Aspects of a Post Keynesian Theory of Finance

Abstract

Unlike other postwar interpretations, the Post Keynesian approach starts with a monetary theory of production. Keynes introduced this terminology to emphasize the fact that money was not a veil, but a real factor determining production decisions in a modem economy. Not only was this approach innovative in its treatment of money, it built on Keynes' original formulations of a number of basic propositions in the theory of finance. In addition to the well-known motive, Keynes employed his original theory of interest rate parity and carried out his analysis in terms of forward, futures, and options contracts. Economists working in the Keynesian tradition have usually chosen to ignore these aspects of Keynes' work, while finance theorists have incorporated them into their basic theory and instead concentrate on Keynes' approach to probability, dismissing it as based on a subjective approach.1 This essay calls attention to Keynes' contributions to the modem theory of finance that might serve in the development of a Post Keynesian approach to finance. Three areas are highlighted. The first is the treatment of expectations, and inevitably, the relationship between risk and uncertainty. The second is the importance of this diverse approach to expectations for the determination of prices, in particular of financial assets. The third is the reciprocal of the theory of asset price formation as found in the theory of interest, and in particular the explanation of the yield curve.

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