of loanable funds to interpret the General Theory (King 2002: 22).

Keynes himself encouraged both neoclassical and non-neoclassical approaches to his work (King 2002: 31–32, 43), but King also notes that Keynes’ heart attacks and his burden of work related to the Second World War stopped him from making systemic, point-by-point responses to all the controversy caused by the General Theory (King 2002: 30).

However, according to King, Keynes “never once repudiated the IS-LM interpretation of the General Theory” but “endorsed it warmly” (King 2002: 31) – although Kriesler and Nevile have pointed out in their paper “IS-LM and Macroeconomics after Keynes” (Kriesler and Nevile 2002) that the early IS-LM models of Roy Harrod and W. B. Reddaway were not exactly the same as that of John Hicks (1937).

Nevertheless, when Keynes came to his famous article “The General Theory of Employment” (Quarterly Journal of Economics 51 [1937]: 209–223) – which was a statement of the central message of the General Theory – he stressed the role of fundamental uncertainty, subjective expectations and the instability of investment (King 2002: 31) – points which lie at the heart of modern Post Keynesian theory.

King concludes that the most important early non-neoclassical interpreter of Keynes’ General Theory was none other than Michał Kalecki (King 2002: 34).

Update
Philip Pilkington has a post on ISLM and Roy Harrod here:

Philip Pilkington, “Keynes’ General Theory, the ISLM and Roy Harrod’s ‘Dynamics,’” Fixing the Economists, July 15, 2014.

BIBLIOGRAPHY
Hicks, J. R. 1936. “Keynes’ Theory of Employment,” The Economic Journal 46.182: 238–253.

Kalecki, M. 1936. “Pare uwag o teorii Keynesa,” Ekonomista 3: 18–26.

Keynes, J. M. 1937. “The General Theory of Employment,” Quarterly Journal of Economics 51: 209–223.

King, J. E. 2002. A History of Post Keynesian Economics since 1936. Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.

Kriesler, Peter and John Nevile. 2002. “IS-LM and Macroeconomics after Keynes,” in Philip Arestis, Meghnad Desai, and Sheila Dow (eds.), Money, Macroeconomics and Keynes: Essays in Honour of Victoria Chick, Volume One. Routledge, London and New York.

Kriesler, Peter and John Nevile. 2002. “IS-LM and Macroeconomics after Keynes.”
http://www.asb.unsw.edu.au/schools/economics/Documents/P.%20Kriesler%20and%20J.%20Nevile%20-%20IS-LM%20in%20Macroeconomics%20After%20Keynes.pdf

Lerner, A P. 1936. “Mr. Keynes’ ‘General Theory of Employment, Interest and Money,’” International Labour Review 34: 435–454.

Pigou, A. C. 1936. “Mr. J. M. Keynes’ General Theory of Employment, Interest and Money,” Economica n.s. 3.10: 115–132.

Reddaway, W. B. 1936. “General Theory of Employment, Interest and Money,” Economic Record 12: 28–36.

Robinson, Joan. 1937. Introduction to the Theory of Employment (1st edn.). Macmillan, London.

Targetti, F. and Kinda-Hass, B. 1982 [1936]. “Kalecki’s Review of Keynes’ General Theory” [translation of Kalecki 1936], Australian Economic Papers 21: 244–260.

Townshend, Hugh. 1937. “Liquidity-Premium and the Theory of Value,” The Economic Journal 47.185: 157–169.