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The Foundations of the Theory of National Income: An Analysis of Some Fundamental Errors

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... 16 On the rate of interest and monetary factors in Kalecki's macroeconomics, see the thorough discussion by Sawyers (2001). 17 For a thorough discussion of the issue of the relation between accounting and intentional saving and investment in macroeconomic theory, see Lipsey (1972) and the literature quoted there. (4) ...
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The paper considers the legacy for modern macroeconomics of Kalecki’s theory of income determination. The latter is reconstructed in its analytical constituent parts referring in detail to the original sources. The critical appraisal of its historical relevance is made from the vantage point of the specific strain of contemporary New-Keynesian macroeconomics that is also based, after a long historical gap, on imperfectly competitive microeconomic foundations. Important elements of Kalecki’s theoretical construction have been a lasting, even if usually unacknowledged, legacy to the toolkit of modern macroeconomics.
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R. G. Hawtrey, like J. M. Keynes, was a Cambridge graduate in mathematics, an Apostle, influenced by the Cambridge philosopher G. E. Moore, and connected to the Bloomsbury Group. Though eventually overshadowed by Keynes, Hawtrey, after publishing Currency and Credit in 1919, was in the front rank of monetary economists. This chapter explores their relationship during the 1920s and 1930s, focusing on their interactions about restoring an international gold standard after World War I, the 1925 decision to restore the convertibility of sterling, Hawtrey’s articulation of what became known as the “Treasury view,” Hawtrey’s commentary on Keynes’s Treatise on Money, Keynes’s questioning of Hawtrey after his testimony before the Macmillan Committee, their differences about short-term and long interest rates as monetary-policy instruments, Hawtrey’s disagreement with Keynes about the causes of the Great Depression, and finally their correspondence about the General Theory.
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A.W.H. ‘Bill’ Phillips was an innovative and sometimes path-breaking economist, but one whose achievements and influence have been much exaggerated. The famous ‘Phillips curve’ was neither as innovative, insightful, nor influential as it has been portrayed; the ‘Phillips machine’, although innovative, left little mark. His work on the theory of stabilisation policy and econometric theory was of much greater intellectual value. But attempts at finely tuned macroeconomic control with which the former was concerned feel thoroughly out of favour. Phillips’s work on econometrics went largely unnoticed, and his insights were later rediscovered after his death. There are indications too, that his econometric insights persuaded Phillips himself that the stabilisation policy with which so much of his work had been concerned could not be made effective.
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Richard Lipsey has had a wide-ranging career as a researcher, a teacher, a textbook author and participant in matters of economic policy. In all of these, technical facility is used to enhance understanding of economic matters and not for its own sake. His approach is not to simply go with the flow, but to think carefully about the nature and practice of economic enquiry. Lipsey combines a practical focus of investigation with a lifelong concern with methodology. His passionate belief in the importance of economic understanding makes him an engaging and stimulating colleague. In his years at LSE and after, Lipsey created and continues to create a special intellectual environment and to be a part of it is both a pleasure and of great benefit.
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It seems paradoxical beyond endurance to rule that a manufacturer of shampoos may not endanger a student’s scalp but a premier education institution is free to stuff his skull with nonsense. (Judge Howlson, reported in Stigler (1975), p. 191)
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The paper, written for the centennial celebration of Kalecki's birth, considers the legacy for modern macroeconomics of Kalecki's theory of income determination. This is notable for having been the first to be built, unlike Keynes' but alike the contemporary New-Keynesian macroeconomic models, in an imperfectly competitive framework and, at the same time, for linking the theory of distribution, on the one side, and the theory of income determination, on the other. Important pieces of Kalecki's theoretical construction, such as the basic idea of building the theory of income determination in an imperfectly competitive framework, the implicit assumption of the isoelastic transposition of demand curves, his use of the notion of the degree of monopoly in the framework of macroeconomic models, have been a lasting legacy to the toolkit of modern economics in general and modern macroeconomics in particular. Unlike part of contemporary macroeconomic theorizing, which takes place in the framework of abstract models, following an intrinsic logical development with a momentum of its own, Kalecki was always much concerned, in his theoretical constructions, with real world data and burning real world policy issues. Yet his basic message, dating back to his early contributions in the early thirties, that demand creation by governments could provide the basic solution to the unemployment issue, a solution which in capitalist economies would remain unimplemented in practice for the political difficulties it implies, has proved of non-lasting value, aside from its continuing ideological impact.
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