What I here call fundamental-theoretical Keynesianism differs from the other two types of Keynesianism in that it is not evasive concerning the real balance effect of money wage and price reductions. Fundamentaltheoretical Keynesianism denies the existence of this effect.
It might perhaps be objected that Keynes did not argue for the position which we here define as that of fundamental-theoretical Keynesianism. Into the analytical framework which he introduced Keynes did not incorporate the real balance effect (this statement will scarcely be contradicted), but the reasons why he failed to do so are not quite obvious.
From the outset he may have omitted from his formal system those analytical elements which (had he included them) he would have had to disregard at the end because of his conviction that lags, frictions, and institutional rigidities render the real balance effect practically insignificant. On the whole I believe, however, that Keynes's failure to develop a clear-cut verbal argument with respect to the real balance effect, which at the same time is absent from his formal system, should lead us to contrast his views with the views of those who do attribute theoretical importance to the real balance effect. This is why I speak of fundamentaltheoretical Keynesianism when I mean denial of the theoretical validity of the real balance effect.
It seems to me that the anti-Keynesian reasoning which establishes the real balance effect is valid reasoning, but that a theoretical system which relies on the equilibrating faculty of the real balance effect should recognize that the rate of growth may depend importantly on how much or how little use the economy is allowed to make of general price changes in equilibrating itself.
Let us for a moment completely disregard lags in the adjustment process and also rigidities of a sociological-political character. Even on these assumptions, there remains the difficulty that it is impossible to describe a series of appreciable, consecutive price reductions without thereby postulating a very high real rate of interest. This means little growth or, if we carry the assumption far enough, perhaps no growth.
If price reductions instead of monetary expansion were used as a means of satisfying the desire for additional real balances, the real rate of interest might have to rise regardless of how far the money rate of interest is lowered. After all, the money rate is subject to a floor, perhaps somewhere near the zero level. Growth rates would be reduced, and if the size of the required price reductions were great enough even for relatively small rates of growth, stationary or near-stationary equilibrium would be the only analytical result consistent with these assumptions.
To put it briefly, with the aid of the real balance effect of price changes it is possible to describe a process which will eliminate any demand for additional real balances and hence any possible deficiency of effective demand; but if the demand for real balances were equated with the supply of real balances by this mechanism instead of by the proper degree of monetary expansion, the growth process might be harmed or even destroyed. This is the tentative conclusion which the present state of the controversy suggests to me concerning the real balance effect. While this conclusion is non-Keynesian, it is obviously influenced
by analytical developments which were greatly stimulated by Keynes's work. If we reject fundamental-theoretical Keynesianism, we may view the Keynesian analytical apparatus as a simplifying device which disregards the equilibrating faculty of changes in the general price level.
For the reasons here indicated, it seems to me that this is frequently a very useful simplification in the theory of long-run growth as well as in the analysis of countercyclical policies.
In this anniversary session I should perhaps have spent less time trying to analyze problems in detail and more time making general observations. Yet the main general observation which I would like to offer did require reference to detail. Some important specific ideas of the General Theory have become incorporated into widely accepted economic theory, although it is not at all obvious just how Keynesian or Robertsonian or neo-Wicksellian or neoclassical the integrated product is. The ideas that have thus found their way into the main stream of doctrinal development are those of cyclical Keynesianism rather than of stagnationist or of fundamental-theoretical Keynesianism. Also, there has recently developed a good deal of awareness of differences between reasonable versions of cyclical Keynesianism, which allow for the efficacy of central bank policy in periods of moderate disturbance, and extreme or unreasonable versions of cyclical Keynesianism which place all the emphasis on fiscal policy. But the elements of Keynesian theory that have found their way into the main stream of doctrinal history do not tell the full story. Even where the present generation and the next are unlikely to go along with Keynes's answers, they will find that Keynes posed problems in a fruitful fashion. They will want to move with Keynes over some sections of his analytical route, although they presumably will not wish to stay on Keynes's route right to the stage of definite conclusions. This is what I was trying to say in a somewhat detailed discussion of specific propositions.
To be sure, while Keynes called his book of twenty years ago a General Theory of Employment, Interest and Money, the number of significant problems in that area which he left outside the scope of the book is quite large. The list of neglected or omitted problems includes the relationship between incentives and the equalitarian currents of our epoch, monopoly and competition, the possible coexistence of inflationary tendencies and of full use of equipment with the underemployment of labor, and the effect of technological progress on relative factor prices. Still, the range of problems on which he has compelled us to agree or to disagree with him is wide. For this posterity will be grateful to him. Much has met his eye and it would be ungracious to complain that not even more has. After all, economists have continued to derive inspiration from more works than one and from more brilliant thinkers than one. None can deny Keynes a prominent place among these men and the General Theory a prominent place among these works.