Controversies in Post Keynesian Economics.

This book, while focused on controversies in Post Keynesian Economics, provides numerous points of comparison with other schools of thought and thereby allows the reader to acquire a full understanding of the essential differences between the Post Keynesian view of how the economy functions and what the author labels the neoclassical-synthesis-Keynesian and neoclassical views. In addition, the disagreements that have led to variant conclusions for the government's role in public policy are made accessible to the reader with a basic knowledge of economic concepts.

The first three chapters provide the historical background for understanding current-day Post Keynesian theory and policy and set the stage for a central theme of this book: the importance of the non-neutrality of money in Keynes's theory and policy. After presenting an overview of the problems confronting Keynes in the 1930s, the author then shows how economists after Keynes attempted to develop a neoclassical synthesis, bringing together pre-Keynesian classical notions with Keynes's ideas. The synthesis was not really a synthesis at all, the author argues, but rather reflected a basic misunderstanding of Keynes. The model resulting from the neoclassical synthesis led to the conclusion that the economy is stable in the long run and that money is neutral, in that changes in the quantity of money do not effect the level of output. The author views the neutrality of money as a key assumption underlying the neoclassical synthesis, an assumption that the neoclassical-synthesis-Keynesians were unwilling to relinquish even though it was at variance with Keynes's insistence on the non-neutrality of money. These first three chapters are not merely an explanation of the background of the disagreements among the theoretical perspectives; they also provide an interesting example in the sociology of the accumulation of knowledge: how the legacy of past ideas influence the development and acceptance of new ideas.

In the next three chapters the author explains how it is that Post Keynesians can claim that the private sector can become "too desirous of liquidity to promote full employment" and addresses the implications of this claim. It is here that he is able to connect a shortage of liquidity with reductions in output to show the reader the full importance of the non-neutrality of money for Post-Keynesians. In Chapters Four and Five he lays out the difference between the concepts of uncertainty and risk and then elaborates on the implications of this distinction for the behavior of investors. Neoclassical economists deal with a lack of information by assuming that the information is there, waiting to be discovered, and that time or an expenditure of resources is all that is required to uncover the information. From this perspective there can be short run output effects due to a lack of information, but not long run effects. The Post Keynesian notion of uncertainty is based on the idea that there are some things about which we will never have the information necessary for the calculation of expected value. In this context a decision not to invest, i.e., to hold money, or a decision to plow ahead, based on "animal spirits," are plausible types of behavior. It is not irrational for people to opt not to invest in the real economy, when there is a fear that things might go badly, and instead to opt for liquidity. There is a special role for money in a world of uncertainty that does not exist when expected outcomes are known.

The final chapter in this section is Chapter Six, the heart of the book. This chapter makes clear that without sufficient liquidity in a world of uncertainty there is no reason to expect that resources will be fully employed in either the short or the long run, i.e., money is not neutral. Having already established that investment decisions are made under uncertainty, the author then turns to the question of how firms carry out their business in this environment. One thing they do is to try to establish institutional structures, such as contractual agreements, which mitigate against the effects of uncertainty. For example, a contract to produce and deliver goods establishes a level of demand that firms can count on with reasonable expectation. At the same time these contracts commit firms to payment schedules which require revenue flows sufficient to meet agreed upon payment flows. Thus firms must ensure that they will have the liquidity to meet their contracted payments. A failure on the part of the system as a whole to produce the needed liquidity means a failure of firms to meet payments and hence the likelihood of reductions in the level of production and an increase in the level of unemployment. Therefore, the lack of liquidity is non-neutral in the short and the long run. (A surprising omission from this chapter is a discussion of the endogenous money supply.)

The chapter on the role of government provides a solid transition from the author's discussion of full employment of resources (Chapters Four through Six) to his discussion of inflation (Chapters Eight and Nine). The author argues that the essential role of government lies in reducing uncertainty. Based on his earlier analysis of fluctuations in output, two obvious functions for the government are to provide the liquidity that firms need as well as the incentives to invest "when entrepreneurs lose their 'animal spirits.'" The government can also control another source of uncertainty in the economy, inflation, which, as the author explains in the final chapters of the book, results from conflicts over distributive shares. The solution to inflation requires both a way to reach agreement over what constitutes fair shares and a mechanism to bring about these fair shares. The author sees a further role for government in that it may act as a civilizing force not only to help the different sides reach an agreement but also to devise mechanisms such as Tax Based Incomes Policies which will establish these shares in a non-inflationary manner.

This book, while never oversimplifying, presents an overview of major controversies in Post Keynesian Economics and, more importantly, leaves the reader with a clear sense of how the pieces of the Post Keynesian view fit into a well-integrated perspective on how the economy functions.