So I don’t fully understand the argument here. Brad de Long (BDL) seems to be claiming that Lars P. Syll (LPS) is claiming that to be a ‘true Keynesian’ one must believe that temporary demand-shocks lead to a permanent decline in output.
BDL says, in contrast to what LPS claims, John Maynard Keynes (JMK) himself did not believe that short-term demand-shocks lead to a permanent decline in output.
To this end, BDL quotes a passage from Ch22 of The General Theory in which JMK describes how a crisis can eventuate. In this description, business managers are disappointed at lower than expected profits (i.e. a ‘declining marginal efficiency of capital’). This causes them to reduce investment and increase their liquidity preference, which in turn causes unemployment.
I disagree with BDL’s claim that the quoted passage suggests Keynes did not believe that a temporary fall in aggregate demand could lead to a long term decline in output. In all honesty, the passage doesn’t seem to suggest anything one way or the other. Perhaps business manager’s profit-expectations were disappointed because of an unanticipated decline in demand. Or perhaps demand remained utterly constant and the business managers just duped themselves into thinking demand was about to take off, and then it didn’t.
This is probably just me being dense, but I just don’t see why BDL thinks that passage proves anything about what Keynes thought about the ‘long term’ effects of ‘short term’ demand fluctuations. The marginal efficiency of capital is defined by Keynes as:
being equal to that rate of discount which would make the present value of the series of annuities given by the returns expected from the capital asset during its life just equal to its supply price. This gives us the marginal efficiencies of particular types of capital-assets. The greatest of these marginal efficiencies can then be regarded as the marginal efficiency of capital in general. The reader should note that the marginal efficiency of capital is here defined in terms of the expectation of yield and of the current supply price of the capital-asset.
The ‘expected annuities’ here are going to depend on what business managers think future profits are going to be, which they determine by ‘projecting forward’ the situation at the present time. The situation at the present time could be the actual number of sales they had that period, which is (part of) aggregate demand. A sudden fall in demand will reduce the expectations of future profits and hence the marginal efficiency of capital.
On a broader point, the use of ‘short term’ and ‘long term’ is massively confusing. The ‘non Keynesian’ argument seems to be that a short term dip is cancelled out by another short term rise, so that the integral of the overall output level for the entire history of human civilization remains constant regardless of period-by-period fluctuations.
I genuinely don’t know (or even much care) what the ‘proper Keynesian’ argument is vis a vis the effect of short term fluctuations on the long term. It seems obvious to me that short term falls in output (i.e. unemployment) will sum to a fall in ‘long term’ output. Perhaps I’m wrong about that, and I’d be grateful if someone could explain why.