Introduction

There is one crucial aspect of Keynes's heuristic model which has so far remained implicit. One major objective of the General Theory is to resolve the classical dichotomy between money and production by showing that ‘money enters into the economic scheme in an essential and peculiar manner’ (GT, p. xxii). As early as 1932 Keynes made it clear that what was really needed in economics was a ‘monetary theory of production’. The ultimate reason for systemic market failures in a developed capitalist economy is seen precisely in the influence of money on production. According to Keynes orthodox economists are unable to explain market failures and persistent unemployment because they do not have a method capable of coping with the monetary aspects of modern economies. They have always maintained that production is not affected by money in an essential way, at least in the long period. Money is considered simply as a technical device for facilitating real exchanges. Production is believed to be merely ‘veiled’ or, at best, ‘lubricated’ by money.

In order to clarify Keynes's position on this issue I think it is illuminating to compare and contrast it with the position of Schumpeter, another distinguished critic of this aspect of orthodox economics. Both Schumpeter and Keynes reacted against the received view, claiming that money does affect production in an essential way. At first sight their approaches to the problem appear completely foreign to each other.