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Keynes and Macroeconomics After 70 Years

Keynes and Macroeconomics After 70 Years

Critical Assessments of The General Theory

Edited by L. Randall Wray and Matthew Forstater

In this substantial new collection, esteemed Post-Keynesian scholars reassess the relevance of Keynes’s The General Theory to a broad array of topic areas, ranging from the environment, investment finance, exchange rates, and socialism, as well as inquiries into general Post-Keynesian theory.

Chapter 4: Two Founding Fathers of the Post Keynesian Critical Appraisal of Self-balancing Mechanisms?

Lino Sau

Subjects: economics and finance, post-keynesian economics


Lino Sau* INTRODUCTION The Post Keynesian literature has often scrutinised the similarities and differences between the theoretical work of John Maynard Keynes and Michael Kalecki. On the one hand, Davidson (2000) has emphasised that the principle of effective demand elaborated by Keynes is more general and, to some extent, superior to that independently discovered and elaborated by Kalecki. On the other hand, Kriesler (2002) and Lopez (2002) have argued that Kalecki’s theory of price, distribution, investment, money and finance is, in many respects, superior to Keynes’s General Theory. There are certainly many differences between the contributions of these two economists; nevertheless, in this chapter we try to ‘compound’ Keynes’s and Kalecki’s critical analysis of the ‘classical’ assumption that flexibility of wages and prices is always able to ensure full employment equilibrium. In fact, both Keynes (1923, 1931, 1936) and Kalecki (1937, 1944, 1966) denied the existence of self-balancing endogenous mechanisms able to stabilise the economic system, and opened the way to Post Keynesian approaches seeking to demonstrate that wage and price flexibility can be destabilising. In ‘A Tract on Monetary Reform’ (1923), in a set of writings from 1931 to 1933 and in The General Theory (1936: Ch. XIX), Keynes questioned the viability of flexible wages and prices to restore full employment. In a comment on Pigou (1944) and in Studies in the Theory of Business Cycles (1966), Kalecki argued that falling prices will not necessarily stimulate an increase in aggregate demand when firms and households have...

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