The General Theory: the Characteristics of a Monetary Economy

Abstract

During the period Keynes was preparing the General Theory, after having abandoned the viewpoint of the Treatise, he took the opportunity in a short essay in honor of Arthur Spiethoff to give a summary of his fresh thinking on the role of money.1 He had already revised the title of his Cambridge lecture course from “The Pure Theory of Money” to “The Monetary Theory of Production,” detailing the role of money in determining economic activity. The Spiethoff essay indicates the direction of his thought. His main objective was to discard the analytical strand which viewed money as “a neutral link between transactions in real things and real assets and does not allow it to enter into motives or decisions” (p. 408), as in the works of Marshall and Pigou where money plays a purely symbolic part and the system functions as in a barter economy and excludes money from crises or instability. Yet crises and instability appear precisely in monetary economies in which money exerts its potency on decisions to spend and on financial options. Previously, in the Treatise, Keynes had moved beyond the concept that money is in some way “neutral” and that variations in the quantity of money cannot affect real variables. Now, in this essay, he sought to approach capitalist reality more keenly in a theoretical schema capable of incorporating the fact that money modifies behavioral functions:
The theory which I desiderate would deal, in contradistinction to this, with an economy in which money plays a part of its own and effects motives and decisions and is, in short, one of the operative factors in the situation, so that the course of events cannot be predicted, either in the long period or in the short, without a knowledge of the behavior of money between the first state and the last. And it is that which we ought to mean when we speak of a monetary economy. (pp. 408–9)