7 The Years of High Theory: I 7.1. Problems of Economic Dynamics 7.1.1. Economic hard times I went to university in the fateful 1930, and during the four-year course I watched the almost complete collapse of the American economy. I also had occasion, at that time, to hear my Professor of Banking, who was also the Vice-President of the New York Federal Reserve, admitting during a lecture that he did not know why the President had ordered the closure of all the banks the day before. My grandfather’s bank did not open again and later my father also went bankrupt. I studied these events: my conversion can be seen from the fact that the subject of my thesis was Marxism. Having observed the incompetence and impotence of the Government, I decided to change to Economics, hoping to find there the key to understanding the events: even if this was rendered impossible by the useless orthodoxy of the period. Thus R. M. Goodwin (‘Economia matematica: Una visione personale’, 1988, p. 157) explained his simultaneous conversion to Marxism an d economics. This was not an isolated case; similar conversions flooded in during those years. The entire period from the beginning of the First World War to the end of the Second was marked by crisis; a crisis which affected every sphere of bourgeois life, from the economic to the social and from the political to the cultural. The outbreak of the First World War had sown doubts about the rationality of the international capitalist system. But the most lucid minds had immediately understood the deep reasons for the conflict, and could not avoid acknowledging the truth in the arguments of those Marxist thinkers who had preached the dangers of imperialism and prophesized the great war. Then, as soon as the First World War had ended, the conditions were laid down for the Second, as Keynes and a few other enlightened thinkers immediately understood. In the meantime, a nation-continent had attempted its escape from cap- italism with the Bolshevik Revolution, an attempt which not even military intervention by the major capitalist powers was able to quell. At that time it was impossible to see where the revolution was finally going to lead. The only thing that everybody clearly saw was the practical demonstration that cap- italism was not eternal and that the proletarian revolution was possible. Many and immediate were the attempts at imitation, driven on by the great wave of industrial conflict which had already affected all the major capitalist countries in the second decade of the century and which showed no signs of slowing down until the middle of the 1920s. The bourgeois dread was so great that in about fifteen years half of Europe was at the mercy of Fascism. And if this were not enough to convince even the most optimistic of the depth of the crisis, they only had to look at the economy: the breakdown of the system of international payments, abandonment of the Gold Standard even by those countries which still supported it, competitive devaluations, harsh protectionism, the contraction in international trade; and then, increasing instability in growth, increasingly bitter crises, rampant unem- ployment, the Wall Street Crash, and the suicides of speculators. It seemed that all the Marxist predictions were turning out to be true, from the falling rate of profit to the increasing immiseration of the proletariat, from the deepening of the interimperialist contradictions to the reawakening, because of the crisis, of the revolutionary consciousness, and from the increase in the concentration of capital to the amplification of the periodic oscillations. Was the final collapse in sight? Nobody was surprised at the weakening of the intellectual fascination of that economic orthodoxy which preached the allocative efficiency of com- petition and the rationality of economic agents. Nor was it surprising if the laissez-faire ideology could no longer recruit members, while the most enlightened economists began to theorize the necessity of abandoning free trade in order to rescue capitalism. The economists of this period can be roughly divided into three groups. Some underwent a Goodwin-style conversion and, escapi ng from the fetters of the official scienc e, began to look for alternative theoretical approaches, Marxist, institutional, or others, which seemed to promise sharper instru- ments with which to understand reality. A second group, on the contrary, gave up any pretence of using neoclassical theory to understand reality and tried to cultivate it as pure theory, satisfied with the puzzle-solving work it offered in abundance. Finally, there were those who, while continuing to show due respect for the official science in which they had been educated, tried to twist it to serve ends it was not suitable for, above all in the attempt to use it to explain the real world. The most eminent examples of the last category were Keynes and Schumpeter. But they were only the tip of the iceberg. Most of the economists of this group returned to the problem s which had given birth to political economy: those of macroeconomic dynamics.It was not surprising that they lost more time than necessary in liberating themselves, often without success, from ‘techniques of thought’ which served more to hide than to reveal reality. Nor is it surprising that, in the end, they produced imperfect and incoherent theories. In the next three sections of this chap ter we will outline the three most important dynamic theories formulated in the years of high theory, those of Keynes, Kalecki, and Schumpeter. In the rest of this section we will consider various themes of economic dynamics to show the main directions of 233 the years of high theory: i theoretical development from which originated the work of the three masters. Finally, in the next chapter, we will deal with developments in micro- economic and the general-equilibrium theory as well as with the contributions of various heterodox theories. 7.1.2. Money in disequilibrium Up to now we have emphasized the static character of neoclassical analysis. In this chapter we must contradict ourselves. In fact, some dynamic macro- economic models had already been formulated in the 1890s by a few great neoclassical economists. It is interesting to note that the field in which such attempts were made was mainly that of monetary economics. It is not by chance that it happened in this way. In fact, unless money is considered as the same as any other good, monetary theory does not lend itself to a simple application of the method of maximiza tion of individual goals in the pres- ence of scarce resources: first, because money is not a good which is desired in itself and it is not clear what is meant by demand for money; second, because money is not a naturally scarce go od and it is not obvious what is meant by supply of money; finally, because it is not evident which factors the supply and demand of money depend on, nor is it clear what is meant by monetary equilibrium. The early neoclassical economists, who were all concerned with other matters, rather overlooked monetary problems and adopted the equation of exchanges as the last word in regard to the scientific explanation of the price level. As we have seen in the last chapter, in Fisher’s (simplifi ed) versi on, the identity MV ¼ PT where M is the quantity of money, V is its velocity of circulation, P the level of prices, and T the level of transactions, becomes an explanation of the value of money once V, T, and M have been fixed exogenously. The dif- ficulties and the interesting thing about this theory arise, as Cantillon and Hume had already pointed out, as soon as one wishes to study the process by which a monetary impulse affects the level of prices , that is, as soon as one wishes to tackle the problem of the value of money in dynamic terms. Fisher, Wicksell, and Marshall have made the most interesting attempts to solve this problem. Even though their theories were formulated in the 1890s, it is worth discussing them in this chapter, as they produced their best fruits precisely in the years of the ‘high theory’. In Fisher’s theory, the variables appearing in the equation of exchanges are set at their normal value, so that the explanation emerging from the equation refers only to the ‘final and permanent effects’ of monetary changes. However, there are ‘temporary effects’ that are felt in the transition 234 the years of high theory: i period. And it is with these effects that Fisher tried to explain economic fluctuations. When prices begin to rise, following an increase in M, the monetary interest rate is slow to adjust, so that the real interest rate falls. In this way economic activity and the creation of bank credit is stimulated. Production, pulled by demand, increases, and prices increase still more. However, the indebtedness of the economic agents also grows. Finally, when the monetary interest rate (and with it the real interest rate) rises to adjust to the reduced value of money, deflation begins; and this will have catastrophic effects owing to the high level of indebtedness artificially generated by the preceding boom. Another great influence on the monetary thought of the 1930s, especially in England, was that of Marshall. The Marshallian version of quantity theory is represented by the famous ‘Cambridge equation’. The first official formulation of this theory was made by Marshall in a testimony to the ‘India Committee’ in 1899. As early as 1871, while reformulating Mill’s arguments on money, Marshall had already sketched out his own personal version of the quantity theory in an unpublished paper. For a long time, however, the Cambridge monetary theory remained basically an oral tradition. The key formulations came out rather late, and are to be found in an article by Pigou, ‘The Exchange Value of Legal Tender Money’ (1917), and in Marshall’s Money, Credit and Commerce (1923). The ‘Cambridge equation’ is: M ¼ hYP where Y is the real income and h is the ratio in which individuals wish to keep liquid assets. Although h can be interpreted as the inverse of the income velocity of circulation, the original interpretation, which underlines its dependence on the decisions of economic agents, offers quite marked the- oretical advantages. For example, it makes it possible to introduce into the demand function for money those ‘psychological’ factors, such as uncer- tainty and other motivations in regard to choices about personal wealth, which Keynes was later to develop into the liquidity preference theory. Another important Marshallian idea in regard to monetary dynamics concerns periodical crises, which Marshall explained as caused by changes in the entrepreneurs’s inflation expectations in connection with credit fluctua- tions. When credit expands excessively and prices rise, entrepreneurs and speculators expect further price rises; therefore they increase their demand for credit and goods. Thus the inflation ary expectations are self-fulfilling. As monetary wages are inelastic in the short run, profits increase, investments are encouraged, and inflation is fuelled. In inflationary phases credit expands very fast, which puts the creditors in a risky position and reduces their willingness to offer further credit. At a certain point credit begins to contract and the interest rate rises. A lack of confidence spreads and speculators are forced to sell to repay debts. Thus, prices fall and real wages rise; panic 235 the years of high theory: i creates panic, and spreads together with bankruptcies. In the end, production and employment contract. A precise type of monetary policy was derived from this theory, one based on the necessity to stabilize the price level, to control credit, and to establish an indexation of future payment contracts. Rather than Marshall, however, it was his students, especially Pigou and Keynes, who pursued this line of thought. The theory used by Keynes in Tract on Monetary Reform (1923) is inspired by it. 7.1.3. The Stockholm School An important source of dynamic analysis during the years of high theory was represented by Wicksell’s work. We have already discussed this in the last chapter. Here we will recall the essential elements of Wicksell’s contribution to monetary analysis, just to introduce the theories of his followers. Towards the end of the last century and the beginning of ours, Wicksell undertook a detailed study of the implications of the divergence between natural and bank interest rates and, more importantly, he formulated the nucleus of a theory which aimed to provide the basis for economic policy measures able to guarantee price stability. In Wicksell’s theory, the ‘natural’ interest rate is the equilibrium price of savings and investments, and, at the same time, the real rate of returns of investments. However, the ability of the banks to create credit is independent from savings, so that the market interest rate, i.e. the one applied to bank credit, can differ from the natural rate. If it is lower, the demand for credit will increase. The supply of credit will adjust, as it is fairly elastic (even if not completely, given the necessity of the banks to maintain reser ves). The monetary expansion will fuel the demand for real goods and, with it, increase prices. This is a disequilibrium inflationary process in which Say’s Law does not apply. As long as the difference between the natural and market interest rates lasts, aggregate demand will increase, partially dragging with it supply and generating a cumulative process of price increases. In monetary equilibrium, savings are equal to investments, the market interest rate is equal to the natural one, profits are zero, and the level of prices is constant. Economic fluctuat ions are determined, according to Wicksell, by oscillations in the natural interest rate (which may be caused, for example, by technical progress or by changes in the state of confidence of the entrepre- neurs) and by the tendency of the bank rate to lag behind the natural rate. The model had an enormous influence on the monetary theory of the early nineteenth century, and was taken up and developed by various economists, especially Austrian, such as Mises and Hayek, but also American and English, such as Fisher and Keynes. In Sweden, Wicksell’s teachings were developed by several scholars who went on to form, in the 1930s, the so-called ‘Stockholm School’. Its most important members were: Erik Robert Lindahl, Karl Gunnar Myrdal, Bertil Ohlin, and Erik Lundberg. 236 the years of high theory: i Lindahl developed the theory of the cumulative process in an article published in 1929 (reprinted in Studies in the Theory of Money and Capital (1939), with the title The Interest Rate and the Price Level ) in which he anti- cipated some Keynesian arguments. He defined macroeconomic equilibrium in terms of the equality between the value of the production of co nsumer goods an d the aggregate consumption expenditure. He argued that the Wicksellian cumulative process, in the presence of unemployment, would only partially have resulted in an increase in prices, while in part it would have generated increases in consumption and production in real terms, and therefore a reduction in unemployment. Myrdal tried critically to develop the Wicksellian analysis in Moneta ry Equilibrium. He maintained that ex ante investments, i.e. invest ment decisions, depend on the entrepreneurs’s expectations in regard to the rate of return. Monetary equilibrium is only reached when ex ante investments coincide with ex ante savings, i.e. with the part of income which individuals decide not to consume. When the expectations of the entrepreneurs change, investments and the value of aggregate production also change, while savings adjust by means of variations in the incomes earned, the prices (of the consumer goods), and the saving ratio. In equilibrium, investments may be positive and aggregate demand may grow, so that monetary equilibrium is compatible with an increasing price-level. Vice versa it is possible, as a consequence of a restrictive monetary policy and owing to the inelasticity of money wages, that the process generates unemployment, so that equilibrium is reached at any level of employment. The Stockholm School did not limit itself to developing the Wicksellian analysis of the cumulative processes in the field of monetary theory, but tried to extend its dynamic properties to other sectors of economic theory, con- tributing in this way to the birth of the modern methods of economic dynamics, to the point of anticipating some of the most recent developments of non-Walrasian economics. Besides this , there are, especially in the work of Lindahl, the basic theoretical elements of the modern notions of inter- temporal and temporary equilibrium. Thes e notions were taken up, refor- mulated, and made known to the great academic public by Hicks in 1939. We will discuss this in more detail in the sections of the next chapter dedicated to Hicks. Here we will limit ourselves to outlining the evolution of these the- ories in Sweden. One of the first interesting contributions made by Myrdal to the development of modern dynamics consists in the introduction of expectations among the variables that determine prices. By means of expectations, future changes produce effects on economic activity before they actually occur. This leads to the fact that the determination of the equilibrium variables must include expectations of future movements. Sub- sequently Lindahl introduced the hypothesis of perfect foresight, and defined an equilibrium in which, for each individual and each good, the expected price produces equality between supply and demand. All the expectations in 237 the years of high theory: i regard to future evolution come true, so that the economy is in equilibrium ‘through time’: this is a type of inter-temporal equilibrium. A year before, Hayek had formulated the same concept. The notion of inter-temporal equilibrium gives the appearance of a dynamic process. But it is not a true dynamics, as the determination of all the prices and all the quantities of all future periods takes place in the present time. In order to escape from this difficulty, Lindahl introduced a new concept, that of ‘temporary equilibrium’. From this point of view the evolution of the economy through time occurs over a succession of periods. The basic hypothesis is that we are dealing with such brief periods of time that the factors which directly influence the prices can be considered as unchanged. The idea is that the economy is in equilibrium in each period, and that the data of that equilibrium, the factors influencing the prices, change from one period to another, like unpredictable disturbances. Such a type of analysis was criticized by Myrdal and Lundberg. The problem is that, in this model, the succession of the disturbances, and therefore of the equilibria, remains unexplained, while it is precisely the nature of the changes occurring in the movement from one period to another that must be explained. Lindahl recognized the difficulty, and admitted that he had endeavoured to introduce ‘dynamic problems into a static context’. It was in an unpublished paper written in 1934, and later in the article ‘The Dynamic Approach to Economic Theory’ (published in his 1939 book) that Lindahl made the decisive jump forward. Here he constructed a model of a sequential economy which moves in ‘complete disequilibrium’, and in which the prices of all goods are fixed each time by the single sellers. These prices are based on expectations that, ex post, usually turn out to be mistaken. Exchanges are undertaken at these prices, so that excess demands can occur on all markets. The excess demands are eliminated by means of unplanned variations in stocks, so that buyers always obtain what they demand, while the disequilibrium is only perceived by the producers. The producers, on the basis of the information thus obtained, modify their own expectations and, consequently, the announced prices for future exchanges. In this way the economy can move through a series of disequilibria without necessarily tending to adjust towards a Walrasian equilibrium. On the other hand, it could not be otherwise, as the ‘complete disequilibrium’ model does not use three of the fictional analytical devices of the Walrasian model: perfect price flexibility, the auctioneer, and taˆtonnement. In Chapter 9 we will see that it was precisely the abandonment of one or other of these devices that gave birth to the modern non-Walrasian theories. 7.1.4. Production and expenditure Around the beginning of the century, a group of trade cycle theories, quite different from those of the monetary type outlined above, became popular, 238 the years of high theory: i especially among politicians and the general public, rather than academic economists. These theories focused on the real factors of crises and tended to cast doubts on some doctrinal taboos, such as Say’s Law and the argument that the ‘invisible hand’ is able to ensure stability and full employment. Even if some of these theories were supported by a few orthodox economists, their origin is not within the neoclassical theoretical system but rather in that ‘underworld of Karl Marx, Silvio Gesell, and Major Douglas’ of which Keynes spoke in the General Theory, and in which he found, if not pre- cursors, at least economists who ‘deserve recognition for trying to analyse the influence of saving and investment on the price level and on the credit cycle, at a time when orthodox economists were content to neglect almost entirely this very real problem’ (Treatise, I, p. 161). It is possible to label these theories ‘theories of real macroeconomic disequilibrium’ and to divide them into two groups: those of ‘over-savings’ and those of ‘over- capitalization’. In both cases their dist ant origin can be found in Marx’s ‘reproduction schemes’, but the economists from whom the two approaches directly originated were John Atkinson Hobson and Mikhail Ivanovic Tugan-Baranovskij. Hobson tackled the problems of unemployment and crises in various works, among which we will recall especially The Economics of Unemploy- ment (1922). The basic argument was that the business cycle is caused by the effects that variations in the distribution of income have on the average propensity to save. In the expansion phases, prices increase and real wages decrease because of the delay with which money wages adjust. The increase in the profit share causes savings and investments to rise. The increase in productive capacity implies that the production of consumer goods will also rise; worse, as wages have difficulty in keeping pace, production will rise more rap idly than the demand. Therefore, unsold inventories will accumu- late while the prices of consumer goods will drop. But this will cause profits to decrease, triggering the depression. Then, the depression itself, by causing production and income to decrease, will eliminate the excess of savings. Hobson pointed out the famous paradox or dilemma of thrift, according to which a high level of savings, while being useful for personal enrichment, is detrimental to the economy as a whole, as it reduces effective demand. Keynes criticized the theories of under-consumption in the same manner as Tugan-Baranovskij had many years before, with the argument that the lack of effective demand caused by low consumption can be compensated by high investment expenditure. Tugan had first raised this criticism in attacking some Marxist theories of breakdown and under-consumption. Then, in his major work, Industrial Crises in Contemporary England,he advanced an original theory of economic crises in which investment decisions are the main cause of fluctuations. The cyclical movements occur because of the absence of a balancing mechanism between savings and investments. The formation of savings is 239 the years of high theory: i a relatively stable process, whereas investments tend to be carried out in clusters. In the phases of prosperity investments increase, generating effective demand for the whole economy by a process similar to that of the Keynesian multiplier. The finan cing of the investments over and above current savings is effected by an expansion of bank credit and by the availability of ‘free’ or ‘loanable’ capital, i.e. by the liquid funds accumulated in the preceding depression phase. The increase in investment raises the production and the productive capacity of the capital goods sector. However, in phases of prosperity the proportion between consumer-goods and capital-goods sectors changes in such a way that the productive c apacity of the system tends to rise above consumer demand. This reduces the incentive for capital accumula- tion. Moreover, and this is the most important fact for Tugan, the accu- mulation of real capital leads to the exhaustion of loanable capit al, and the supply of credit tends to slow down; the interest rate rises, and this dis- courages further capital accumulation. The consequences are an excess supply of capital goods and a reduction in their prices and production. Then, from this sector, deflation is transmitted to the whole economy. In the phases of crisis and depression, savings exceed investment, and are accumulated once again in the form of idle liquid balances. Tugan-Baranovskij’s model is the head—‘the first and most original’, as Keynes was to say—of a family of cycle models based on the relationships between savings and investment which have among their most important exponents Arthur Spiethoff, Karl Gustav Cassel, and the Keynes of the Treatise. We will discuss Keynes later. Here, for the sake of completeness, we will outline the models of Spiethoff and Cassel. According to Spiethoff, an investment boom can be triggered by techno- logical innovations and the opening of new markets. During the expansion phase, the production of capital goods grows more rapidly than the pro- duction of consumer goods; employment and consumption also grow more rapidly, so that the composition of supply diverges from the composition of aggregate demand. The prices of consumer goods increase and, with these, profits. But accumulation of capital causes productive capacity to increase, and at a certain point prod uction of consumer goods will exceed demand, thus causing prices and profits to fall. The rate of investment will decrease both because of diminished profitability and because plants have been renewed a short time before. In other words, the depression is caused by the over-capitalization of the preceding boom. Cassel reproposed this model with some important modifications in Theoretische Sozialoekonomie. He did three main innovations. The first concerns the role played by certain lags, such as those existing between investment decisions and the activation of plant and those between changes in the interest rate and investments. The second concerns the explanation, in terms similar to the accelerator mechanism, of the influence that variations in demand for consumer goods have on investments. The third regards the role 240 the years of high theory: i played by the financial sector in amplifying economic fluctuations. A low interest rate during recovery, when profits are high, stimulates investments. Sooner or later, however, investment will overtake savings and the interest rate will rise, contributing to the inversion of the cycle. On the other hand, during the phases of depression the low level of investments with respect to savings causes the interest rate to decrease, thus paving the way for the next recovery. Monetary factors, however, are only reinforcing elements in the cyclical movement, whose real causes are to be found, as in the theories of Tugan and Spiethoff, in the disequilibria between the composition of demand and the structure of output. It is this kind of disequilibrium which underlies almost all the non- monetary pre-Keynesian theori es of the business cycle, and Keynes himself, in the Treatise, reasoned in these terms. We will see later that one of the essential aspects of the theoretical revolution to which Keynes gave his name consisted in going beyond this way of thinking. 7.1.5. The multiplier and the accelerator The fourth great stream of thought in dynamic theory in the inter-war period was the study of the interaction between the multiplier and the accelerator. The principle of the multiplier can be presented, in its simplest way, by assuming the maximum aggregation possible. If DY represents the increment in the national income, C the increment in consumption, and c the marginal propensity to consume, then DC ¼ cDY. The sum of the increase in the autonomous expenditure, DA, and that of the induced expenditure, DC,is equal to the variations in income: DA þ DC ¼ DY from which, by substituting in DC, we have DY ¼ 1 1 À c DA 1/(1 À c) is the multiplier. If the propensity to consume is 0.8, an increase in the autonomous expenditure of $100 bn. will generate an increase in income of $500 bn. In fact, the initial expenditure of $100 bn. generates incomes that will be spent to buy consumer goods of the value of 0.8(100) ¼ 80; this generates incomes which will be spent to buy consumer goods of the value of 0.8(80) ¼ 0.64(100) ¼ 64; and so on. Therefore, the overall income generated by the initial expenditure of 100 is equal to 100[1 þ (0.8) þ (0.8) 2 þ (0.8) 3 þ (0.8) 4 þ ] ¼ 500. In fact, the sum of the numbers between the square brackets tends to 1/(1 À 0.8) ¼ 5. It is important to understand the reason why the multiplier process is convergent. A small increase in autonomous expenditure does not generate 241 the years of high theory: i [...]... self-sustaining; on the one hand it spreads from the capital-goods sector to the whole economy, on the other it produces the strange and miraculous effect of the ‘widow’s cruse’: as the expenditure of each agent is the profit of another, the higher the aggregate expenditure of the capitalists, the higher their earnings will be The Marshallian element of the model resides in the theory of money demand,... performed by the owner of the capital, the innovative process takes place through the creation of new firms, and competition operates by means of the bankruptcies of inefficient and obsolete firms The second, on the other hand, is characterized by the existence of large firms Technical progress is planned by the firms themselves, and growth occurs by means of the increase in company size rather than in their number... average of the expected shortterm rates within the time of maturity of the loan Therefore, the variations in the long-run rate are always smaller than those of the short-term rates; and, to the extent to which investments are financed with long-term debt, the influence of the variations of the cost of finance can be ignored even more legitimately A problem does arise here, however: if there is a permanent... much more On the contrary, his work is important for the history of modern economic thought, not only because he was the first to formulate the theory of effective demand, nor so much for the fact that the Kaleckian version of that theory was more realistic than the Keynesian one, but because of the centrality Kalecki assigned to the problem of the distribution of income and to the non-competitive context... payments The United States masked them with a policy of long-run foreign loans, whereas France accumulated gold and sterling reserves The final blow to the English Gold Standard came immediately 246 the years of high theory: i after the 1929 crash American loans dried up, while the Bank of France decided to convert its sterling reserves into gold Then, in 1931, a wave of panic, caused by the collapse of the. .. the multiplier process can be found in Marx There is an interesting page in chapter 17 of the second volume of the Theories of Surplus Value, in which Marx tries to explain how a lack of effective demand in an industry with a high level of employment can be transmitted to the entire economy through a reduction in the production of that industry and the consequent reduction in employment and wages The. .. it is important to recall that, according to Pigou, the possibility of increasing the level of employment depends on the occurrence of two institutional conditions: high elasticity of the credit supply and high flexibility of prices and wages 7. 2.2 How Keynes became Keynesian In regard to the two fundamental problems of English economic policy of the 1920s and the 1930s, the Gold Standard and unemployment,... that the levels of output and employment depend on investment decisions has two important theoretical implications The first is that, if the level of employment depends on the level of investment, rather than on its composition, the neoclassical view that full employment is reached by means of the changes in relative factor prices, and the consequent changes in relative demand, is deprived of any theoretical... rather than a real variable, and to determine it by the forces of supply and demand for money In the ‘Cambridge equation’ the quantity theory was formulated in terms of the quantity of liquid balances which individuals wish to keep in relation to the income they earn From this point of view, money is mainly demanded for its services in the purchasing of real goods Purchases cannot be completely planned,... economies from the end of the Second World War to the 1 970 s has contributed to legitimating the steady growth models and left Harrod’s original views in the shadows However, the period of deep instability we are now passing through favours a general reappraisal of the economic- growth argument which may lead to a re-examination and a new appreciation of the Keynesian bases of post-Keynesian theory From . changes in the state of confidence of the entrepre- neurs) and by the tendency of the bank rate to lag behind the natural rate. The model had an enormous influence on the monetary theory of the. PT where M is the quantity of money, V is its velocity of circulation, P the level of prices, and T the level of transactions, becomes an explanation of the value of money once V, T, and M have. to the birth of the modern methods of economic dynamics, to the point of anticipating some of the most recent developments of non-Walrasian economics. Besides this , there are, especially in the