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Letter: The reason Keynes argued for an active fiscal policy

Summary:
May 1 2024 William White is right (Letters, April 29) to say that John Maynard Keynes regarded the rate of interest as “highly conventional”, but he should have quoted the whole sentence from chapter 15 of The General Theory: “The difficulties in the way of [full employment] ensue from the association of a conventional and highly stable rate of interest with a fickle and highly unstable marginal efficiency of capital.” It was for this reason that Keynes advocated an active role for fiscal policy. For as he put it in 1932: “The lender, with his confidence shattered by his experiences, will continue to ask for new enterprise rates of interest which the borrower cannot expect to earn.” The current disabling of fiscal policy has thrown the whole onus of demand management on monetary

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May 1 2024 William White is right (Letters, April 29) to say that John Maynard Keynes regarded the rate of interest as “highly conventional”, but he should have quoted the whole sentence from chapter 15 of The General Theory: “The difficulties in the way of [full employment] ensue from the association of a conventional and highly stable rate of interest with a fickle and highly unstable marginal efficiency of capital.” It was for this reason that Keynes advocated an active role for fiscal policy. For as he put it in 1932: “The lender, with his confidence shattered by his experiences, will continue to ask for new enterprise rates of interest which the borrower cannot expect to earn.” The current disabling of fiscal policy has thrown the whole onus of demand management on monetary policy, which is powerless against the “stickiness” of the long-term rate of interest.

Robert Skidelsky
Keynesian economist, crossbench peer in the House of Lords, author of Keynes: the Return of the Master and co-author of How Much Is Enough?

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