General Theory and Policies for Global Prosperity Brendan Sheehan Leeds Metropolitan University Keynes Seminar, Robinson College, Cambridge 25 February © PKSG 2009

Leitmotiv of Policy Proposals Expansionary cure in preference to contractionist cures Curing a Global Depression Curing Global Trade Imbalances over the long run Theoretical Justification?

The General Theory model – the ultimate independent variables Propensity to consume Psychological expectations of future yields on capital assets State of liquidity preference Aggregate supply relationship Wage unit

State of Long Term Expectation Influences expected prospective yields and liquidity preferences Keynes focus on short period changes in state of long term expectation Conventional method of calculation and uncertain knowledge

Aggregate Effective Demand (AED w ) Expected C w + I w = D w AED w defined where D w = Z w AED w determines aggregate employment, price-level and the real wage rate Unstable AED w causes unemployment equilibrium

Global Depression – International Wage Cutting Contractionist cure – what is the impact on AED w ? Competitive wage cut can work International wage cutting increases global debt burdens Worldwide AED w and employment both fall

Global Depression – expansionary cure Globally coordinated fiscal expansion Globally coordinated monetary policy – cheap money all around Stimulates AED w and worldwide employment Semi-inflation reduces global debt burdens

Global Trade Imbalances The Inter-war Gold Standard Asymmetric adjustment – debtor nations deflate to reduce trade deficits Surplus nations trade surpluses shrink All march backwards together – the contractionist cure

Global Trade Imbalances – expansionary cure Elastic bank money in closed system International Clearing Bank (ICU) Elastic supply of international money – bancor ICU only deals with central banks Exchange rates fixed in bancor terms

Global Trade Imbalances – expansionary cure Trade deficit nation has debit account Trade surplus nation has credit account Trade deficit and trade surplus nations must act - trigger points Symmetrical adjustment – marching forward together

ICU – the consequences Central banks monopolise currency dealings on behalf of citizens Favours those trading and those involved in direct investment abroad The euthanasia of the currency speculator Viable framework for new Bretton Woods??