Further discussions and criticisms of Keynes’s General Theory

The chapter deals with further criticisms of Keynes’s General Theory, notably the critical comments on the liquidity preference theory of the interest rate and the debate on the wealth (or Pigou) effect. These topics were discussed within an analytical framework in which the interrelations among all the relevant variables and markets are taken into account. Such a framework may be depicted as a general-equilibrium context, though not in a proper Walrasian sense. The chapter concentrates on Hicks’s contribution to the theory of interest rates and on Kaldor’s criticisms of Keynes’s liquidity preference. The chapter closes by explaining how the debate on Walras Law and the parallel debate on the Pigou effect ended by erasing the inside financial structure of the economy as irrelevant for the basic Keynesian model. A section is devoted to the evolution of the view of banks and the formalization of the money multiplier.