Return to Keynes

The2008financial crisis and the European Sovereign Debt Crisis after forth have set the world economy into recession, the future of which is still obscure. Facing this reality, main stream economists’explanation cannot be satisfactory and most of them remain silent. Mean while, the image of John Maynard Keynes has appeared more often than ever in the media since the1970s."Return to Keynes" has become a hot topic. But there has many Keynesian schools in economics, including Neoclassical Synthesis, New Keynesians, Post Keynesians and the Monetary Circuit Approach, at least. Different economist has different idea about where should we return to exactly.Shortly after the publication of Keynes’General Theory, Hicks, Harrod and Meade interpreted it through the new classical paradigm, and got the IS-LM model as its simplified version. Neoclassical Synthesis, centered on the IS-LM model, incorporated Modigliani’s consumption function, Solow’s growth model and Phillips Curve, reaching a series of macroeconomics polices. This is the so called "Keynesian Census". Frankly speaking, Neoclassical Synthesis was still new classical real analysis in essence, appropriating some general concepts from the General Theory. This version of Keynesian economics aroused severe critics from the Cambridge economists, leading by Joan Robinson. It caused the almost twenty-year lasting "Cambridge Capital Controversies" in economic theory, which ended as Samuelson admitted that there were logical problems in the Neoclassical Synthesis. Robinson emphasized historical time and disequilibrium method, and constructed an alternative theory system, however ignoring Keynes’concept of monetary economy. On the other hand, Neoclassical Synthesis had been attacked by Monetarism since the1970s. Friedman revived the Quantity Theory, and latterly, the new classical macroeconomics extended the general equilibrium theory to the macroeconomic area. Neoclassical Synthesis incorporated some new classical hypothesis and reinterpreted Keynesian economics as a theory of unemployment equilibrium through the mechanism of nominal rigidity. Thus, economics returned back to the new classical real analysis. Keynesian revolution had been reversed.Based on the perspective of economic theory history, this dissertation point out that real analysis and monetary analysis are two opposed paradigm, the debate between which has come through the whole economics history. The two analyses found on different understanding of the nature of money and its role in economic life. The dissertation tries to demonstrate that real analysis, basing on commodity money theory, has obvious deficiencies, and the monetary theory of monetary analysis is more realistic. The revolutionary contribution made by Keynes was that he clarified that the typical character of economic life was fundamental uncertainty, and that money was important as it was the join between present and future. Keynes named this kind of economy as "Monetary Production Economy". The principle of effective demand, expounded by Keynes in the General Theory, is the basic framework for analyzing Monetary Production Economy. Apparently, Keynes objected real analysis and reformed monetary analysis. After Keynes, economists, including some Post Keynesian economists and economists belong to the Monetary Circuit Approach, integrated the monetary theory of Keynes’The Treatise on Money and the principle of effective demand. They extended the concept of Monetary Production Economy, arguing that the key difference between traditional economy and modern economy was that money played an essentially important role in the latter. The monetary creation mechanism in the Monetary Production Economy is that demand can create its own supply and loan creates deposit. The new version of monetary analysis developed Keynes’ principle of effective demand and constructed a series of macroeconomics models.Hence, this dissertation argues that,"return to Keynes" should return to Keynes’ understanding of realistic economy, which means the concept of Monetary Production Economy, and economists should further develop Keynes’principle of effective demand. Undoubtedly, the related literatures of Post Keynesians and Monetary Circuit Approach are suitable starting points.