Seventy-Five Years Later
Edited by Thomas Cate
Chapter 6: Keynes’s General Theory, the Quantity Theory of Money and Monetary Policy
Peter Docherty* INTRODUCTION: REVOLUTION AND CONSENSUS Thirty-five years after the publication of Keynes’s General Theory, Harry Johnson examined what appeared at the time to be the end of the ‘Keynesian Revolution’. In that paper, Johnson (1971) examined not only the conditions under which Keynes’s General Theory had transformed thinking in the 1930s and 1940s about the operation and management of the macroeconomy, he also considered the conditions under which that transformation was in the process of being superseded. The ‘monetarist counter-revolution’, as Johnson called it, was reasserting both the tendency of economic systems to gravitate to full employment and the validity of the quantity theory of money.1 Johnson (1971, p. 12) predicted, however, that the counter-revolution would fail, and within 20 years Blinder (1988) was describing the resurgence of Keynesian thinking, and Gordon (1990), and Romer (1993), were documenting the structure and achievements of a New Keynesian economics. Interestingly, James Tobin (1981) had offered the interim reflection that the counter-revolution would be more successful than Johnson had predicted. An important dimension of this New Keynesian economics was its implications for the theory and practice of monetary policy. After a twenty-year period in which money and monetary policy were thought to have little or no effect on the real economy, the so-called principle of money neutrality, New Keynesian monetary policy saw a very important causal link between monetary conditions and fluctuations in real economic activity (Clarida et al. 1999, p. 1161). It also advocated that this link be exploited in the...
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