5 The functioning of a monetary economy
5.1 Introduction The previous chapter brought to light significant points of agreement between our two authors, especially regarding their common grasp of a decentralised market economy as a macroeconomic system, their shared concern towards long-term issues and their shared purpose for obtaining full employment together with price stability. Yet, this is not to deny the great divide that remains between some of their basic claims. Regarding their respective positions about the efficiency of fiscal policy, regarding also the way they conceive how monetary policy should be conducted and above all regarding their respective confidence in the ability of centralised authorities to impede market failures, the gap might appear insuperable. Hence, we come finally to the last step of our inquiry, which is that of the theoretical underpinnings of Keynes’ and Friedman’s pleas regarding economic policy. As we will argue below, money as well as the ‘monetary’ character of a decentralised market economy, the treatment of uncertainty as well as the modelling of expectations and finally the dynamics underlying the interactions between the real and the monetary spheres of the economy are at the heart of the analytical problems to be considered here. Strikingly, neither Keynes nor Friedman formulates the terms of the debate between their own positions and the ones of their opponents in terms of value judgements or moral principles. They develop the same attitude in that for both of them the issue to be settled is about theory. Keynes formulates very well the debate at stake in his 1934 paper entitled “Poverty in Plenty: Is the Economic System Self- Adjusting?” (CW 13, pp. 485–92). When he targets his opponents, Keynes claims: [They] do not, of course, believe that the system is automatically or immediately self-adjusting. But they do believe that it has an inherent tendency towards self-adjustment, if it is not interfered with and if the action of change and chance is not too rapid. (Keynes 1934, CW 13, p. 487) In Keynes’ views, the rationale behind this ‘belief ’ is the classical theory of the interest rate, which considers the interest rate as the key variable able to freely
