Prof. Aoyama’s Study on Robertson and Keynes in the Interwar Japan
Toshiaki
Hirai
Professor
Emeritus,
E-mail : olympass@yahoo.co.jp
1. Introduction
The present
chapter has two objectives. One is to examine the study of Robertson and Keynes
conducted by Prof. Hideo Aoyama (1910-1992) - one of the leading theoretical
economists -, concentrating on his activities in the interwar period, and the
other is to present my own study in the same sphere for the sake of comparison.
This might seem a slightly
odd approach given the time span of over 60 years. At first I had planned to focus
on Aoyama’s study alone. As my research proceeded, however, I came to notice
the need to clarify my own understanding in the area concerned in order to fulfill
the initial purpose, for my approach and understanding are rather different
from his. That is why I chose to juxtapose them, adding my assessment of his
study from my own stance.
The chapter runs
as follows. Firstly the economics situation in the interwar Japan
2. Economics in Interwar Japan : An outline
Fukuda started his academic career as the
leader of the Young Historical School in Japan, after studying economics under Lujo
Brentano in Germany Tokyo High School
of Commerce (now Hitotsubashi University) and Keio University
It should be noted here, among other
things, that he continued to show interest in the Cambridge School Marshall ’s Principles as textbook at Keio
University , eventually bringing out a
volume published as Fukuda (1907), in which Marshall 6 in
Marshall
Fukuda,
a very influential leader of public opinion, continued to show interest in what
was happening in both the world scene and in Japan wont to praise Keynes’s analysis and proposals put forward in The Economic Consequences of the Peace
(1919).
Fukuda trained
many leading economists. Above all, Ichiro Nakayama’s accomplishment (1898-1980)
was remarkable. Nakayama, after graduating from the Tokyo High School of
Commerce, studied economics under Schumpeter at Bonn University Walrasian general equilibrium theory and his
own dynamic theory. He then tried to integrate the two by introducing an idea
of “equilibrium in the development process”1 which is greatly
influenced by Keynes’s “under-employment equilibrium” in the General Theory, the result of which was Equilibrium Analysis of Development Process
(1939). Through these activities Nakayama became a great pioneer in these
fields2.
Negishi referred to Takata, Aoyama and
Kei Shibata (1902-1986) as the “Trio of the Kyoto School Walrasian general equilibrium theory .
All in all,
Nakayama, Aoyama and Takuma Yasui (1909-1995), whom we need to add here – a
maverick at Tokyo University famous for his pioneering stability
analysis of Walrasian general equilibrium－
were the leading economists of the then so-called “Pure Economics” in interwar Japan
Turning
to the economic policy scene, Keynes was, again, very influential, as can be
seen in the Kinkaikin (Lifting of Gold Embargo) Controversy over how the
Japanese monetary system should be rectified – one of the two biggest economic controversies
in the 1920s in Japan
Turning back to academic activities in Japan trade cycle as
represented by the Stockholm School , although the centre of attention was the
so-called “Political
Economy School
3. Robertson’s trade cycle theory
The Cambridge School ,
which had initially inherited Marshall as by Aftalion and Cassel , his theory
incorporated the same ideas as Wicksell’s.
Let us recall that Robertson’s theory was highly rated by the Wicksell
Connection on the grounds that it analyzes a similar problem by means of a
similar method.
Greatly influenced by Robertson,
Keynes was spurred on to evolve from the Tract
(1923) to the Treatise (1930).
In this section we aim to show how Robertson
actually developed his theory, and then examine how Aoyama saw its essence, how
Aoyama viewed its essence, and what Aoyama took to be its essence.
3.1 Trade cycle theory
Unlike the monetary
theories found in Hawtrey (1923) and Keynes (1923), and the psychological theories in Pigou (1920),
Robertson’s trade cycle theory interweaves the real factors with the monetary
factors in terms of the relations between saving, credit-creation and capital
growth.
With regard to the
real factors, Robertson classifies the output fluctuations in terms of
“appropriate” and “inappropriate”. Entrepreneurs often alter the volume of
output based on reasonable considerations. The appropriate volume of output
follows a rhythmical pattern of justifiable increases and decreases, being in
accord with the technical and legal structure of the modern economy. Inappropriate
fluctuations, as excess of actual fluctuations in the volume of output over
“appropriate” fluctuations, occur in relation to the use of large and expensive
durable means of production.
Robertson (1949, p. 39) then goes
on to observe that the objective of monetary theory should “be … to permit …
appropriate alterations in output and to repress [inappropriate alterations]”.
Monetary Factors are
related to the activities of the banking system. In order to increase the
volume of output, real circulating capital is required in advance. In order to purchase
it, short lacking is required. If firms do not possess the whole amount of the
short “lacking”, the banking system provides the balance. Thus the banking
system assists the productive activities by enabling consumption goods to go to
the firms as circulating capital. When the firms’ demand for circulating
capital is strong, the public is deprived of consumption goods. It is by dint
of an increase in the prices of consumption goods due to the use of credit that
the banking system induces “forced saving”5.
Robertson adopts a variant of the
QT6 to the effect that the price level of consumption goods depends
on the quantity of money channeled towards consumption. If the real balance of
the quantity of money possessed by the public increases (decreases), they try
to increase (decrease) their expenditure in order to restore consumption to the
desirable level.
“Lacking” is defined thus: A man
is lacking if during a given period he consumes less than the value of his
current economic output (Robertson, 1949, 41).
The ”lacking” is given
by the portion of products not consumed. As this portion is purchased by firms
with money, “lacking” might be thought of as money to purchase it (we must omit
Robertson’s complicated lacking taxonomy here).
Robertson develops
his trade cycle theory in the case of short lacking , and in the case of short
and long lacking. Let us focus here on the former case.
In order to increase the volume
of output, circulating capital is required. For this, short lacking is
indispensable. If it cannot be procured as would be hoped, no planned increase
in production can be implemented. The supply of short lacking is made by (Abortive)
Lacking, which occurs when the income from sales of current output is saved
with no resort to the creation of capital. Supply of it does not increase
quickly enough to cope with a large and discontinuous increase in the demand
for it.
The large excess demand for short
lacking is met only by the provision of credit by the banking system. The
consequence is (Imposed) Lacking.
When short lacking is met, the
required circulating capital is procured, so that the volume of production
increases. The amount of money in the economy increases, and the price level
consequently rises.
Let us suppose that the banking
system supply the required money: the excess demand for short lacking is thus
met, but the price level rises. Once this occurs, excess demand for short
lacking persists for several reasons7.
If the banking system goes on
supplying money to cope with the excess demand, the price level goes on rising
cumulatively.
3.2 Aoyama’s two-track
evaluation
What interested Aoyama most was, then, a
new theory, a “dynamic general equilibrium theory” (hereafter DGET) to be
explained below - a dynamic version of Walrasian general equilibrium theory as
initiated by Volpe, Frisch and Hicks.
Aoyama argues that Robertson (1926) pioneered
a business cycle theory based on DGET8, for Robertson’s model, he states,
possesses a feature to the effect that the variables, determined at each point
of time in a simultaneous equations system incorporating “period analysis” (together
with a distinction between “ex-ante” and “ex-post” concepts), move on over time.
This led him to show a keen interest in Robertson’s theory9.
Robertson developed his theory by dynamizing
the Cambridge-type quantity theory applying “period analysis”. Aoyama elegantly
clarified the functioning of Robertson’s model as analyzing, by means of four
co-efficiencies, how the price level goes up and down according as to whether the
period of money circulation is longer or shorter than the average production
period. Aoyama goes on to remark that, seeing that price
fluctuations can be explained with an investment and saving analysis, Robertson
might as well have done so.
That is the positive evaluation. At the same
time, however, Aoyama sees some difficulty or limitation in Robertson’s theory.
He argues that Robertson’s theory as a dynamic extension of the quantity theory
cannot deal with the monetary aspect of the actual economy. The difficulty derives
from the quantity theory per se, which states that prices can be determined by
expenditure on consumption over output. Especially when alternative forms of
holding wealth is allowed for, it will meet the difficulty of treating them10.
In
this respect Aoyama claims that Keynes’s bearishness function theory (in the Treatise) and liquidity preference
theory (in the General Theory) are major
contributions11 to economic theory, for they are, in essence,
anti-quantity theories of money which illustrate how the price level is
determined by incorporating assets other than cash balances.
Aoyama
argues that Robertson’s attempt to extend his period analysis in such a way, incorporating
savings account (as is seen in the Treatise,
in which it is inextricably linked to the stock market), is fundamentally
flawed. He even goes so far as to claim that period analysis cannot deal with the
problem of the rate of interest.12
Aoyama, moreover, criticizes Robertson’s
theory in that it assumes a social economy in which entrepreneurs are
inseparable from laborers, thus neglecting saving from entrepreneurs’ profits.
Thus Aoyama’s evaluation of Robertson’s theory
should be actually seen as two-track.
Aoyama seems to overact to Robertson’s theory.
Firstly, it is doubtful if Robertson’s theory of trade cycle can be, in essence,
characterized as dynamizing the quantity theory. Secondly, Robertson himself
neither refers to, nor shows any interest in Walrasian general equilibrium
theory. This I observe from the history of economics point of view.
4.
General equilibrium theory and the Wicksell connection
: With or without DGET
What should we make of the relationship
between GET and the Wicksell Connection? This is very important in
understanding the features of economic doctrines developed in the interwar
period. When it comes to Aoyama’s papers, however, we find his understanding
rather different from ours. The main reason is that he tries to grasp the whole
picture exclusively from a DGET point of view as the dynamic version of GET,
while we do so in terms of GET vs. the Wicksell Connection without considering
DGET. “With or Without DGET”, therefore, could be a crucial diverging point.
Therefore, we will first present our version,
and then critically examine Aoyama’s. It should be noted that the difference
between the two, notwithstanding the fact that our interpretation derives, in
essence, from the same literature as considered by Aoyama - which means that we
form different pictures from the same literature -, could lead to differences in
evaluation of Robertson’s and Keynes’s theories.
4.1 Our interpretation
We see the Wicksell
Connection as bringing together those economists who, reacting against
neoclassical economics, developed monetary economics . The Connection is also indispensable
for an understanding of the evolution of Keynes’s ideas in the 1920s, which
culminated in the Treatise (1930. Hereafter TM).
Classifying economic theories between real and monetary economics14
has the great, if rough, merit of identifying a fundamental distinction between
economic theories: while real economics regards the market economy as stable
and converging towards full employment, monetary economics regards it as
inherently unstable and incessantly fluctuating. The difference derives from a
difference in opinion as to the role of money and credit.
Real economics regards money as having neutral
effect on the real economy, while monetary economics sees it as having a
certain effect. That is, real economics accepts the classical dichotomy, the quantity
theory of money (hereafter QT) and Say’s Law, whereas monetary economics
rejects them, focusing attention on transitional periods.
Real economics, embraced by the classical
economists as well as the neoclassical economists, represents mainstream
economics. It should be noted that WGE is real economics. Monetary economics
came to the fore with Wicksell (1898), a century after Thornton followed by the
“Wicksell Connection” (hereafter WC), which can be further classified
between two types:
(i) The hard-core
version: Monetary economists who endeavor to construct their own theories of
economic fluctuations in terms of the divergence either between the natural
rate and the money rate of interest or between investment and saving, based on
immanent criticism of Wicksell’s theory: Myrdal, Lindahl, Mises, Hayek, and
Keynes (1930)16. They consciously criticize neoclassical orthodoxy.
(ii) The peripheral version : Monetary economists who
unwittingly do the same thing as the hard-core version. To that degree they are
less critical of neoclassical orthodoxy: Robertson (1926) and Hawtrey (1913).
Picking out Wicksell, Myrdal, Hayek, and Keynes, let us examine the
similarities and differences.
(1) Hayek takes the most extreme position in the
sense that only he develops an argument to the effect that the way money is
injected into the economy never fails to influence the relation between the
price levels of consumption goods and many producers' goods, bringing about a
prolongation (or shortening) of the production structure. In addition, Hayek
alone regards the case of voluntary saving as an ideal state of affairs, and thinks
holds the case of forced saving to be an awkward state of affairs disturbed by
the quantity of money.
(2) Myrdal falls into a position second farthest
from Wicksell, for he is farther from Wicksell than Keynes is, as he approves
only the second of Wicksell's monetary equilibrium conditions and denies the
first and third ones, while Keynes approves all of them. Moreover, Myrdal has
doubts about the bank rate operations performed by the banking system, while
Keynes stresses their importance, following Wicksell.
(3) Myrdal and Keynes adopt a common position as
far as the determination of the price level of consumption goods is concerned.
They also develop similar arguments concerning the value of capital, and both attribute
investment and saving with a central role in analysis .
The difference
lies, firstly, in how investment should be dealt with. Secondly, concerning a
theory of production, Myrdal adopts a theory of roundabout production, while
Keynes adopts the TM supply function (to be explained later). Thirdly, Myrdal
consistently adopts an investment and saving analysis, while Keynes's analysis
is rather ambiguous. Finally, the definitions of income and profit differ in
that Myrdal takes them as ex-ante concepts.
4.2 Aoyama’s interpretation examined
As
already stated, in the 1940s “ Pure Economics” turned its attention to Hick’s Value and Capital (1939) and the Stockholm School
Aoyama started his studies with Hayek’s Monetary Theory and the Trade Cycle, and
Prices and Production which led him to
go on studying the Tugan-Baranovsky
School could be overcome by means of DGET. He understood
Aftalion=Robertson’s analysis as showing DGET in terms of period analysis. He even
insisted that only DGET can effectively refute Say’s Law while Keynes’s General Theory can not , in spite of Keynes’s
claim that his theory of effective demand did away with the Law.
We now need a rough outline of DGET17
― what Aoyama (1942) presented as Volpe’s model. DGET is a dynamic version
of WGE which is static, while retaining the main elements as far as possible – i.e.
utility maximization by households; profit maximization by firms; contemporary
interdependent relation between agents; Walras’s Law; numeraire and so on. The
main difference between the two lies in whether inter-temporal relation and
expected prices are included or not.
Firstly, a household behaves in such a way as
to maximize its utility defined as a function of demand for goods over the
period from the present to the year of its (expected) death. From this, an
individual demand function is obtained as a function of the time series of the
prices of numerous goods.
Secondly, a firm is assumed to produce goods
in such a way as to maximize profit by means of goods obtained at period ω earlier than the present period. From
this an individual supply function is obtained as a function of the time series
of the prices of numerous goods.
Thirdly, general equilibrium in the market is
formulated. There at each time all the prices are determined, which means that over
the entire period the time series of prices and quantities of numerous goods
are determined.
This is a basic idea of DGET.
Aoyama’s understanding of WGE and the
Wicksell Connection is different from ours as shown in section 4.1. The main
difference lies in interpretation of what Wicksell and the Wicksell Connection were
aiming at.
It was, above all, DGET that attracted Aoyama’s
keenest interest, so he then set out to interpret theoretical economics from the
DGET point of view. Because DGET is a dynamic version of WGE, WGE itself also
occupied a central place in his studies. It was from this stance that he viewed
Wicksell and the Wicksell Connection. That is, while in our interpretation DGET
has no place in understanding Wicksell and the Wicksell Connection, in Aoyama’s
interpretation it has a central place.
In consequence Aoyama was not concerned
with the critical stance the Wicksell Connection took on WGE, the quantity
theory of money and the classical dichotomy. It was, therefore, hardly
surprising that when he examined Wicksell’s theory, he focused on the natural
rate of interest within the framework of WGE rather than on TCP (Theory of
Cumulative Process), and saw Myrdal as a theorist of general equilibrium-cum
ex-ante concept rather than a harsh critic of WGE.18
In our understanding, moreover, it is
impossible for us to take the Wicksell Connection within the framework of DGET,
for they were critical of GET per se although their models were, in essence,
dynamic – DGET might be one form of dynamics, but dynamics could have other
forms.
Turning to the Cambridge School Cambridge
Schumpeter is famous for his two separate
theories: GET as statics and The Theory
of Economic Development as dynamics (it was Nakayama who tried to
incorporate the two). Schumpeter praised Robertson (1926) very highly because
it aimed at analyzing economy from the
same point of view as Schumpeter’s dynamic theory did. This praise is different
from Aoyama’s although both rank Robertson (1926) very highly.
Turning to the Stockholm School
As Aoyama saw it, WGE and theory of economic
fluctuations evolved separately. The path toward integration of the two,
however, was finally opened by DGET as typified by Robertson (1926).
We might sum up ours as a history of
economic theory approach, while Aoyama takes a theoretical economics approach.
5. Keynes’s Treatise and General Theory
In this section, I propose
my interpretation of the theoretical framework of the Treatise and the General
Theory, and then examine Aoyama’s evaluation of Keynes’s theories. I eventually
decided that I might as well present my interpretation, having formed it on the
perusal of these books, rather than set out other scholars’ divergent
interpretations.
5.1
The Treatise19
The
most significant feature of the Treatise
theory seems to be the coexistence of a Wicksellian-type theory and ‘Keynes’s
own theory’.
The Treatise belongs to the Wicksellian strand of thought. The principal grounds on which Keynes
regards his theory as belonging to the Wicksellian stream lie in his adoption
of the idea that the bank rate influences investment and saving. In the Treatise this idea is used to present a
mechanism in which economic stability (stability of the price level and the
volume of output) can be attained by means of a bank rate policy.
At the same
time, Keynes develops ‘Keynes’s own theory’, which we will explain below.
5.1.1 The Basic
Assumptions
Let us begin with the production of
goods. Goods are classified in two groups: consumption goods and investment
goods. The output of each good is determined at the beginning of the current
period based on the amount of profit in the previous period20. Units
of quantities of goods are defined in such a way that each unit has the same
cost of production. This means that the average cost of each good is constant
and the output of each group thus measured does not change during the current
period.
The production cost of each group of
goods defined as the unit cost multiplied by the volume of output is determined
at the beginning of the current period. It is paid as the earnings of the
factors of production at the beginning of the current period. Part of the
earnings is spent on consumption goods while the rest is saved21.
We turn next to the price level of
investment goods. This is determined in the capital stock market, for the
output of investment goods is small as compared with capital stock as accumulated
over a long period. Keynes then discusses the price level of investment goods
in two ways. One is related to the stock market. Investment goods are additions
to capital stock . Capital stock is in a one-to-one relation to securities.
Therefore the price level of investment goods is determined on the stock
market. In order to understand it we need to examine the financial structure.
Money is defined as including not only state money and bank money, but also
short-term and long-term bonds. Each bears its own rate of interest. Against ‘money'
stand equities22
In the Treatise money, which includes bonds and yields interest, is
compared with equities which are in a one-to-one relation to capital goods. The
public make a portfolio selection between them.
(Assumption 1) The rate of interest is
a policy variable. The money supply changes as the rate of interest changes23.
The other formulation concerning the
determination of the price level of investment goods is as follows;
(Assumption
2) The demand price of capital goods (and therefore that of investment goods)
can be obtained by discounting the prospective yields by the rate of interest.
It is realised as the market price of capital stock (and therefore that of
investment goods). If the rate of interest rises, then the demand price of
capital stock goes down and investment expenditure decreases.
5.1.2 The Market
Mechanism
The market mechanism in A Treatise on Money is composed of two
parts. One has to do with the determination of variables in ‘each period'. The
other concerns the determination between one period and the next.
Let us first explain the former. In the
case of the consumption goods sector, the determination in each period is
constructed as follows.
(Mechanism
1) The determination of the consumption
goods sector in each period.
The production cost and the volume of
supply are determined at the beginning of the current period. Once the
expenditure on consumption goods is determined mechanically on the basis of the
earnings, it is automatically realized as the sale of consumption goods proceeds,
and both the price level and the profit are simultaneously determined.
This mechanism is simple but somewhat
unclear. It is simple for the following reasons:
(i) The output is supposed to be
realized according to the entrepreneurs' plan, and
(ii) As a result, profit is
ascertained and entrepreneurs are supposed to determine
It is somewhat unclear because it is
not explained how the expenditure on consumption goods (the sale proceeds) is
determined.
In the case of the investment goods
sector, the determination of variables in each period is constructed as
follows.
(Mechanism
2) The determination of the investment
goods sector in each period.
The production cost and the volume of supply
is determined at the beginning of the current period. The price level of
investment goods is determined in the capital stock market. As a result of the
above, profit is ascertained.
Let us turn to the determination
between one period and the next. This is shown as follows:
(Mechanism
3) The behavior of the entrepreneurs
(the ‘TM supply function'). Entrepreneurs behave in such a way that they expand
output in the next period, according as they make a profit in the current
period. Conversely they behave in such a way that they contract output in the
next period, according as they make a loss in the current period24.
This mechanism
suggests that Keynes deals with the relation between profit and output in terms
of a one-period time-lag. We will refer to the supply function which is
expressed as the function of profit, as the ‘TM supply function'. It is
peculiar to the Treatise and can be
formulated as follows;
ΔR = f1 (Q1<t>)
ΔC = f2 (Q2<t>)
(where R stands for the output of
consumption goods, C the output of investment goods, Δ an increment, Q1
the profit of consumption goods, Q2 the profit of
The TM supply function occupies an
important place in Keynes' theoretical development from the Treatise to The General Theory25.
From the above argument, the
theoretical structure of A Treatise on Money can be expressed as the dynamic
process of Mechanisms 1 and 2 through the TM supply function. In the
consumption goods sector, ‘each period' is determined by Mechanism 1, while in
the investment goods sector ‘each period' is determined by Mechanism 2. The
profits thus ascertained determine the output in the next period
After that, the economy returns to both
Mechanism 1 and Mechanism 2, and then moves forward through the two TM supply
functions. This is the dynamic mechanism which is developed in the Treatise.
5.2 The
whole picture
Now
that I have outlined my interpretation of the theoretical structure of the Treatise and the Wicksell Connection (at
section 4.1), it is time to view the whole picture – Figure 1 - of my
understanding of the relation between the Treatise,
the Wicksell Connection and the General
Theory, although we will be looking into the General Theory a little later
(at 5.3).
We
regarded the Treatise as propounding
monetary economics critical of neoclassical orthodoxy. How, then, did Keynes
develop his theory after the Treatise
to arrive at the General Theory? This
theme was, in fact, developed in great detail in Hirai (2008, Chs. 6-12),
outlined as follows.
After the Treatise Keynes went on applying “Keynes’s
own theory”, disregarding Wicksellian theory. In the Treatise, the
importance of the relation between profits and the volume of output (the “TM
supply function”) is stressed as expressing the dynamic mechanism. Keynes
adhered to this function after the Treatise. Toward the end of 1932,
however, he eventually abandoned it, and put forward a new formula of a system
of commodity markets - a turning point on the
way to the General Theory. The
revolutionary feature of the General Theory lies in showing, through
presentation of a clear-cut model, that the market economy, if left to itself,
falls into an underemployment equilibrium. It was not until 1933, however, that
Keynes came to put forward a model of how the volume of employment is
determined. Thereafter he took pains to elaborate his model. At the same time,
we argue that the General Theory sees the market economy as fraught with
instability, uncertainty, and complexity.
5.3 The theoretical model of The General Theory : An
interpretation26
Keynes
states that only two fu ndamental units of quantity - quantities of money-value
and those of employment (adopting the wage-unit as a unit of employment) should
be used in a theory of employment, arguing that the concepts of national
dividend, the stock of real capital, and the general price-level lack
precision. As to prices, he uses only the price of an individual commodity, and
prices occur as endogenous variables. More importantly, Keynes takes for
granted the existence of many kinds of goods and capital assets 27 and
expectations, including long-term and short-term expectations28.
The main
problem is to see how his model was to be constructed, once all these factors were
taken into account. Our answer is that Keynes aimed at building a theory of
underemployment equilibrium, assuming the existence of various kinds of goods
and expectations, in terms of the two fundamental units only. In carrying out
this task we need to consider the relation between the micro- and
macro-structures in his theory.
Our conclusions are
summarized in Figure 2, which offers a bird's-eye view of the structure of the General Theory.
Let
us go through the main conclusions, dividing them into four are as.
The First Area concerns the
principal corrections and clarifications that need to be introduced, namely:
(1)
using the first postulate of classical economics only t o describe the behavior
of an individual firm in the multiple-goods economy.
(2) taking
the concept of the “marginal efficiency of capita l”29 only as
expressing the demand for investment goods
.
(3)
explicitly showing
the supply side in the consumption goods sector.
The Second Area is a matter of
our cleaned-up version of the commodity market mechanism. Let us refer to the
micro-structure of the General Theory with the above-described
ambiguities removed as the “purified micro-structure”.
(Proposition 1) The commodity market
mechanism of the General Theory can be expressed in terms of the
purified micro-structure and the macro-structure expressed as the “revised IS
curve”. The purified micro-structure is composed of the market mechanisms in
the investment and consumption goods sectors while the revised IS curve is
derived from the purified micro-structure.
The Third Area comprises our
understanding of the commodity market mechanism as it stands in the General
Theory.
(Proposition 2) The mechanism of the
commodity market actually described in the General Theory can be
expressed in terms of the “non-purified micro-structure” and the
macro-structure as described in Chapter 3. The latter is derived from the non-purified
micro-structure, given the distribution of the existing amount of effective
demand among different industries is fixed.
The Fourth Area relates to
certain propositions which differ from other interpretations of the General Theory.
(Proposition 3) The aggregate supply and the
aggregate demand functions describe one and the same purified micro-structure
from different angles, so that both are equilibrium concepts. Chapter 3
provides not so much a supply-demand equilibrium analysis as a “pseudo-macro
system”.
(Proposition 4) There are two, mutually incompatible,
consumption theories: the
theory
based on the heterogeneity-expectations approach and the “consumption function”
theory. What is required in the theoretical structure of the General Theory
should be the former.
The consumption
theory based on the heterogeneity-expectations approach is as follows: the
market price, the volume of production and the volume of employment in an
individual consumption good industry are determined in such a way that the
effective demand for the consumption good, generated through the multiplier
process with the income in the investment goods sector as the prime mover, intersects
a “sales proceeds function” for that industry, which describes the relationship
between the volume of employment and the sales proceeds.
(Proposition 5) Determination
of the equilibrium values.
The national
income and the rate of interest are determined where the “revised IS curve”
intersects the LM curve (to be explained below).
In our view, the
aggregate supply and the aggregate demand functions should be replaced by the “revised
IS curve”, which expresses the whole real economy in terms of a functional
relationship between the rate of interest and the national income. In order for
the system to be determinate we need another equation, which is the LM curve,
showin g the state of equilibrium in the money market.
The General
Theory is a form of monetary economics. Keynes assumes the exogeneity of
money supply, and argues that money's “own-rate o f interest” falls most slowly
because of the highest liquidity-premium.
M =
L1(Y) + L2(r)
where
M is the total amount of money; L1 the liquidity pre ference function
due to the transaction s and precautionary motives; L2 the liquidity
preference function due to the speculative motive; Y income, and r interest.
The essence of his theory of money rests w ith L2(r) .
The rate of interest is determined between the monetary authority and the
public in the debts market. Keynes stresses that the degree of success o f any
monetary policy depends on psychological and conventional phenomena. Monetary
policy should not be changed drastically31, for this would imply the
risk of increasing the volatility of the economic system through the collapse
of public confidence.
(Proposition 6) A
dual (or two tier) adjustment mechanism.
The rate of
interest plays an essential role in adjusting the whole system, while
individual prices in the investment goods sector and the “multiplier process”
in the consumption goods sector play subsidiary roles.
The rate of interest
plays a primary role in the adjustment of the whole system, for it alone can
adjust any discrepancy between the level of national income determined through
the mechanism of the commodity markets and the level of national income that
would bring about equilibrium in the money market. Individual prices play a
role in bringing about equilibrium in the investment goods markets, in which,
given the rate of interest, is ascertained a demand curve which meets a supply
curve. The multiplier process, through which purchases of consumption goods
occur one after another until they converge at a certain point, plays a role in
the adjustment of the consumption goods markets.
Finally, one point is
worth emphasizing. The General Theory theoretical model cannot be
confined within a mathematical framework, for Keynes presents a clear-cut
theoretical model, but at the same time his theory is constructed on rather
subtle and complex realities.
5.4 Aoyama’s evaluation
of Keynes’s theory32
Aoyama’s evaluation of Keynes’s theory might
be seen as reflecting his assessment of Robertson’s theory.
On the one hand, Aoyama did not regard
the General Theory as revolutionary.
He argued that although Keynes criticized Say’s Law from his theory of
effective demand, the General Theory
is, in fact, not a theory of under-employment equilibrium33. He
maintained that DGET can effectively be applied to criticize Say’s Law, and
that this stance was, rather, to be discerned in Robertson’s analysis.
To sum up, the criticism of Say’s Law
by Aftalion and Robertson was the most penetrating in theories of economic
fluctuations. We insist, moreover, that by using DGET as the recent product in
theories of economic fluctuations we could assure Aftalion-Robertson’s stance definitely
(Aoyama (1942), p.245).
On the other hand, Aoyama evaluated Keynes ’s
theory of money — the bearishness function theory (in the Treatise), and the liquidity preference theory (in the General Theory). He argued that Keynes’s
bearishness function theory is, by its very nature, against the quantity
theory, and stressed the importance of Keynes’s approach, which takes account
of the influence of portfolio selection on the price level of goods.
More interestingly, he sees some
difficulty and limitation in Robertson’s period analysis, arguing thus:
Robertson’s analysis is a dynamic extension of the quantity theory and can deal
with neither the bearishness function nor the theory of liquidity preference. Aoyama
argues that Keynes’s theory of money is, by its very nature, against the
quantity theory of money.
6. Conclusion : A brief outline of Post WWII34
After
WWII, economics, like everything else, was imported from the US and came to
dominate Japan, which meant that the development of economics in the interwar
period made through influences from Europe came to a halt.
In the field of macroeconomics the Keynesian
revolution which occurred in the shape of IS-LM cum 45 degree line arrived.
This was a different interpretation from the one that had evolved in interwar Japan monetary economics. A dynamic version of Keynesian
macroeconomics (trade cycle theory put forward by P. Samuelson, Hicks and
others) as well as econometrics followed suit.
In the field of microeconomics, WGE arrived
with more mathematical elaboration as represented by the proof of the existence
of, and the stability conditions for, an equilibrium point. As can be surmised from
the above description of the development of “pure theory” in interwar Japan, this
field showed no gaps and stood at the sa me level as the US counterpart, as attested
by the achievements of, to mention but a few, Morishima (a disciple of Takata
and Aoyama), Uzawa and Negishi.
The combination of Keynesian macroeconomics
with WGE was called the “Neo-Classical Synthesis” and ruled the roost in mainstream
of econ omics up until the 1970s.
Subsequently, over the last three decades anti-Keynesian
schools such as Monetarism andNew
Classi cal School
Even on the Keynesian side, there emerged schools
critical of Keynesian macroeconomics as one pillar of the Neo-Classical
Synthesis (the Income-Expenditure approach), as repr esented by the
Disequilibrium Keynesians – Leijonhufvud, Negishi and so forth –,
Post-Keynesians and New Keynesians. Thanks to Leijonhufvud (who coined the
term), the Wicksell Connection drew the spotlight once again.
WGE, another pillar of the Neo-Classical
Synthesis, also came under attack both from within a nd from outside.
In the 1970s the Arrow-Debreu model was proved neither
to retain equilibrium nor to guarantee global stability – the
Sonnenshine-Mantel-Debreu theory. Efforts then went into modeling WGE under
disequilibrium – the Neo-Walrasian model.35
With regard to the
criticism of WGE from outside, it was objected that the axiomatic methodology
adopted in it does not explain actual economic phenomena and, what is more,
economics was moving in the wrong direction due to Debreu’s elaboration of WGE.
Israel at the “genuine” gam e theory based on cooperative games which
von Neumann and Morgenstern originally aimed at establishing should be pursued.
This type of criticism could be one reason why Market Design Mechanism theory
came to flourish recently.
What about the DGET? One can say that this line became
predominant neither in Japan which has a n ame similar to that of
DGET, it emerged from an intellectual background different to that of DGET.
Notes
1 This idea was severely criticized by Nisaburo Kito – a leading
Keynesian and a professor of the Tokyo
High School
2 Eiichi Sugimoto (1901-1952), who was
also a disciple of Fukuda, rated Marshall
3 For the academic circumstances
surrounding his studies in Japan gish i and
Ikeo (1999).
4 He tried to
examine the industrial fluctuat ions in terms of a natural and market rate of
interest only in Robertson (1934)
5 Forced saving was already in Robertson (1922, 90-93), although the ter m
“lacking” was not. See Presley (1979, 10-104) and Bridel (1987, 85-88).
6 See BP, pp. 59-62.
7 See BP, pp.72-76. For the same
argument, see Robertson (1922, pp . 157-158).
8 See Aoyama (1944)
pp.7-8.
9 He also regards Lindahl (1939)
as elaborating o n Robertson’s theory. See Aoyama (1940) p.304.
10 See Aoyama (1939)
pp.213-214.
11 See Aoyama (19 39)
Ch.7.
12 See Aoyama (1941 ) pp.236-237.
13 For them, see Hirai (2008), pp.17-30.
14 On which see Hicks (1976).
15 Wicksell
(189 8; 1935[the original in 1906]) does not refer to Thornton h e similarity was pointed out in
1916 by Davidson to Wicksell. See Laidler (1991, 150).
16 Marco Fanno put forward his o wn theory of business
fluctuations as early as 1912, succeeding Wicksell’s theory critically. See
Spiller and Pomini (2007).
17 For details, see Aoyama (1942) pp.192-217.
18 See Aoyama (1944) pp.14-15.
19 For more det ails, see Hirai (2008), pp.56-70 .
20
The “constancy of output” needs to be unders tood in a dynamic context, as it is
here. In Hicks (1967), this is “stage one”, at which the price levels of
investment and consumption goods change, while the volume of output and the
level of employment remain constant. See also the fourth lecture in Kahn
(1984).
21
Cf. TM.1, p. 122. Hicks (1967, p. 196) explains this by introducing the
propensity to save explicitly.
22 Cf. TM.1, p. 127 and pp. 179-180.
23 Cf. TM.1, p. 194.
24
Cf. TM.1, pp. 141, 179-180. Myrdal (1939) interprets Wicksell's
investment theory in a similar way, and refers to a formula now known as
Tobin's “q theory”. Cf. Myrdal (1939), pp. 76-78 and p. 65.
25
The term, “TM supply function”, is apposite for the following reasons. “TM”
simply refers to the Treatise (the only book in which Keynes uses this
function). “Supply function” is appropriate given that Keynes himself referred
to the mechanism as the “supply curve”.
In Asano (1985 (6); pp. 37-40), the role of
the TM supply function is similarly stressed. In Yoshikawa (1985; p.129), it is
interpreted in connection with Tobin’s “q theory”. On the other hand, in the version
of Keynes’s development from the Treatise to the General Theory in Klein (1947), the TM supply function makes no
appearance at all (cf. pp. 189-192). This is also true of Chapter 7 of Harrod
(1969). This is the case, notwithstanding that all stress the importance of the
Treatise.
26
The detailed analysis is developed in Hirai (1981). The above text owes to its
abstract version seen in Hirai (2008), pp.184-191 except for Figure 2.
27
See Hirai (1981), p.22 5, which shows how the heterogeneity of goods runs
through the General Theory.
28
See Hirai (1981), pp.180-183, which shows how expectations run through the General
Theory.
29
Minsky maintains that Keynes failed to construct an appropriate investment
theory because he put too much emphasis on the marginal efficiency of capital.
An appropriate investment theory, argues Minsky, should aim to determine the
demand price of investment goods by capitalizing the prospective yields of
capital. Keynes thought the two approaches identical, and emphasized the former
approach. See Minsky (197 5), Chapter 5. Joan Robinson upholds Minsky's
argument. See Eatwell and Milgate eds. (1983), p. 71.
30
Harrod (1936) seems to accept Keyn es’s claim that there exists no established
theory of the rate of interest, but takes a rather neutral position, stating
that the theory of liquidity preference is neither in conflict with nor
necessary to what he has to argue. See p. 135. Harrod (1948), however, supports
the theory of liquidity preference on the grounds that it is much more
realistic than either of the loanable fund theories or the theory which
attributes far too much foresight to the market, and defends it against several
criticisms, claiming that it should be properly regarded as an attempt to fill
a void. See pp. 63-72.
31
With regard to monetary policy, Keynes points out the following: (i) In reality
the monetary authority cannot perform the ideal operations; (ii) There could be
some contingencies in which the monetary authority would fail to attain a
certain rate of interest.
32 Takahashi (1936), probably the only book of its time that examined the Treatise
in detail from a critical, but not ideological, point of view, attributes the
vital defect of the fundamental equations to the fact that Keynes takes
equality between the earnings and the cost of production for granted and neglects
the cost of capital depreciation. See Takahashi (1936), Chapters 4 and 5.
Kitoh
(1942), the most sophisticated book dealing with bot h the Treatise and the General
Theory published in Japan he instab ility of the monetar y economy. He criticizes the fundamental
equations on the grounds that Keynes neglects the fluctuations of goods in
stock as well as the cost of capital depreciation. See Kitoh (1942), pp.
124-139. However, Kitoh rates the fundam ental equations highly for connecting
the price level with the distinction between the act of saving and the act of
investing. See Kitoh (1942), pp.73-80. Kitoh translated the Treatise in f ive volumes over the per iod
1932-1934.
33 See
Aoyama (1942), p.274.
34 For details,
see Hirai (2008)
35 See, e.g.,
Car telier (2007).
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