keynesianism 1

The specific situation analysed by Keynes, in which a market economy fails to achieve full employent, is based on the the validity of Keynes observations about the rigidity of money wages. An economy with a fixed supply of currency, perhaps based on a more or less fixed supply of gold, would certainly be exposed to deflationary forces if individuals decided to withdraw more and more currency from circulation. If money wages are fixed, monetary deflation will probably be reconfiguered as a contraction of the real economy. The simplest solution to this problem, put into practice by governments everywhere since the abandonment of the gold standard, is for government to progressively inflate the money supply, and so prevent workers from making real wage gains by defending a current money wage. Even Milton Friedman considered this the most realistic response to a deflationary crisis as severe as that of the great depression. Keynes claims to have developed a general theory of the capitalist economy, supplementing the restricted theory of the classical economists (for Keynes, principally Smith, Ricardo and Marshall), which tacitly assumed that the interest rate would be equal to Keynes' "neutal rate" of interest, or a rate of interest maintaining employment "at some specified constant level". In the context of the abandonment of the gold standard, the notion that the economy is subject to deflationary pressure on account of its restricted supply of money is no longer so credible. Keynes' theory itself can be taken as a description of the special case of an economy in which the government does not permit itself to expand the money supply.

The great difficulty with Keynes, and part of the reason why his books are still read, is that while he talking about one thing, he might be alluding to something else. So people think, perhaps he could have meant that real wages were fundamentally stable, or that the interest rate on productive capital might fall for a different reason, or that the medium term processes of the economy might behave like the short term processes, etc etc.