“Natural Rate” Mutations: Keynes, Leijonhufvud and the Wicksell Connection

Abstract

In this chapter we make good on a promise from the introductory material and project the own-rates framework into familiar macroeconomic contexts, including its implications for IS/LM analysis. We do so by way of an implicit critique of Leijonhufvud’s “The Wicksell Connection.” This will also serve as a conclusion to our book in the sense that it demonstrates a main theme which was argued throughout this work and which culminated in Chapter 14. The own-rates of interest analysis offers an important avenue by which to demonstrate Keynes’s claim for the existence of unemployment equilibria. Keynes based his argument in this area on forces integral to an economy faced with uncertainty, where asset holders might choose to fly to safety. In such an economy he suggested there would be (at least) one asset exhibiting a liquidity premia in excess of its carrying cost. This is how he defined a monetary economy. This existence did not make the attainment of full-employment impossible, though, as Leijonhufvud argues. It does mean, however, that — given institutions, expectations and the propensities to save and to consume — it is possible for new investment activity to get hung up at a level lower than the full-employment level of savings. What would happen then? One possibility is that output adjusts to this new lower level of demand and settles into a less-than-full employment equilibrium.

I have given in another work a long list of “sporting plants,” as they are called by gardeners; — that is, of plants which have suddenly produced a single bud with a new and sometimes widely different character from that of other buds on the same plant.

Charles Darwin (1859)

Perhaps it is worth stating at the start that I do not want to be slotted into the familiar species of an interpretation of Keynes’s book that favors one chapter over another, thereby becoming perhaps the first“ Chapter 17 Keynesian.” My explorations below range over many “chapters” of Keynes’s intellectual output. Yet I do find the framework set out in Chapter 17 of the General Theory particularly useful as a way of centering many of Keynes’s concerns into an equilibrium framework.