《宏观经济学 Macroeconomics》课外读物：Keynesian Economics：The Search for First Principles

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Keynesian Economics The Search for First Principles By ALAN CODDINGTON Queen Mary College University of London I would like to acknowledge various forms of indebtedness in con nection with this paper: to, among others, Thanos Skouras, Alan Peacock, David Currie, and an anonymous referee of this journal for helpful comments on an earlier draft; to Michael Kennedy and Co- lette Bowe for indispensable guidance at various stages; and to the University of Manchester for the Hallsworth Fellowship in Political Economy, which made this work possible I. Introduction n The General Theory of Employment, method consisted of analyzing markets or Interest and Money [13, 1936]and else- the basis of the choices made by individual where, Keynes attacked a body of theory traders. Thus, the resulting theory oper that he designated"Classical "In posing ates at two distinct levels-that of in a threat to the"Classical"system-or at dividual choice, and that of market least to a recognizable caricature of it- phenomena-even though the connection Keynes also called into question the between the two levels may be provided method of analysis by which this system only by an analysis of the choices of a"rep- was constructed The purpose of this arti- resentative"trader. Moreover, in order to cle is to inquire into the various ways in provide a basis for a manageable analysis which methods of economic analysis have of market phenomena, the analysis of in- come to terms with this threat, either by dividual choice has to be of a particularly esponding to it or by reinforcing it with stereotyped and artificial kind. This tion: " What has to be changed or sacrificed based on choice theory of a type that al in order to accommodate Keynesian ideas lows the two levels to be connected i will within standard methods of analysis?"Its refer to as"reductionism, "on the grounds theme will be the variety of ways in which that the central idea is the reduction of this may be done: three broad types will market phenomena to (stylized)in- be presented and the contrasts between dividual choices them explored Considerations of tractability impose The first task accordingly is to charac- restrictions on the kind of choice theory terize the method of analysis of that body on which the market theory can be based of theory in opposition to which Keynes the theory cannot deal with choices in all presented his own. Very broadly, this the idiosyncratic detail in which actors 1258

Coddington on Keynesianism 1259 conceive of them, nor in terms of the elu- gram, I will refer to as"fundamentalist sive and wayward manner in which actors Keynesians. "It is the purpose of this sec make up their minds; stable objectives and tion to expound such an interpretation, to vell-defined constraints are needed to consider some of the diffculties in sustain- provide a firm enough foundation for mar- ing it, and briefy to discuss its significance ket theory. And just as the choice theory for economic theorizing. has to be restricted in the interests of Like the interpretation of the work of building up to market theory, so the mar- any active mind, the interpretation of ket theory has to be restricted in the inter- Keynes's writings requires the use of se ests of working back to choice theory. lection and emphasis: it requires a view as Overwhelmingly, reductionist theorizing to what is central and what merely periph has confined its attention to situations of eral, what is essential and what merely in market equilibrium; for these situations a cidental, in his writings; in this way appar choice theory basis is relatively straight- ent inconsistencies and obscurities may forward. There may be, in accordance readily be resolved, at least to the satisfac- with the standard schedules, a gap be- tion of those adhering to that interpreta tween market demand and market sup- tion. For fundamentalists, what is central ply, but the choice theory from which and essential in Keynes's writing is to be each of these schedules is derived sup- found primarily in his article"The Gen poses that all choices are realizable; ac- eral Theory of Employment"[14, 1937] in cordingly, the standard schedules can tell the Quarterly Journal of Economics of us nothing about what will happen when 1937, an article concisely restating the ar- the traders attempt to do what, in the ag. gument of the general Theory in response gregate, is impossible; nor are the to various critics; in the General Theory schedules likely to persist as the traders itself, the essence is said to lie in chapter become aware of the difficulty of doing 12, " The State of Long-Term Expecta- what they had regarded, in making their tions, "and, to a lesser extent, in chapter (intended) choices, as straightforward. 17, "The Essential Properties of Interest Overwhelmingly, therefore, reductionist and Money. "The kind of considerations to theory has been concerned with the con- be found in these places can be traced nection between equilibrium states of back at least to the work of ten years ear- market phenomena and the choice logic lier in The End of laissez- Faire [12, 1926 from which these states could be gener- and, with hindsight, still further back. ated. It should be noted, however, that An early statement of the fundamental this concern with market equilibrium is ist position was provided by Hugh Town not a defining characteristic of reduction- send [28, 1937]. He argued that the kind ism: it is rather a way in which reduction. of considerations raised by Keynes in his ist theorizing has been rendered manage- theory of liquidity preference have quite able devastating consequences for reductionist II. Fundamentalist Keynesianism price theory if they are allowed to apply to all assets. Once all prices are seen as If Keynes's ideas are to be hreat to the reductionist program, the liquidity premium, price theory becomes question naturally arises of how serious a enmeshed in the same tangle of expecta threat they are: of how fundamental the tional and conventional elements that aspects are that are threatened. Those characterizes Keynes's theory of the rate who have seen Keynes's work as a frontal of interest. On this view, the hope of ex assault on the whole reductionist pro- tracting"real"(relative) prices from their

1260 Journal of Economic Literature monetary context looks bleak; although the clearly specified and stable objectives we should not, as Hicks [ 9, 1946, chap. 12] and constraints required by reductionist has pointed out, confuse Keynes's innova- theorizing, Keynes emphasises that the analytical procedure(in dealing basis of choice lies in ith the rate of interest in association with and shifting expectations of future events money-holding decisions rather than with and circumstances: expectations that have borrowing and lending) with his sub- no firm foundation in circumstances, but stantive contributions. Nevertheless, the that take their cues from the beliefs of oth- threat to the reductionist program does, ers, and that will be sustained by hopes, on this view, indeed appear to be a funda- undermined by fears and continually buf- mental one feted by"the news. " He was drawing at Perhaps the most uncompromising, and tention to both the importance and the certainly the most tirelessly eloquent, elusiveness of the state of business conf- ponent of fundamentalist Keynesianism is dence, and the way it unfolds. Keynes G. L. S. Shackle [25, 1967; 26, 1972; 27, focused on the conventional element in 1974]. His own work has centered on the valuation: the way in which valuations irreducibly creative element in human may persist to the extent that they are choice: its basis in constructs of the choos- shared, but are thereby rendered sustaina- ing mind. His appreciation of Keynes's ble in the face both of minor events and contributions to economic theory has, ac- of changes in circumstances, but vulnera- cordingly, centered around this same con- ble to anything that threatens this conven- cern, and naturally he sees these matters tional basis. In the course of a riot, for ex- of expectation, uncertainty, and ignorance ample the moods and feelings of the -matters of the provision of knowledge rioters may be widely shared until, at a surrogates in e face of knowledge defi- later stage when the riot has lost its force, ciency-as of the essence. A most succinct the moods and feeling may generally and distillation of Shackle's reading of Keynes rapidly revert to normal. The coordina- has recently been provided by B J Loasby tion of such crowd behavior and its charac [17,1976] teristic dynamics arise from the fact that One further line of thought must be the participants are taking their cues di mentioned in the present context: this is rectly from one another. Reductionist one that has attempted to use the funda- choice theory as it has been developed mentalist aspect of Keynesianism as a way does not shed any light on decisions in- of clearing the ground to permit a return volving such immediate and strong inter- to a certain cluster of doctrines and con- dependence as thi cerns that are variously referred to as Once its choice-theoretic foundations classical"(as distinct from"neoclassical") are threatened, the whole reductionist or"Neo-Ricardian. "The objective of this program is called into question; for with school, whose most distinguished practi- out them the market theory would have tioner is Joan Robinson, is to produce a nothing on which to stand, nothing to hybrid of Keynesianism with those aspects which it could be reduced. The concept of of Ricardos work that were appropriated market equilibrium is in this way left ex- by Marx: Ricardo minus Says law and the posed to attack. For without a clearly quantity theory of money specified and stable basis in choice logic, Keynes's QJE paper of 1937, to which the ide Un fundamentalists attach such great impor- longer connected to the realizability of in- tance. is first and foremost an attack dividuals intentions in the aggregate. This the kind of choice theory that is required does not mean that market equilibrium for the reductionist program. As against cannot be rehabilitated; what it means is

Coddington on Keynesianism 1261 that the sustainability of equilibrium must from the restrictions that it imposes on our depend on conditions that are confined to thinking This, however, is not so much a the level of the market. For the funda- matter of what Keynes said, as of what we mentalist, however, Keyness ideas re- are led to if we follow his line of thought, quire the rethinking and reconstruction of taking the QJE article as the definitive the whole body of reductionist theory: its guide to its direction choice-theoretic basis and the equilibrium where we are led by a line of thor theory of markets that rests on it. depends a great deal, of course, on w The objections to equilibrium theoriz- we are disposed to go. Fundamentalists ing have been elaborated by fundamental- have, correspondingly, contributed freely ist Keynesians. Joan Robinson has shown of their own preoccupations in arriving at that if the idea of equilibrium is pursued interpretations of Keynes's thought. at relentlessly, then as the concept becomes their most uninhibited, fundamentalist all-embracing it becomes paralyzed by its Keynesians have presented Keynes's ideas own logic: equilibrium becomes a state of as an escape from the essential"timeless- airs that is, strictly, unapproachable: un- ness"of the modes of thought he attacked less it already exists, there is no way of More concretely, they have presented his attaining it [20, 1953]. Similarly, in the central message regarding employment as ork of G. L S Shackle, the idea of gen- concerning the existence of a liquid asset eral equilibrium is shown to require the in a world of uncertainty, thus providing pre-reconciliation, one with another, of all a retreat from the holding of real assets present and future choices of all economic and the associated commitment to(em actors (26, 1972]. On either ground it ployment-generating) production of a par would follow that the standard use of the ticular output. This theme has been much method of comparative statics(or, better, elaborated by Shackle and is concisely ex omparative equilibria") to analyze the pounded by Loasby; in Joan Robinsons effects of changes in circumstances, is work, however, we find its place taken by strictly unwarranted and illegitimate. of a preoccupation with the heterogeneity course, this line of thought would have ni- capital goods: the fact that individual hilistic consequences for the entire corpus items of the capital stock that history be- of economic theory and in particular for queaths to us cannot be costlessly trans- its applicability; in this respect, the line of formed into one another, but exist in thought reaches a purist and impractical particular forms, embodying particular conclusion that is in marked contrast to techniques, reflecting the superseded ex Keynes's own highly eclectic approach to pectations of the past. The problems mic th raised by the existence of liquid assets and The concept of equilibrium is accord- durable, functionally specific capital as- ingly seen by fundamentalists not as a sets, are not, however, unrelated; the na- useful simplification for economic theo- ture of capital goods means that holdi rists, but as a distraction. 2 The essence of them involves a kind of commitment Keynes's thought is seen as the liberation while the nature of liquidity allows an es from equilibrium theorizing, as an escape cape from that particular commitment Fundamentalist Keynesianism, in see This argument is elaborated in Coddington [3, ing Keynes's ideas as a wholesale on- 1975] and Loasby [17, 1976, chap 3] a Thus: "The hushes ft- stops when slaught on the reductionist program, does not see those ideas as providing a substi- n, 1964, p. 80]. But this sopori tute for that program. Rather, it sees " The co of course, is an indis- Keyness own ideas as a first step in a thor o时m56 ough-going revision of economic theor

1262 Journal of economic literature Accordingly, it sees what Keynes did sponding to full employment as nearly as is constructively as merely a makeshift, an practicable, the classical theory comes into its improvisation, a stop-gap To take the constructive part of Keyness work(in de volume of output to be given, i.e. to be deter mined by forces outside the classical scheme of veloping the consumption is no objection to be raised marginal efficiency of capital schedule against the classical analysis of the manner in tc)as being the substance or result of which private self-interest will determine what the Keynesian Revolution"would there in particular is produced, in what proportions fore betoken a failure of nerve, a betrayal the factors of production will be combined to oduce it, and how the value of th of fundamentalist principles. 3 uct will be distributed between them In order to sustain the fundamentalist interpretation, it is necessary to postulate This is abundantly clear, and in obvious that Keynes himself had occasional lapses. confict with the fundamentalist view of Thus, Joan Robinson (23, 1973, p. 3] Keynes's thought being subversive of the writes: whole classical ("reductionist")scheme there were moments when we had some Accordingly, we find Joan Robinson writ trouble in getting Maynard to see what the ing [21, 1964, p. 92], in connection with point of his revolution really was, but when he this passage, of the"fallacy"that Keynes came to sum it up after the book was published fell into, and remarking sadly that,"He was himself partly to blame for the perver Here she refers, of course, to the JEarti- sion of his eyes him cle of 1937 gan the reconstruction of the orthodox Again, she writes [21, 1964, p. 75 scheme that he had shattered"[22, 1971 The General Theory broke through the unnatu- ral barrier and brought history and theor a further embarrassment for funda- together again. but for theorists mentalists is that Keynes indicated quite into time has not been easy. After twenty years the awakened Princess is still dazed and clearly that he found nothing to object to in Hicks's distillation [8, 1937]of the Gen eral Theory into the IS/LM framework, or Keynes himself was not quite steady on hi what has come to be known as " the in come-expenditure model, " quite devoid She then goes on to refer [21, 1964, p. 75] of any fundamentalist characteristics. to Keynes's(highly suspicious") remark This again must be seen about the timeless multiplier[13, 1936, p. momentary lapse on Keynes's part if the 122] fundamentalist interpretation is to be sus- A major embarrassment for fundamen- tained, at any rate if Keynes himself is to alists is to be found in the final chapter of be allowed to be a fundamentalist Keynes- the General Theory. Here we find Keynes ian arguing as follows [13, 1936, pp. 378-79]: What, then, does fundamentalism add if our central controls succeed in establish. up toP It does not provide any sort of de- ing an aggregate volume of output corre terminate theoy economy functions at the aggregate level An immediate difficulty for fundamentalists is the it does not enable one to make any definite ct that the QJE article of 1937, after having ad- predictions about the likely effects of al anced the arguments already discussed, goes on to ternative policies or circumstances.On stress the importance of the consumption functi hich is then deployed(anticipating terminology will introduce at a later stage)in a thoroughly hy 4 See Keynes's letter of March 31, 1937, to Hicks draulic fashion in Hicks [10, 1973

Coddington on Keynesianism 1263 the contrary, it is a viewing point from inhibiting effects on alternative modes of which such constructions would appear as economic regulation. More broadly, the rather desperate makeshifts of transient comparison also arises among the alterna- applicability. Fundamentalist Keynesian- tive effects of investment decisions taken ism is concerned with the texture rather within alternative institutional frame. than the direction, as it were, of the eco- works(various powers and responsibilities nomic process having been given to agencies of the To stress the basis of all economic ac- State), whose regulative capacities then tivity in more or less uncertain expecta- also become a part of the appropriate tions is precisely to emphasize the open- comparison. ness and incompleteness of economic In summary, we can say that fundamen- theorizing and explanation. It does ne talist Keynesians are united in seeing elf provide any kind of fixed mechanism Keynesian ideas as posing a threat to the according to which the unfolding of whole reductionist program; and that events takes place; but it does show how their primary concern has been to rein one would set about constructing a narra- force this threat with further threats tive of events. It is a view about where the when it comes to providing an alternative gaps are in the causal chains that can be to the reductionist program, however, identified in the economy: the points at matters are less unified. There is a marked hich the economic process is susceptible contrast, for example, between the pro. to influence. We can accordingly begin to spectus offered by Joan Robinson for the appreciate the deep ambivalence of this completion of the Keynesian revolution standpoint towards economic policy On and the insight offered by Shackle into its the one hand, it sees potentiality for enor- integrity and essence. And when we move mous leverage, the whole economic proc. from the critical to the constructive as- ess moving in response to changing states pects of fundamentalism, not only are of mind and consciousness; on the other matters less unified, they are also less def hand, the very precariousness of this vi- nite. In Loasby' s work, this indefiniteness sion leads very naturally to thorough- is transformed into a methodological prin- going scepticism about the predictability ciple [17, 1976, p. 167 of the effects of deliberate attempts to ap- If one ply uit of political obj of employment set forth by Keynes in his tives. The point of view in itself provide IQIE] article of 1937, it is this: unemploy no guidance on whether the precarious- in a market economy is the result of ignoran potential for political leverage. That is to roeconomic models miss the point-which is say: the wayward and unruly character of precisely that no model of this situation can be fully specifi individual choices-and in particular in- vestment decisions---is seen as an imped Ill. Hydraulic Ke ment to economic functioning; but the during the nineteen forties and fifties, question that must be faced from a policy there appeared a number of expositions of point of view is whether it is a greater Keynesian economics, "attempting to impediment to the self-regulation of the make the ideas accessible to students, and economy than it is to the workings of dis- even to intelligent laymen. what these cretionary fiscal and monetary policy. This works had in common, quite apart from matter would involve not just the consid matters of substance, was an unmistakable eration of an impediment to economic enthusiasm for (what were taken to be functioning, but a comparison between its Keyness ideas. This enthusiasm was at

1264 Journal of Economic Literature times unrestrained to the point of excite- aggregate level 7 Indeed, the esteem in ment; it was the authors of these works which the two aspects have been held has who spoke without reservation of a tended to move in opposite directions, the Keynesian Revolution, "one of the books period when"fiscalist"policy enthusiasm in fact h this title [15, Lawrence R. was at its height being a time at which the Klein, (1949)1966]. It is some indication intellectual interest in the underlying the of the level of enthusiasm reached by ory had become moribund. again, the de these expositors and popularizers that mise of"fiscalism"in the late sixties and one,Jan Pen, wrote a book setting out and early seventies was accompanied by a rea- discussing a particular specification of a wakening of interest in the underlying static"Keynesian"model of relationships theoretical conceptions. (We shall have between a small number of macroeco. more to say about this revival in the next nomic aggregates and gave it the title section Modern Economics[19, 1965]. It is not my All this should not be allowed to give the intention here, however, to attempt to impression, which would be quite mis chart the process of the diffusion and taken, that the fiscal enthusiasm stemming popularization of Keynes's ideas 5 from Keynes's ideas did not include, or The period of Keynesian enthusiasm could not provide, a theory in support of was really the post-war period: the ideas its policy doctrine. It could and it did went cantering briskly through the fifties What then, we are led to ask, is the theo- and early sixties; faltered sometime in the retical basis for fiscalist enthusiasm? How middle sixties and stumbled into the sev. is it to be characterized as one of the enties.6 This, at any rate, is the pictur strands in the development of Keynesian its emerges at the level of popular thought? It is to these questions we now ence, at the level of widely and influential- turn ly-held views on macroeconomic policy; at The theoretical content of the body of the level, that is, of Keynesianism as a doc- ideas that has been propagated through trine about how a largely decentralized the educational system in the West since economy may be subject to broad (as op- World War II as"Keynesian Economics posed to detailed )central control or influ-(by, for example, Paul Samuelson's peda ence through the instrument of the gogically authoritative textbook [24 budget. It is tempting to adopt the prac- 1973]I shall proceed to refer to as"hy tice of referring to this doctrine as "fiscal- draulic Keynesianism. "This designation show that it is a particular variant refects the view that the natural and obvi (and perhaps a corruption or vulgarize- ous way to regard elementary textbook tion)of Keynes's ideas. At any rate, it is Keynesianism is as conceiving of the econ important to keep distinct the ups and omy at the aggregate level in terms of downs of Keynesianism as a policy doc- disembodied and homogeneous Aows Of trine from those of Keynesianism as an course, conceiving of the macro-economy academically respectable theory of the functioning of a capitalist economy at the 7 Reflecting on the fragmentation of Keynesian thought, Axel Leijonhufvud makes the following ob- s But see John Kenneth Galbraith's"How Keynes servation:"For some time now, contentment with came to America"for some interesting insights into this state of the arts has rested on the motto"The deas made their Theoretically Trivial is the Practically Important and U.S. academic economics establishment [5, 1971] he practically Important is the Theoreticall 6 For an attempt at intellectual stock-taking at that Trivial. It is a disturbing formula which can hardly e, see my Rethinking Economic Policy"[4, be a permanent basis for the further development of the field"[16, 1968

Coddington on Keynesianism in this way will be fruitful only to the is only one agency making deliberate acts tent that there exist stable relationships of choice; that one agency is"the govern between these overall Aows. And it is my ment. And it is the belief that there are contention that the central characteristic indeed stable relations amo, that provides ng the various of"hydraulic Keynesianism"is the belief overall fows in the econo that such stable relationships do exist at a basis for"the government"to pursue its the aggregate level. It is this belief that policy goals regarding the overall level of gives some point to the hydraulic concep- economic activity and hence, relatedly, of tion;without such a belief the conception the level of employment. It is the stability would simply be a matter of national in. of these aggregate relationships that pro come accounting, not of economic theory. vides"the government"with the leverage It should be noted that the aows it needs to influence those Aows that are volved in this conception are Aows of ex- not under its direct control. By making penditure, income or output. That is to deliberate choices for the Aows it does say,neither prices nor quantities per control (via the budget), and bearing in period make a separate appearance: they mind the(allegedly) stable relationships appear inextricably in the contribution between this and the other Aows that are each makes to the overall fows of spend- objects of concern for economic policy, ing and receipts. It should now be appar- "the government"can, in principle, exer- ent why the belief in the existence of, and cise an indirect control on the overall level the attempt to establish, stable relation-(although not the composition) of the ships between the overall Aows is radically that are not the objects of anyone's delib- inconsistent with reductionism. For any erate choice. That is the story. On the face reductionist program must give a crucial of it, it may appear a major triumph in the role in its theorizing to prices as such(not march of human reason: a dramatic and to the contribution they make to overall irreversible extension of the boundaries of spending fows). The grounds for this view political responsibility. Instead of unem- are that it is prices as such that provide the ployment and depression being seen and incentives that individuals face in making accepted passively, like the weather, they the choices on which the whole scheme is are to be seen as matters for human will to rest. This does not mean that hydraulic and design, something that hi pianism can alloy nt of central be played by prices; when we come to government, could actually resist and think of such prices as embracing wage remedy. 8 As an idea it looked both simple rates and interest rates, we can see that and good; accordingly, it was, at the end this cannot be so. Correspondingly, it does of the war, rapidly assimilated to both the not mean that reductionism is incapable policy statements and rhetoric of all major of allowing overall Aows to play any part political parties. 9 in its scheme. Since these are alternative programs for theorizing, rather than alter- 8 This changed attitude did not come easily or quickly, and fundamental attitudes had been under native theories, they revolve around mat. going a process of erosion for some decades by the ters of emphasis. They do not concern time Keynes came on the scene. For a painstaking what can or cannot play a part in a theory, Harris (7, 1972) on of this process in Britain, see Jose but what can or cannot play a central part. The major bridge in Britain between Keynesian In fact, contrary to the standpoint as- doctrines and sociated with reductionism, hydraulic recognition in the White Paper Employment Policy Keynesianism is a scheme in which there [6, 1944)

1266 Journal of Economic Literature In summary, it can be seen that the hy. ever reason, in its attempts to respond to draulic approach is in confict with reduc- changes in expenditure tionist market theory. The hydraulic ap- Since the IS-LM apparatus was put for proach shows how things would work ward by Hicks, however, we have had when market prices(and wages)will not, something like 30 years experience of de- or will not quickly enough, or will not be mand management policies based on the allowed to, perform their allocative role; assumption that the economy exhibits it analyzes a situation in which prices are marked hydraulic characteristics in the failing, both as disseminators of informa- short-run; and the question of why these tion about relative scarcities and in the policies have been less effective at some provision of incentives to act on the basis times than others naturally raises in a of that information practical way the question of the scope If the central message of the General the hydraulic conception. It is therefore of Theory is that overall employment is more considerable interest that Hicks, in a revi a matter of the demand for output than of sion of Keynesian economics in the light real wages, except when"full employ. of this experience, does not adopt his own ment"already obtains, then that message IS-LM apparatus for the purpose [11 is certainly embodied in the hydraulic ap- 1974, chap 1]. Rather, he provides an al proach. As such, it is an audacious simplifi- ternative framework in which the possibil cation, which is, on the face of it, in con- ity of an expansion in demand being trans- Aict with the corpus of reductionist lated into an expansion of output depends theorizing. Furthermore, as a way of crucially on the structure of inventories at hinking about macroeconomic policy, it the outset of the process. In particular, it seems to work to some extent, sometimes. depends crucially on there being plentiful The intellectual problem that it raises, stocks of materials to sustain investment however, is that of its own scope. What we projects until decisions to increase the out need to know are the circumstances in put of these materials are taken; or what which, and the extent to which, the opera. amounts to the same thing, it depends on tion of an economy may be conceived of there being ample foreign exchange re- in hydraulic terms. There are various ap- serves representing command over for proaches to this question. A familiar one eign inventories of materials. Unless this is provided by the IS-LM apparatus, condition is met, the attempted expansion within which it can be readily shown that can easily run up against bottlenecks and the economy exhibits the characteristics dissipate itself in the diversion of re- of the hydraulic model to the extent that sources from other uses and, notoriously the interest elasticity of expenditure is low in creating balance of payments problems and of the demand for money is high; with Of course if the increase in investment a zero interest elasticity of expenditure expenditure is translated into a net in of demand for money, the operation of the process can set in, and adequate stock a and an indefinitely large interest elasticity crease in real investment, the multiplier economy would be exactly in accordance consumer goods will then be required to with the hydraulic model: changes in avoid bottlenecks at this stage and sustain penditure Aows would lead to changes in the expansion. 10 output Rows without any repercussions on This analysis can readily be transformed from a the rate of interest. In sum it follows that price"basis to a"Aexprice"one; in which case the the economy may exhibit the characteris- in for a successful ex on becomes that tics of the hydraulic model to the extent while changes in expenditure are being that the interest rate is impeded, for what-

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