Edited by Robert W. Dimand and Harald Hagemann
Chapter 27: A Treatise on Money
With his Treatise on Money, Keynes wanted to overcome what he perceived to be the essential shortcoming of contemporary economic theory: its sole preoccupation with comparative statics (comparison of long period equilibrium positions) did not provide any useful guidance concerning appropriate policy reactions in the face of short-period deviations from full employment long-period equilibrium. Its rich and detailed analysis of cyclical fluctuations of prices, production and employment focuses on the divergence of savings and investment, determined by quite different economic agents (that is, on the divergence of the market rate and the natural rate of interest). However this innovative analysis of potential dynamic transition processes was marred by Keynes’s banana parable, intended to dispute the benefits of acts of savings, because it implied instability of the full employment, long-period equilibrium understood to be the centre of gravitation of cyclical fluctuations. Soon the analysis of the Treatise on Money was eclipsed by Keynes’s solution to the instability problem because the resulting consumption function implied changes of production and employment as the mechanism equilibrating savings and investment opening up the revolutionary possibility of equilibrium unemployment that would be at the centre of the General Theory of Employment, Interest and Money.
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