Joan Robinson Piero Sraffa James Meade E. A. G. Robinson Richard F. Kahn Keynes’ Circus "I have my heart to the left and my brain to the right." 1926: Economic Journal, Only constant returns compatible with perfect competition : Collected Works of Ricardo 1960: Production of Commodities by Means of Commodities: Prelude to a Critique of Economic Theory

Michal Kalecki: A Parallel Development of the General Theory? Keynes: A deviationist from Marshall Kalecki: A deviationist from Marx Macroeconomics of class conflict “When workers spend what they earn, capitalists earn what they spend ” Proba teorii koniunktury (An essay on the theory of the business cycle), Warsaw: 1933 I  Y (a multiplier process)  Profit  S = I »As in General Theory, investment spending drives the macroeconomy … and generates fluctuations Michael Kalecki

Keynes’ General Theory What did he say? Different things at different times »On tariffs »On saving What did he mean? Y = C + I C = C(Y) …Propensity to consume  passive response to income I = I(i) …Marginal efficiency of capital + animal spirits  instability Income adjusts S = I …spending multiplier … Income adjusts, not wages and prices L = L(Y,i) … Liquidity preference function interest rate determined in money market  interest rate determined in money market, not S credit = D credit, not S saving = D investment …the transition from a lower to a higher scale of activity involves an increased demand for liquid resources which cannot be met without a rise in the rate of interest, unless the banks are ready to lend more cash…If there is no change in the liquidity position, the public can save ex ante and ex post and ex anything until they are blue in the face without alleviating the problem in the least. The “Ex Ante” Theory of the Rate of Interest, Economic Journal, … In the world of the classical economy, … why should anyone outside an insane asylum wish to use money as a store of wealth? …The possession of actual money lulls our disquietude; and the premium which we require to make us part with money is the measure of the degree of our disquietude. The General Theory of Employment, QJE, 1937.

Keynes on Uncertainty We simply do not knowBy “uncertain” knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty…Or, the expectation of life is only slightly uncertain. Even the weather is only moderately uncertain. The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention, or the position of wealth-owners in the social system in About these matters there is no scientific basis to form any calculable probability whatever. We simply do not know. Nevertheless, the necessity for action and for decision compels us … to do our best to overlook this inconvenient fact and behave exactly as we should if we had behind us a good Benthamite calculation of a series of prospective advantages and dis advantages, each multiplied by its appropriate probability, waiting to be summed. The General Theory of Employment, QJE, 1937.

The Neoclassical – Keynesian Synthesis Short – run  Keynesian Unemployment Long – run  Classical Full Employment Sir John Hicks Mr. Keynes and the Classics: A suggested simplification, Econometrica, 1937 Goods Market: I = S Money Market: L = M  ISLM macromodel i Y IS LM

Stabilizing an Unstable Economy Minsky Moment: Hyman Minsky Financial Instability Hypothesis: Hedge finance Speculative finance Ponzi finance Two types of risk affect the volume of investment. …The first is the entrepreneur's or borrower's risk and arises out of doubts in his own mind as to the probability of his actually earning the prospective yield for which he hopes. If a man is venturing his own money, this is the only risk which is relevant. …But where a system of borrowing and lending exists, a second type of risk is relevant which we may call the lender's risk. GT, Chapter 11. Price of capital assets PIPI PKPK Investment Internal funds IoIo I1I1 Borrower’s Risk Lender’s Risk When expectations are disappointed, investment collapses … but debts remain