AGGREGATE ECONOMIC ACTIVITY - AFTER TWENTY YEARS by William Feltner In the twenty years that have elapsed since the publication of John Maynard Keynes's General Theory of Employment, Interest and Money, this work has come to mean different things to different economists. Not even in the first approximation is the "Keynesian influence" a well-defined concept. I think it is impossible to understand the problem with which this anniversary session is concerned unless we are willing to distinguish between at least three meanings of the Keynesian influence.
To avoid frequent repetition of lengthy phrases, I will speak here of (1) cyclical Keynesianism, (2) stagnationist Keynesianism, and (3) fundamental-theoretical Keynesianism. Anticipating the conclusions, I will add that in my opinion "cyclical Keynesianism" has survived these twenty years and will continue to be influential doctrine in the predictable future. "Stagnationist Keynesianism" and "fundamental-theoretical Keynesianism" have received hard blows, and they might not survive, or at least not in much strength. I shall also argue that specific analytical tools of the Keynesian system will retain their usefulness in contexts where it is advisable to disregard the equilibrating faculty of changes in the general price level.
Let us first turn to what, for the sake of brevity, I have called "cyclical Keynesianism." Given the general price level, saving obviously does not have to be equal to planned investment at the capacity level of output. There may take place an unplanned (unexpected) accumulation of inventories, coupled with the hoarding of previously active money or with failure of new-money creation to keep pace with the increase in output; or there may take place an unplanned reduction of inventories, coupled with dishoarding or with new-money creation that exceeds the increase in output.
The first of these cases is that in which planned investment falls short of savings and the second that in which planned investment exceeds savings. In the second case, where planned investment exceeds savings at a
stable price level, it is at least in principle always possible to restore the balance by restrictive credit policies. But in the first case, where saving exceeds planned investment at a stable price level, it is not always possible to restore the balance by the conventional easy money policies of central banks.
Conventional central bank techniques can supply more reserves to the banks, and they can reduce interest rates on government securities to very low levels, although they presumably cannot reduce these rates quite to zero. This leaves the rates on business loans subject to a positive (and perhaps not even so very low) floor level. If, to begin with, full capacity saving exceeds planned investment at the given price level and if we limit ourselves to conventional easy money policies, it is unpredictable how much of the new money will go into additional investment and how much into idle deposits. In a period of major depression tendencies, most of it is quite likely to go into idle deposits. As long as we assume constancy of the general price level, compensatory fiscal as well as monetary policies may be needed to avoid large-scale cyclical unemployment and excess capacity.
But why assume constancy or near constancy of the general price level? The logic of the matter leads us to the question whether in the absence of wage and price rigidity the saving-investment balance would or would not become restored at the capacity level of output by changes in the level of money wages and prices. The logic of the matter should lead us to this question of price-level adjustments at any event, even if conventional easy money policies were generally reliable means of restoring balance, because even the conventional central bank techniques are interferences, and the logic of the matter inevitably brings up the question whether a market economy is self-adjusting through changes in money wages and prices.