Alternative Theories of Money and Finance
New Directions in Modern Economics series
Chapter 3: Money and Keynesian uncertainty
Unemployment develops ... because people want the moon – men cannot be employed when the object of desire (i.e. money) is something which cannot be readily produced and the demand for which cannot be readily choked off. Keynes (1936, p. 235) INTRODUCTION A modern capitalist monetary economy is inherently unstable. One of the most insightful contributions to our understanding of the essential non-ergodic characteristics of a monetary economy is the original Keynesian theory of money under the conditions of radical uncertainty. Keynes’s theory of money reveals how the problem of involuntary unemployment is inextricably bound up in the liquidity preferences by wealth holders. Unfortunately, these original insights have been eclipsed by the neoclassical reinstatement of Say’s law and its more recent incarnations in the guise of rational expectations and the efficient markets hypothesis. It will be argued that Keynes’s critique of his ‘classical’ contemporaries over the problem of uncertainty acquires even greater resonance in relation to their modern progenies: ‘I accuse the classical economic theory of being itself one of those pretty, polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the future’ (Keynes, 1937c , p. 115). Keynes’s theory of a monetary economy and his liquidity preference theory of investment will be examined in order to highlight the essential properties of money under the conditions of uncertainty, which inevitably prefigures the existence of involuntary unemployment and could – within a laissez-faire, deregulated financial system – induce phases of endemic financial instability and...
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