Robertson versus Keynes
and
The
Long-Period Problem of
Saving and Debt
Third Edition
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Summary of Papers
Chapter I, Robertson versus Keynes
Chapter II, The Theory of Interest
Chapter III, The Long-Period Problem of Saving,
Chapter IV, The Long-Period Problem of Debt,
Chapter V, Concluding Observations,
The changes in the text of this edition are primarily editorial, designed to strengthen the argument. The formal modes specified in Appendix A: Keynes’ Theory of Interest and Appendix B: the Structure of Keynes’ Model of earlier editions are not included in this edition. They have been substantially revised and are included in the forthcoming Essays on Political Economy Volume III: Keynes.
George H. Blackford
November 4, 2019
In the Preface to The General Theory of Employment, Interest, and Money, John Maynard Keynes wrote:
The composition of this book has been for the author a long struggle of escape, and so must the reading of it be for most readers if the author’s assault upon them is to be successful, — a struggle of escape from habitual modes of thought and expression. The ideas which are here expressed so laboriously are extremely simple and should be obvious. The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds. (1936, p. viii)
It is argued below that the failure of policy makers to escape the old and accept the new led to the adoption of economic policies over the past forty-five years that culminated in the Crash of 2008 and the economic stagnation that followed. It is further argued that this failure arose from an inability to appreciate the role of Marshall in the development of Keynes’ thought. I find Keynes’ simple ideas to be easily understood from the perspective of Marshall and beyond the ken of the Walrasian paradigm of neoclassical economics that underlies the worldview of policy makers.
While the primary purpose of this monograph is to provide a definitive explanation of the way in which the rate of interest is determined and to explain the connection between the central thesis of The General Theory and the economic problems we face today, the manuscript is written in such a way as to explain Keynes’ general theory from the perspective of Marshall. As such, it is a primer on The General Theory of Employment, Interest, and Money, directed toward economics students in the hope that it will facilitate their ability to go beyond the Walrasian perspective of Neoclassical economics to gain a deeper understanding of Keynes and of the way in which the economic system actually works in the real world.
George H. Blackford
December 15, 2017
In November of 1936, Dennis H. Robertson proclaimed: “it is not as a refutation of a common-sense account of events in terms of supply and demand for loanable funds, but as an alternative version of it, that Mr. Keynes' account as finally developed must be regarded.” (p.183) The following February, Keynes asked Robertson to provide “at least one reference as to where this common-sense account is to be found.” (p. 210) Thus began the controversy that evolved into what became known as the liquidity-preference/loan-able-funds (LP/LF) debate. This debate continued long after Keynes’ death in 1946 when the torch was passed from Keynes to the Keynesians.
With the Keynesians in charge, the debate took a decidedly Walrasian turn. While some Keynesians may have continued to defend Keynes’ argument from A Treatise on Money to the effect that the rate of interest cannot change in response to a change in saving or investment in the absence of a change in income, the vast majority fully embraced John R. Hicks’ 1936 argument to the effect that it makes no difference which theory one accepts since the static equilibrium properties of the two theories are the same. The Keynesians embraced this argument in spite of the fact that Keynes had rejected it in June of 1937.
In response to the Keynesians, Robertson and his fellow anti-Keynesians continued to insist that Keynes was wrong in his rejection of the idea that the rate of interest is determined by saving and investment through the supply and demand for loanable funds irrespective of whether the equilibrium properties of the two theories are the same. The position of the anti-Keynesians was best summarized by Harry Johnson in 1961:
The liquidity preference-loanable funds debate turns on the question of whether the rate of interest is better regarded as equilibrating the flow of funds onto and off the market for securities or as equilibrating the demand for and supply of the stock of cash. The answer… seems to be that…it makes no difference…provided… one is concerned only with the determination of the equilibrium level of the rate of interest…. The two theories become different, however, when applied to dynamic analysis of disequilibrium situations.… In a dynamic context, the loanable-funds theory definitely makes more economic sense; and the sustained resistance of Keynesians to admitting it, evident most notably in the prolonged defense…of the proposition that an increase in the propensity to save lowers the interest rate only by reducing the level of income, is a credit to their ingenuity rather than their scientific spirit. (1961, pp. 6-7)
And so it went until Robertson died in 1963, a point in time at which the Keynesians so dominated the discipline of economics that there seemed to be no need for them to continue to respond to the anti-Keynesians on this issue, and the controversy just petered out.
Since it made no difference to the Keynesians which theory was assumed, the Keynesians walked away from the debate confident they were victorious as they concentrated on the equilibrium properties of their models. And since the anti-Keynesians were no longer rebuffed by the Keynesians, the anti-Keynesians walked away equally confident of the victorious nature of their performance. Thus, the debate ended with both sides declaring victory. As a result, the issues of the Robertson \/Keynes controversy have never been resolved, for while it is generally agreed that the two theories have identical static equilibrium properties, there exists no consensus as to the nature of their dynamic properties.[1]
The failure to achieve a consensus in this regard has had the gravest of consequences for it left the discipline of economics with two theories of interest, each of which seems plausible and neither of which is fully understood. The result has been a persistent ambiguity with regard to numerous theoretical and practical problems relating to the way in which saving affects the economic system. The reason is, Keynes argued throughout The General Theory that saving is a nemesis that plagues the economic system by inhibiting economic growth and employment. It was this argument that Robertson challenged in his controversy with Keynes. Thus, even though the primary focus of the LP/LF debate was on the determination of the rate of interest—the substance of the debate as framed by Robertson and the anti-Keynesians—was concerned with the way in which saving affects the economic system. As a result, the anti-Keynesians walked away from the debate believing their view of the beneficial role of saving had been vindicated.
This created a situation in which economists have taken positions on both sides of the issue—some arguing that saving inhibits economic growth and employment (demand-side economics) and others arguing that economic growth and employment are stimulated by saving (supply-side economics). The result has been a rudderless guide to ad hoc policies over the past fifty years that have led us to where we find ourselves today, faced with a bitter divide over the appropriate response to the economic, political, and social crisis that has been developing throughout the world since the Crash of 2008—a divide in which neither side seems to be able to understand why the other is so confused.
I believe that given the history of the LP/LF debate this divide cannot be bridged in the absence of a clear understanding of the way in which the rate of interest is determined within the context in which the issue was originally raised by Keynes, namely, within the context of the Marshallian paradigm of supply and demand. There are many grounds on which one can criticize this paradigm, but I suspect that almost all economists recognize its essential validity, and I can’t even imagine what it would be like to try to make sense out of a market economy in a principles course without the concepts of supply and demand as put forth by Marshall. If we are unable to start with an explanation of the way in which prices and quantities are determined by the actions of decision-making units in individual markets within the context of a Marshallian partial-equilibrium analysis, how is it possible to provide a causal explanation of the way in which prices and quantities are determined within any economic model?
It is the purpose of this monograph to sort through the issues of the LP/LF debate in order to provide a definitive explanation of the way in which the rate of interest is determined within the Marshallian paradigm of supply and demand, and, beyond this, to explain the fundamental connection between the central thesis of Keynes’ General Theory—that consumption is the driving force for economic growth and employment, not saving—and the economic, political, and social problems we face today.
Chapter I, Robertson versus Keynes, reviews the arguments of the controversy between Robertson and Keynes that are essential to understanding the issues that separated the two sides in the LP/LF debate. It is argued that whether or not the loanable-funds theory is consistent with the Marshallian paradigm is the seminal issue raised by Keynes in The General Theory, but this issue became lost in Robertson’s conflation of three separate issues raised by Keynes: 1) whether or not the rate of interest is determined by saving and investment, 2) whether or not an increase in the propensity to save can stimulate the formation of capital, and 3) whether or not full employment can be maintained in the long run by monetary policy alone.
These three issues are examined in detail below, the first in Chapter II, The Theory of Interest, which explains the causal/dynamic nature of Keynes’ theory of interest, and the second and third in Chapter III, The Long-Period Problem of Saving, which argues that the failure to understand the causal/dynamic nature of Keynes’ theory of interest led policy makers to ignore the long-period problem of saving that Keynes’ explained throughout The General Theory—that is, the problem of maintaining full employment in the long run in the face of a declining prospective yield at the margin due to the increasing stock of capital that results from the flow of saving/ investment.
Chapter IV, The Long-Period Problem of Debt, argues that the failure to appreciate Keynes’ long-period problem of saving led to the fundamental problem we face today, namely, what may be referred to as the long-period problem of debt—that is, a situation in which the institutions within society are such that, given the state of mass-production technology, the full employment of existing resources can only be achieved and maintained through an unsustainable increase in debt relative to income. It is further argued that the reason we face this problem today is because of the increase in the concentration of income and international imbalances that have occurred over the past thirty-five years that are the result of the institutional changes brought on by the economic policies that have been implemented over the past forty-five years.
Chapter V, Concluding Observations, argues that ignoring Keynes’ long-period problem of saving—combined with a failure to understand its companion, the long-period problem of debt—resulted in the adoption of economic policies over the past forty-five years that have taken us down a road that inevitably leads to the kind of financial crisis we experienced in 2008 and the economic stagnation that followed. It is argued that there can be little hope for the future so long as economists are unable to come to a clear understanding of Keynes’ long-period problem of saving in a way that leads to an overwhelming consensus within the discipline of economics to the effect that—consumption is the driving force for economic growth and employment, not saving.
Endnote[1] With regard to this equivalence and lack of consensus on the dynamic properties of the two theories see Ackley (1957), Asimakopulos, Brunner, Davidson, Fellner and Somers, Fleisher and Kopecky, Modigliani, Palley, Horwich, Johnson, Keynes, Klein, Kohn, Lerner, Lloyd, Patinkin, Robertson, Robinson, Rose, Stiglitz (1999), Terzi, Tsiang, and Wray. For surveys of the early literature see Haberler, Shackle, and Johnson (1962). For an analysis of the later literature see Bibow (2009)..
This book is available in paperback and eBook formats at Amazon.com for a nominal contribution to this website.
Robertson versus Keynes
andThe Long-Period Problem of
Saving and Debt
Third Edition
