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Colin Rogers

This chapter provides a definition of the principle of effective demand that is consistent with The General Theory and applies it to illustrate Keynes’s claim for the existence of long-period unemployment equilibrium and as the basis for his policy proposals. The principle of effective demand is then applied to illustrate that although some post-Keynesian models incorporate the endogeneity and non-neutrality of money, these models do not capture the properties of the principle of effective demand, particularly the distinction between the rate of interest and the marginal efficiency of capital. From this perspective the endogeneity of money is an implication of Keynes’s proposal to gain control of the rate of interest by nationalizing the Bank of England.

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Colin Rogers

The new macroeconomics emerged from the new classical counter-revolution against Keynesian economics in the 1970s. Today it is regarded as the dominant form of macroeconomic analysis despite the fact that it proved incapable of anticipating or understanding the global financial crisis (GFC) of 2007–2009 and that it was based on well-known conceptual errors. The new macroeconomics is based on Walrasian/Arrow–Debreu general equilibrium microeconomic foundations that preclude any role for money, banks, finance or governments. Attempts to integrate these institutions into microfounded general equilibrium models where no such functions are required represents a misapplication of the Walrasian/Arrow–Debreu model and leads only to confusion. The conceptual errors that existed before the GFC continue to go unrecognised or unacknowledged and undermine the post-GFC attempts to correct what were perceived to be limitations of the theory. Today the new macroeconomics has no sound economic foundations, microeconomic or macroeconomic; it has no clothes.

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Colin Rogers

‘State of the art’ monetary theory was unable to anticipate or understand the global financial crisis because it rested on microeconomic foundations that precluded any meaningful role for money, finance or banking. These analytical and conceptual flaws have been known for a long time. But many either ignored or misunderstood their implications. This note provides a largely non-technical explanation of the conceptual flaws in ‘state of the art’ monetary theory that rendered it unable to anticipate, or understand, the global financial crisis of 2007–2008; and rendered it thereafter effectively useless as a guide to what should be done.