Actually Reading Keynes
It is a fact lamented by Keynesians and celebrated by Keynes-haters, and undoubtedly true- people still talk about Keynes but almost no one still reads him. For instance, I have read Keynes for a History of Thought class but never in graduate macroeconomics classes.
I wanted to write about why liquidity traps aren’t important, but I thought I should first read Keynes to find out exactly what he meant by “liquidity trap”. I found that chapter 15 of the General Theory contains many insights that are usually attributed to later economists, sometimes those said to be refuting it.
There is proto-monetarism, suggesting that we can sometimes treat the velocity of money as constant:
“Its value will depend on the character of banking and industrial organisation, on social habits, on the distribution of income between different classes and on the effective cost of holding idle cash. Nevertheless, if we have a short period of time in view and can safely assume no material change in any of these factors, we can treat V as nearly enough constant…. if we can take V also as constant, that both the wage-unit and the price-level will be directly proportional to the quantity of money”
There is much discussion of the importance of expectations for monetary policy:
“the long-term market-rate of interest will depend, not only on the current policy of the monetary authority, but also on market expectations concerning its future policy”
Keynes was aware of rational expectations and the problems of credible commitment:
“Thus a monetary policy which strikes public opinion as being experimental in character or easily liable to change may fail in its objective of greatly reducing the long-term rate of interest, because M2 [“speculative demand” for money] may tend to increase almost without limit in response to a reduction of r below a certain figure. The same policy, on the other hand, may prove easily successful if it appeals to public opinion as being reasonable and practicable and in the public interest, rooted in strong conviction, and promoted by an authority unlikely to be superseded”
We even have a proposal for quantitative easing, buying long-dated bonds:
“Perhaps a complex offer by the central bank to buy and sell at stated prices gilt-edged bonds of all maturities, in place of the single bank rate for short-term bills, is the most important practical improvement which can be made in the technique of monetary management.”
For the most part I am impressed. However, it is strange that he rarely mentions inflation and never mentions subjective discount rates explicitly. Keynes himself seems to think that liquidity traps are very rare; depending on how you read section III he is either saying no liquidity trap has ever occurred, or there is only one recent example.