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This paper focuses on how Keynes’s ideas were received in the intellectual community and acted upon by governments in Australia. As Millmow points out, the most influential early advocates of Keyne...

The General Theory is a controversial book, which raises questions about the nature of its assumptions and conclusions. The answers to these questions led to different interpretations which were not mutually compatible and gave rise to controversies and, in some cases, even to distorted interpretations, which transformed the message of The General Theory into something completely different. This chapter discusses a few of the distortions to which Victoria Chick, together with many others, has drawn attention over the years and puts forward a suggestion for why The General Theory might have been liable to be misinterpreted.

The chapter describes the equilibrium of the banking system in a modern economy, with both a central bank and a commercial banking system. Equilibrium conditions are set out for the markets in, first, base money issued by the central bank and, secondly, money in the form of bank deposits (‘the quantity of money’) created by commercial banks. The heart of the chapter is a geometrical construction demonstrating the money creation process in a modern banking environment. A four-quadrant diagram is suggested, because quadrants with isosceles triangles neatly represent the equality of assets and liabilities in financial institutions that is also a necessary feature of bank balance sheets. The resulting ‘apparatus of thought’ is intended to facilitate discussion between economists with different views on both the money creation process and the role of money in the determination of macroeconomic outcomes.

The chapter discusses Schumpeter’s reception of The General Theory and the criticisms he levelled at it. To what extent are these criticisms pertinent and to what extent are they based on misunderstandings and unable to be sustained? The chapter then turns briefly to the heretic elements in the analyses of Keynes and Schumpeter and shows that, important differences notwithstanding, they had more in common by temperament and vision than is typically acknowledged.

There is a tendency to see Indian Currency and Finance as anticipating Keynes’s later work on international monetary issues, including his proposals for the Bretton Woods conference. This chapter argues, however, that such continuities as there may appear to be are purely technical, relating to the ideas and methods of managing money, and are not original to Keynes’s economic thinking. On the other hand, a vast political chasm and thirty years separate these two endeavours. This chapter demonstrates now unoriginal the common technical elements of these two sets of work were while also showing how politically different they were. In this way, the chapter seeks to provide an appreciation of just how great a distance Keynes travelled from his Marshallian convictions of his earliest days to the critical account of capitalism he eventually arrived at.

The General Theory showed that the main determinant of the level of output and of employment at any point of time was the level of effective demand. It did so in an environment of uncertainty using analysis in historical time. Unfortunately, most of Keynes’s insights were soon lost to the profession. This paper considers why this occurred. The most concerted and sustained attack on Keynes’s position was by Milton Friedman. Friedman argued that his work on permanent income as the major determinant of consumption invalidated Keynes use of the consumption function in The General Theory, with important implications for the multiplier and the efficacy of fiscal policy. The attack by the conservative right wing in America on Lorie Tarshis’s excellent 1947 Keynesian textbook , also played an important part in the dilution of the Keynesian message as did the resultant rise to dominance of Samuelson’s Economics: An Introductory Analysis. Given the great influence of Samuelson and the increasing tendency of American economics to dominate English language economics this contributed decisively to the undermining of Keynes’s theory and policy.

A fundamental dimension in macroeconomics, time, is rarely portrayed as a prominent theme, because of the sharp contrasts that have historically divided economists using alternative conceptions of time, but also because of the conundrums brought about by incorporating time into economic models. This chapter provides an interpretation of John Maynard Keynes’s methodological reflections on the concept of time as (among others) complex and manifold magnitudes, which – confounding the choice of units for macroeconomics – requires economists to carefully avoid inconsistent logical reasoning about its characteristics, and instead to focus, as Keynes did, on change and transition.

In light of Victoria Chick’s work on Keynes and economic methodology, in this chapter I explore why there was a Keynesian revolution at all. The reason I give is that existing political solutions to unemployment were blocked. Keynes offered an unblocking intellectual alternative in which both capitalists and workers would gain. I argue that The General Theory can be read on at least two levels: one responding to the institutional facts of the time, the second a more general rebuttal of the neoclassical road to full employment. Though the first reading has been more popular – the orthodox economics profession has always preferred Keynesian policy to Keynesian theory – Victoria Chick’s work and our experience of the Great Recession require us to build a better macroeconomics based on the second.

This chapter addresses two key questions: why did Keynes lose his generality battle and what can be done to restore his generality claim? In answer to the first, the chapter argues that one major reason why Keynes lost his generality battle is that he did not develop a good articulation of his ‘research programme’ in Lakatosian terms. For example, unlike the Arrow–Debreu microeconomic model underlying the general equilibrium macro, the GT does not provide a unifying vision of the economy. As for the second question, this chapter seeks to identify the conditions under which the generality claim can be restored. The most important of these is the one identified by Pasinetti, namely the full-blown articulation of a ‘monetary theory of production’ research programme. This requires developing an autonomy of macro-perspective, placing the emphasis on the role of conventions, institutions and aggregate variables as emergent, persistent features of the economy.

In looking to Keynes for guidance on modern policy issues, we identify some general principles which can be carried forward to the present day. In order to address problems arising from the domestic and international monetary systems, we focus on the principle of effective demand and the theory of liquidity preference, applied to analysis of a monetary production economy. Yet for Keynes theorising started and ended with context. The analytical process started with identifying the problem and looking to relevant theory for illumination. Yet it was crucial to consider the nature of the context in order to assess the validity of the assumptions and, if necessary, to change them. We therefore consider the differences in monetary systems between the 1930s–1940s and the present day in order to form a Keynesian view of monetary reform.

The Gibson Paradox states that interest rates and the price level are often positively correlated. This contradicts the doctrine that high interest rates dampen economic activity and the price level. In 1930 Keynes names, confirms and emphasises this phenomenon in his Treatise on Money. In 1936, in The General Theory, it is totally ignored. But Keynes’s new concept of given future effective demand as being related to entrepreneurs’ present outlay at a given degree of competition requires that higher discounting costs are compensated by higher prices. Macroeconomic modelling has to be wary of the contradictory influences of interest rates. As producers’ cost they affect the ‘supply channel’. As financing costs they affect an opposite ‘demand channel’. Recent empirical literature confirms the relevance of both channels. The chapter accentuates these issues in a minimalist simultaneous equations model. It stresses the problem of finding the balance between the two channels and it mentions Keynes’s appeal to maintain low interest rates for a continuous ‘quasi boom’.

Joan Robinson argued that it is the task of Post-Keynesians to reconcile the work of Keynes and Sraffa. The central difficulty is to reconcile equilibrium with uncertainty and the solution lies within Keynes’s distinction between short-, medium- and long-term expectation and furthermore between the long term and the technical long period. Recognition that the ‘expectations’ of Keynes’s state of short-term expectation are equilibrium prices, in a carefully defined and qualified sense, makes it possible to replace his Marshallian concept of normal prices with Sraffa’s prices of production. There is a definite case for seeking to recast the principle of effective demand without the Marshallian theory of value. The task is to achieve this without losing either an empirically useful concept of equilibrium or the concept of fundamental uncertainty.

Economic theory that is relevant to the real world is always a product of its time, taking for granted the institutions and behaviours that characterise that time. Old books, like Keynes’s General Theory, present a conundrum: how much is still pertinent today and what revisions are necessary to bring the theory into line with changes in the economic system since the book was written. This chapter attempts an answer to that question. It is argued that the principle of effective demand and liquidity preference is almost unchanged, but that globalisation and changes to the banks’ behaviour pose serious questions for the theory, as does our new awareness of resource constraints and climate change. The underlying methodology remains the best on offer and should be retained in any revision.