Ramsey’s Belief and the Plausibility of Keynesian Economics

Abstract

Using Ramsey’s formulation of the probability theory, this study considers the plausibility of alternative monetary theories—Keynesian and monetarism, which is defined by the people’s confidence in such theories. It is naturally assumed that the more complicated theory entails a dearer cost to understand. Keynesian equilibrium is supported only through belief in the stable intrinsic value of money. Conversely, monetarism requires that laypeople have special and difficult knowledge so as to be confident about its assertion; namely, the linear relationship between nominal money supply and price; the actual value of Marshallian k and the volume of nominal money supply. As such, the Keynesian belief is far more prevalent in the actual economy.