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Intro

Keynes theory on Money was an early work by the 20th Century economist John Maynard Keynes, most well known for his General Theory of Economics, and the inspired Keynesian economics which holds his namesake. His Theory on Money predates his General theory and is in some ways incongruous with it, while in other ways can be interpreted as supplemental or even implicit in the General Theory. Keynes most notably clarified his Theory of Money in caty dialog with other famous economists of the day, Such as Dr Hayek and D. H. Roberts. Any Student of Keynes Theory of Money would be well served reading Keynes “rejoinder” to Mr. D. H Robertson. Keynes described his rejoinder as such “in my Rejoinder to Mr. D.H. Robertson, Published in the Economic Journal for September, 1931, I have endeavored to re-state in a clearer way what my own theory actually is.”

Main takeaways

In Keynes’s Treatise, he doesn’t agree that booms and busts happen solely because of extrinsic random variables such as “sunspots”. Instead, he believes that economic events emerge when when there are discrepancies between savings and investments. According to Keynes, a true measure of a nation’s prosperity is not anything of physical value such as gold or silver, but by national income. To him, the most important characteristic of national income is consumption.

In Keynes's Treatise, he explained how recessions could happen, but not long-term depressions. The seesaw theory of classical economics says that a savings glut will produce a lower interest rate than would cause an increase in consumption. Keynes had to figure out what was the factor that was holding the economy back. He was able to address this further in The General Theory of Employment, Interest, and Money. In his General Theory, Keynes argued against the seesaw theory and said that the economy was more like an elevator that can stop at any level. This is because once the economy reaches the bottom, individuals would have no excess income to save. No savings results in no investment so the economy cannot save itself. Without the savings, there is no pressure to lower interest rates, so there is no incentive for businesses to invest. In his theory on money he asserts that investment is an "undependable drive wheel for the economy," and when no new investment can be found, the economy will begin to falter.

Criticism in the economic community

Keynes and the Economist Hayek had a dialog over Keynes’s theory on money, Keynes felt That Hayek was splitting hairs with him terminologically, he even published a public response to his criticisms called where he said “Dr. Hayek has seriously misapprehended the character of my conclusions. He thinks that my central contention is something different from what it really is” And “It is essential to that theory to deny these propositions which Dr.Hayek puts in my mouth” The meat of their disagreement from Keynes perspective was in regard to ancillary points, and semantic differences in definition, leading him to conclude that Hayek was being nit-picky with him which struck him as being fundamentally divisive in their dialog “So long as a problem of this major magnitude is not cleared up between us, what is the use of discussing “irritating” terminology, which might not bother Dr. Hayek at all if he were not, for these excellent other reasons, looking for trouble? Dr Hayek has missed, or at least does not discuss, the critical point at which our arguments part company. Having passed this by, but finding himself being led down strange and distasteful paths, he tries to prevent himself from being dragged along any further by representing the molehills in the pathway as mountains”