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“In the last chapter of the /General Theory, /quoted above,^35 he [Keynes] falls into the fallacy of supposing that there is some kind of /neutral /policy that a Government can pursue, to maintain effective demand in general, without having any influence upon any particular demand for anything. The Government has to undertake “the task of adjusting to one another the propensity to consume and the inducement to invest” but everything else is best left to “the free play of economic forces.”^36 This is a metaphysical conception as unseizable as /abstract labour /or /total utility. /What is a policy which /merely /adjusts the demand for investable resources to the supply? To increase effective demand when it threatens to flag, various means can be used: to reduce taxation or to shift the burden from those most likely to increase their consumption to those most likely to reduce their savings; to foster competition so as to reduce profit margins; to increase subsidies or outlays on social services — all means which tend to reduce inequalities in consumption. Or Government expenditure on investment can be increased, directly or through nationalized industries, or reductions in taxation and credit policy can be used to encourage private investment. Contrariwise, when effective demand seems excessive, taxes to discourage consumption, credit restriction and reduced Government expenditure can be brought into play. And all this has to be worked out so as to preserve the balance of trade at some level or other, as well as to preserve employment. What is a /neutral /policy? What mixture of these means is it that leaves private enterprise unaffected in content and acts only on the quantity? [pp. 89-90]”

KeynesEffective DemandNeutral Policy
Book:Economic philosophy
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“After the war, when the problem of deficient effective demand seemed to have faded into the background, a fresh question came to the fore — long-run development. The change arose partly from the internal evolution of economics as an academic subject. The solution of one problem opens up the next; once Keynes’ short-period theory had been established, in which investment plays the key role, it was evidently necessary to discuss the consequences of the accumulation of capital that investment brings about. [p. 92]”

KeynesEffective DemandLong Run Development
Book:Economic philosophy
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“The analysis of the /General Theory /shows that inflation is a real, not a monetary, phenomenon. It operates in two stages (once more giving a crudely simple account of an intricate process). An increase in effective demand meeting an inelastic supply of goods raises prices. When food is supplied by a peasant agriculture a rise of the prices of foodstuffs is a direct increase of money income to the sellers and increases their expenditure. The higher cost of living sets up a pressure to raise wage rates. So money incomes rise all round, prices are bid up all the higher and a vicious spiral sets in. The first stage — a rise of effective demand — can very easily be prevented by not having any development. But if there is to be development there must be a stage when investment increases relatively to consumption. There must be an increase in effective demand and a tendency towards inflation. The problem is how to keep it within bounds. Some schemes of investment that seem to be clearly indispensable to improvements in the long run, such as electrical installations, take a long time to yield any fruit and meanwhile the workers engaged on these have to be supplied. The secret of non-inflationary development is to allocate the right amount of quick-yielding, capital-saving investment to the consumption-good sector (especially agriculture) to generate a sufficient surplus to support the necessary large schemes. It is in this kind of analysis, rather than in the mystifications of “deficit finance,” that the clue to inflation is to be found. [pp. 110-11]”

InflationKeynesEffective DemandDeficit FinanceGeneral Theory
Book:Economic philosophy
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“The /utility /economists, according to Wicksell, were committed to a “thoroughly revolutionary programme” precisely on this question of distribution of income.^9 Marshall, and to some extent Pigou, got out of the fix that their theory had landed them in by emphasizing the danger to total physical national income that would be associated with an attempt to increase its /utility /by making its distribution more equal. This argument has been spoiled by the Keynesian revolution. If, as Keynes expected, saving is more than sufficient for a satisfactory rate of private investment, to use it for social purpose is not only harmless but actually beneficial to National Income, while if more total saving is needed than would be forthcoming under /laisser faire /it can easily be supplemented by budget surpluses. Edgworth, as we saw above,^10 and many after him, took refuge in the argument that we do not really know that greater equality would promote greater happiness, because individuals differ in their capacity for happiness, so that, until we have a thoroughly scientific hedonimeter, “the principle ‘every man, and every woman, to count for one,’ should be very cautiously applied.”^11 Many years ago, this point of view was expressed by Professor Harberler: “How do I know that it hurts you more to have your leg cut off than it hurts me to be pricked by a pin?” It seemed at the time that it would have been more telling if he had put it the other way round. Such arguments are getting rather dangerous nowadays, for though we shall presumably never have a hedonimeter whose findings would be unambiguous, the scientific measurement of pain is fairly well developed, and it would be very surprising if a national survey of the distribution of susceptibility to pain turned out to have just the same skew as the distribution of income. If the question is once put: Would a greater contribution to human welfare be made by an investment in capacity to produce knick-knacks that have to be advertised in order to be sold or an investment in improving the health service, it seems to me that the answer would be only too obvious; the best reply that /laisser-faire /ideology can offer is not to ask the question. [pp. 127-8]”

KeynesMarshallEdgworthHarberlerHedonimeterLaisser FairePigouWicksell
Book:Economic philosophy
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“I do not regard the Keynesian revolution as a great intellectual triumph. On the contrary, it was a tragedy because it came so late. Hitler had already found out how to cure unemployment before Keynes had finished explaining why it occured.”

FoundRevolutionLateIntellectualTragedyRegardFinishedContraryCuresTriumphUnemploymentEconomistExplainingKeynes
Book:The Second Crisis of Economic Theory: And Other Selected Papers from the American Economic Meeting, December 27-29, 1971
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