Anwar Shaikh on Inflation, William Buckley, Liberals and Conservatives
From • Capitalism: Lecture #28 - Theory of Inflat...
In Keynes’s framework, an immediate consequence of the existence of involuntary unemployment is that increases in aggregate demand will primarily raise output and employment, with prices bearing the brunt only in the vicinity of full employment (Snowdon and Vane 2005, 61, 142). This put him in direct opposition to the classical quantity theory of money, which claims that an increase in effective demand consequent upon an increase in the money supply will only increase the price level. From Keynes’s point of view, the quantity theory (like other facets of neoclassical economics) only becomes applicable at full employment (Snowdon and Vane 2005, 70). And even then it may not work, because the precautionary and speculative components of money holdings depend on expectations and the state of confidence, so that money demand could fluctuate sharply (Snowdon and Vane 2005, 70)—in direct contradiction to the central requirement of the quantity theory that the demand for money be a stable function of income and the interest rate (chapter 12, section IV). The Phillips curve allowed Keynesian economists to explain why prices began to rise before the point of full employment. The original Phillips relation between the rate of change of nominal wages and the rate of unemployment was translated into an inflation-unemployment curve through the assumption that prices are set as markups on costs, ultimately reducible to labor cost. Everything seemed fine until the Phillips curve fell apart during the Great Stagflation of the 1970s and Friedman and Phelps carried out the neoclassical counterrevolution from which arose New Classical Theory, Real Business Cycle Theory, and ultimately New Keynesian Theory (chapter 12, section IV). It is important to note that Keynesian economics shares a crucial commonality with all variants of the counterrevolution: both sides assume that prices only begin to rise when aggregate demand exceeds full employment supply. But there is another way to look at the matter. From a classical growth perspective, the maximum growth rate of a system is when the surplus product is fully reinvested (i.e ., when the rate of capital accumulation is equal to the profit rate). Such a limit is implicit in Ricardo’s corn-corn model and in Marx’s Schemes of Expanding Reproduction and is explicit in von-Neumann’s and Robinson’s treatments of growth. From this point of view, the ratio of the actual rate of accumulation to the profit rate can be viewed as an index of the utilization of an economy’s growth potential. This ratio is simply the share of investment in profit.