A common feature of practically all strands of post-Keynesian theory is the notion that the money supply should not be considered as fixed independently of money demand in macroeconomic models. There are, however, at least two ways to postulate money endogeneity. The first, and perhaps best known today, is Kaldor's version, where the money supply curve is assumed to be horizontal at a given interest rate level. Kaldor's approach focuses on the means-of-payment function of money, stating that money is created when firms and individuals plan to acquire goods and services and borrow from banks the necessary amount of money to do it. Kaldor's emphasis is laid on central banks' behavior, assumed to be entirely accommodating of commercial banks' demands for the reserves required to satisfy the demand for bank loans. Keynes's version, based on his Treatise on Money and other essays, focuses on money in its liquid-store-of-wealth function. To propose that money is the most liquid asset in an entrepreneurial economy rules out the possibility of accepting a horizontal money supply curve, as it is shown in the paper. In fact, the first and most important contrasting concept in Keynes's approach in comparison to Kaldor's is the notion of liquidity. Keynes proposes a hierarchical view of liquidity, while Kaldor views liquidity as a ‘flat’ concept, where different assets exhibit different degrees of liquidity but their relationship is not hierarchical. A second contrast is that Keynes's view of endogeneity is based on a theory of how banks work instead of a theory of central banking. The paper develops Keynes's approach to money endogeneity along the lines just described and evaluates Kaldor's criticisms of Keynes's views.
Fernando J. Cardim de Carvalho
Fernando J. Cardim de Carvalho
Among the areas in which the Keynesian revolution has been more unsuccessful in changing orthodox views, the relationship between savings and investment must certainly be the best known. Even today, after more than seventy years of publication of The General Theory, policy-makers are still advised to raise national savings rates in order to accelerate growth (and, more recently, end the crisis initiated in 2007 in the United States). Keynes's proposition that investment creates savings, and not the converse, seems to violate fundamental intuitions of economists as well as of the general public. In fact, investment creates savings in monetary economies, the operation of which is harder to grasp than the corn economy that inspires the opposite causality. How is the relationship between savings and investment defined in Keynesian and orthodox theories? In this paper, Keynes's views are contrasted to Wicksell's and to Wicksellian approaches embodied in loanable funds theories. In particular, one searches to clarify the theoretical relationship between the concept of aggregate savings (non-consumed output) and financial savings (net demand for assets) that should be more relevant to a discussion of investment finance. The special concept of finance employed by Keynes is used to stress the role played by banks in Keynes's theory and, in combination with his rejection of Say's law, to clarify the meaning of the »investment creates saving« proposition.