Money and Markets: Essays in Honor of Leland B. Yeager

Reflections on reswitching and roundaboutness 201labor-market conditions determine employment and hence real output and realincome and that the additional consideration of the quantity of money allows forthe determination of the nominal levels of the output and income magnitudes. TheAckley-based rendition of Keynes versus the classics continues to be served up asstandard textbook fare, while a blending of Keynes and the classics (Keynesianneoclassicalsynthesis) is presented in the form of Keynesian IS–LM analysis with asupply-side (neoclassical) undergirding.Here and in the discussion below, the term “classical” is used as Keynes used it– to refer to the ideas of all economists (except Robert Malthus) from Adam Smithto Cecil Pigou. Accordingly, the loanable-funds market, in which the interest ratebrings into balance the supply of loanable funds (saving) and the demand forloanable funds (to finance investments), is taken to be the centerpiece of “classical”economics. This application of supply-and-demand analysis would have no placein Ricardo’s Principles of Political Economy (1911[1817]) or in Sraffa’s Production ofCommodities by Means of Commodities (1960).Though Ackley’s trumped-up classical model employing the neoclassical productionfunction is now commonplace, the understanding of how this modelactually relates to classical, neoclassical, and Austrian thought has been largely lost.Ackley himself recognized the nature – though, I will argue, not the significance –of the simplifying assumptions needed to transform pre-Keynesian thought into aclassical model. The introduction of his graphical exposition of classical fullemploymentequilibrium, especially his second-listed simplifying assumption, isrevealing:Actually, Classical price theory (as opposed to monetary theory) implies that thevolume of employment and output is determined in the first instance not bythe level but by the structure of prices. . . . We shall simplify this part of theanalysis very greatly by assuming (1) that perfect competition prevails in allindustries; and (2) that each industry is vertically integrated: it hires only laborand produces final output (using a given stock of capital goods and naturalresources); there are no intermediate goods. These assumptions can be removed with nomajor change in results . . . .(Ackley 1961: 124, emphasis altered)Here, Ackley has collapsed the critical time element out of the Austrians’ capitalstructure. The movement of resources among the temporally sequenced stages ofproduction is no part of Ackley’s classical story. Tellingly, the rate of interest, whichin the Austrians’ own theorizing equilibrates the loanable-funds market, broadlyconceived, and hence governs the intertemporal allocation of resources, makes noappearance in his classical model. Ackley presents separately the loanable-fundstheory, never integrating – or reconciling – this staple of pre-Keynesian macroeconomicswith the production function and its “given” capital stock.Despite Ackley’s claim to the contrary, actually allowing for an intertemporalstructure of capital does produce a “major change in results.” It allows for differentialchanges in the value of capital in response to a change in the rate of interest.