Professor Allan H. Meltzer argues that despite the centrality of Keynes's views to macroeconomics and the active controversy about Keynesian policy, his central ideas have been ignored or misstated. Attention has focused on short-term countercyclical policies, while his principle theme, concerning the types of policy rules that increase stability by lowering variability and uncertainty, has been neglected. Supporting this heterodox interpreetation, the author presents a rigorous study of John Maynard Keynes's views on economic theory and policy from 1920 to 1946.
Keynes's ideas about the role and responsibility of government developed in the 1920s. His Treatise on Money was a flawed attempt to incorporate the effects of price variability. The General Theory, his second attempt, shifted the focus from prices to output. Keynes argued that variability and uncertainty lowered investment and thus the capital stock. The observed variability, he believed, was above the desired natural minimum. This excess gave rise to a rsik premium in interest rates, and private market interest rates remained above the rate at which society would hold the optimal stock of capital. Keynes believed that by reducing the risk remium capital stock and output could be increased and living standards raised.
In his work on postwar policy for Britain and in his proposals for Bretton Woods, Keynes placed great weight on rules, predictability, and the reduction of uncertainty. In keeping with his theoretical work, he opposed discretionary fiscal changes and favored rules to reduce instability and increase the capital stock. These proposals are consistent with, and provide evidence for, the interpretation of Keynes's theory developed in this study.
Allan H. Meltzer is a visiting scholar at AEI and the John M. Olin Professor of Political Economy and Public Policy at Carnegie-Mellon University. He is a founder and cochairman of the Shadow Open Market Committee and has frequently served as a consultant to governments and central banks. He currently is Honorary Advisor to the Institute for Monetary and Economic Studies of the Bank of Japan.
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