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General Theory (changes)

General Notes

• Founder of macroeconomics
• Influenced by Swedish economist Knut Wicksell, who said that the distribution of wealth would not equalize over time, but instead that any growth would be put into the hands of the people who had wealth in the first place. Thus, necessary government intervention
  • Keynes liked this: Keynes assoc. with government intervention into economy
  • Anti-invisible hand
• Introduced “aggregate demand,” where health of society depends only on amount of consumption and investment. Thus, when depression occurs, only way to fix it is to increase consumption and investment.
• Government must get active to fix problems in economy
• General Theory (1936) his magnum opus
  • Meant to be “bigger” than classical economic theory, to see classical theory as a subset of “general theory”
    • Classic PE is only about special cases: that’s not the situation we live in
  • Style: rather complex; indiscriminately mixes critique of classical economy and his elaboration of a new theory
  • Influence: “Keynesian revolution”
    • Markets will not fix themselves, will not eventually lead to full employment on their own
    • Level of employment determined by total amount of spending, not by the price of labor (the latter is classical economy’s theory)
    • More natural for economy left alone to have underemployment and under-investment, hence need for gov action
  • Vocab
    • “Consumption function:”
    • “The multiplier:”
    • “Stickiness:” prices and wages not completely free-floating
    • “Marginal efficiency of capital:”
    • “Liquidity preference:”
  • Significant parts: chapter 12, chapter 24
• Father before him a Cambridge economist
• 1919 Paris Peace Conference member, but defects b/c upset at what was going on; writes Economic Consequences of the Peace 1919, about bad consequences of reparations, about dangers of nationalism
• Writes General Theory at Cambridge during 20s and 30s
  • Anti Alfred Marshall (ie default is full employment for a functioning market): Keynes says that functioning market doesn’t guarantee full employment, in some cases discouraging it
  • Pro government intervention (careful, of course) rather than pure laissez-faire
    • Provided base principles for monetary and financial regulations affecting economy; were put into place
• Held various posts and consultancies for the exchequer

Keynes’ Preface

• This is more theoretical than practice
  • Doesn’t like that: wishes that the higher theories of economics weren’t so unclear and so general
  • Until he solves these problems, can’t even get to the practical problems at all
• His earlier Treatise on Money
  • Still more traditional b/c treats money as separate from supply and demand
  • Problem: the picture of output (static) versus his picture of “dynamic development:” he wasn’t getting a correct picture of changes, though he was doing well at showing what happens w/a given output
    • So, this book is meant to talk about the forces of change (change in output, employment)
• Some Ideas in this New Book
  • “A monetary economy…is essentially one in which changing views about the future are capable of influencing the quantity of employment and not merely its direction” xi
    • related to supply and demand, thus related to theories of supply and demand
  • Thus, his “General theory” “includes the classical theory with which we are familiar, as a special case”
    • to me, it’s a relativism of economics: there is more than one economics
    • to me, this occurs even as he tries to wed them altogether in a larger system
    • very modernist to do so: to pull at the system and at the levels/striations
• Wants opinions of other b/c he says that esp in areas like economics if you think alone too long, you’ll fall into traps: a conversation, a social evolution of the ideas
  • Why? b/c in economics you can’t experiment like in other sciences
    • similar to literature?
• His characterization of the book makes it a modernist project: “A struggle of escape from habitual modes of thought and expression. The ideas which are here expressed so laboriously are extremely simple and should be obvious. The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify…into every corner of our minds.” xii
• Audience: economists, not the public

Keynes’ Introduction

• Who are “the classical economists?”
  • Marx came up with the term to refer to everyone who led up to Ricardian economics: Mill, Smith, and their predecessors
  • Keynes also uses this term to cover the followers of Ricardian economics, esp Mill and Marshall (also Pigou)
  • It “dominates economic thought, both practical and theoretical, of the governing and academic classes of this generation, as it has for a hundred years past” 3
• What is his relationship to them?
  • He contrasts his work with them
  • Says that they address a special case, not the world we actually life in, thus it’s “misleading” and could be “disastrous” if relied upon
• What do the classical economists say?
  • Focus on the distribution of a GIVEN amount of employment among various industries and opportunities according to the value of investment in such fields; as well as how this affects the distribution of the produce (profit) in socioeconomic classes
    • It’s DISTRIBUTION, not total amount: proportions
    • Ricardo: “vain and delusive” he says in letter to Malthus to try to understand the source of the quantity wealth itself
  • They ignore the fact that some resources never seem to be employed, that the world doesn’t actually act at full capacity
  • They have assumed 1) “the wage is equal to the marginal product of labor” (that is, wage is equal to the value lost if one fewer person were employed) and 2) “the utility of the wage when a given volume of labor is employed is equal to the marginal disutility of that amount of employment” (that is, the real wage must match the value required to make that labor come about; so that disutility is what the laborer needs to overcome unwillingness to labor) 5; and 3) unemployment as a result of a mix between voluntary unemployment (the laborer doesn’t find the “reward” good enough, for example b/c of unwillingness to change or b/c of collective bargaining) 6 frictional unemployment 6, which counts as a mistake the source of unemployment (some miscalculation, some unforeseen change or delay)
  • They see volume of labor as determined by demand schedule, supply schedule, and the balance: “where the utility of the marginal product balances the disutility of the marginal employment” 6, that is where there’s a “match” between the marginal cost of labor and the marginal utility of labor
    • That is: “wage bargains between the entrepreneurs and the workers determine the real wage” 11 (that wage tends to be about the same as the marginal disutility of labor, that is, just enough to get them to sell their labor)
      • Not true, he says. Workers don’t withdraw labor if cost of living increases. (to me this is interesting b/c he just revealed a source of inequality b/c if this were true, then classical economics says that workers do have a fair way to bargain)
  • Not true that this classical economic fictional Bargain between employer and employed determines wages, Keynes says: “there may be no method available to labor” to bring their wages to the level of (their own perception of) disutility
    • The prices levels are slipping along, up and down, independent of these bargains… worker has no access to bargaining over REAL wages.
    • What such bargains do affect: the distribution of real wages among various types of labor, NOT the total availability of labor. Though they can change their relative real wage, they do not have power over labor’s general real wage.
• What will he do instead?
  • Find out the level of actual employment: he says no one yet has a theory about the fluctuation of employment (though people have noted or discussed it as a topic)
  • Discover a third kind of unemployment (other than frictional and voluntary unemployment): involuntary unemployment
  • Recognize that there’s a diff between attitudes towards real wages and attitudes towards money-wages
    • ie people might strike if their money wages went below a minimum, but if the change were in real wages, they wouldn’t necessarily strike
    • therefore “Real wages…not the sole variable” as the classical economists thought 8
    • there is a gap between the actual wages and the perception of wages, and this gap actually matters for the availability of labor
  • Say that U S Depression unemployment was NOT b/c they refused to accept low wages: this is what classical economics would say
    • There are other factors in volume of employment than just demand for labor and productivity of labor
  • When real wages fall, money wages rise, and vice versa
• Involuntary Employment
  • When rise in cost of living (price of goods rises in relation to wages) = more demand and supply of labor
  • Classical economists blame unemployment in the end on laborers refusing to accept the wage which nonetheless does meet their marginal disutility (ie, that labor needs to accept even a reduction in real wages) 16
    • “The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight” 16
    • Keynes says well duh we need to develop our own non-Euclidean geometry for economics
• What he does agree with
  • Both he and classical economists say that real wages must decline for there to be an increase in employment (rate of wages will decrease when you employ more people because of diminishing marginal utility, and everyone’s wages go down as a result)
  • He says it’s “indefeasible:” You couldn’t possible go against it, he says, very un-Marxist
• People believe that you always truly do spend your money one way or another, though often they inconsistently maintain that idea
  • Mill, Principles of Political Economy
    • “All sellers are inevitably, and by the meaning of the word, buyers.” If you do not consume, then you are going to invest.
    • Reflects his belief that buying and selling truly happen at the same time, are exchange; any production is automatically exchange for him
  • Marshall, Pure Theory of Domestic Value
    • Spending: on goods you use now/present; saving: on goods you use later/future
    • Marshall believes that saving is automatically investment
      • This is so much lamer than Marx’s Capital vol 3
  • Keynes’ response, by way of Crusoe
    • “false analogy from some kind of non-exchange Robinson Crusoe economy,” where whatever you produce is automatically considered consumption or savings, the latter of which is also coded as spending b/c it’s investment, which is a type of spending
    • he believes that you can’t assume that in the individual case, but you still can assume it in the aggregate case: individuals might consume or save more or less, but on the whole, productive output of whole community does equal the income of the whole community
      • oddly enough then he goes to macroeconomics because on this level you don’t have to worry about individual eccentricities
      • so he AGREES with a lot of classic P E but ONLY if you apply it to aggregate, to the whole; doesn’t reflect individual
      • Bloomsbury-ness of it all: he recognizes the uniqueness of what happens on the individual level, which he perceives as what ACTUALLY goes on in the world; so he takes economics out of this realm of personal experience and says it’s okay on the abstract level
    • Keynes’ other way of saying they’re wrong in this case: “decided..by an optical illusion, which makes two essentially different activities appear the same” (ie investment and saving) 21
      • they are assuming that decision to invest now is tacit agreement to consume later: he says the motives of each step (one, abstaining in the present; two, providing for the future) are separate
      • What classical economic theories are dead now because of this recognition? “the social advantages of public and private thrift, the traditional attitude towards the rate of interests, the classical theory of unemployment, the quantity theory of money,” laissez faire etc 21. They are all now questioned. You can’t say that you saving something is GOOD for the community at large.
• He also says it’s not true that “supply creates its own demand” 21

Savings

• Saving not always good: it’s “two-sided”
• When you save, “the reactions of the amount of his consumption on the incomes of others makes it impossible for all individuals simultaneously to save any given sums,” so when you “save more by reducing consumption will so affect incomes that the attempt defeats itself.” 84
• “Though an individual whose transactions are small in relation to the market can safely neglect the fact that demand is not a one-sided transaction, it makes nonsense to neglect it when we come to aggregate demand” 85

The Propensity to Consume 98-133

• Consumption: when your real wages increase, so does your consumption, but at a lower rate.
  • He says this is a human psychological trait when they’re in the modern world: we can’t adjust habits fast enough 97
  • Thus they will save more proportionally
• However, here’s a problem w/this: growth is outstripping consumption, so we have employment that will generate products NOT being bought.
  • Supply will outstrip actual purchases
  • How to solve? Investment
  • In other words, employment depends on EXPECTED consumption; but actual consumption depends on net income
• We need to keep consumption up because if we don’t the demand for capital will go down, and everything slows down.
• Method: he wants to investigate psychological motivation for consuming or not consuming
  • Not consuming (saving): “Precaution, Foresight, Calculation, Improvement, Independence, Enterprise, Pride, and Avarice”
  • Consuming: “Enjoyment, Shortsightededness, Generosity, Miscalculation, Ostentation, Extravagance” 108
• He says governments tend to save their money too: enterprise, liquidity improvement, prudence
• Yet these “Good” qualities actually have bad results, he notes
  • “The more virtuous we are, the more determinedly thrifty, the more obstinately orthodox in our national and personal finance, the more our incomes will have to fall when interest rises relatively to the marginal efficiency of capital.” 111
  • Spending and saving have nothing to do with these virtues—Precaution, Improvement, etc—“Virtue and vice play no part.” 111
    • It’s all about the rise and fall of the interest rate.
      • Thus we need GOV INTERVENTION to keep investment alive, he says, and cure unemployment
• When we have involuntary labor, almost anything, even “pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classic economics stands in the way of anything better.” 129
• Also, he notes how common sense leads to preferring completely useless activities (gold mining) than partially useless ones (stimulating investment at lower than the current rate of interest)
  • Thus gives that great image of state burying bank-notes and offering leases on the land for private enterprise to go dig it up: says that is better than nothing 129. Then, you won’t have unemployment ;-)
    • real income WOULD increase
    • why does he say this? to mock people b/c they won’t do “more sensible” activity like building houses if they can’t get it at an advantageous rate…so he says Fine go dig holes if you won’t do anything smarter.
    • notes that Ancient Egypt had pyramids and the Middle Ages cathedrals to ensure full employment, but we don’t b/c all our ventures are “useful” and thus must follow the laws of profit returns. as a result we make our fellow humans suffer unemployment. 131

We Still Have an Economy of Instability, chapter 12

• Likens choice of investment to contest in a newspaper where you choose the 6 prettiest women out of the 100 pictures given, and the winner is the one whose choices are the average
  • “We have reached the third degree where we devote our intelligences to anticipating what the average opinion to be.”
• Choices in investment now are too complex: laborious and risky 157; a gamble but one that requires infinite patience
  • Too much speculation (market psychology), too much more than enterprise (guessing the return on an investment)
  • Seen as coming over from America, Wall Street
• Solution? “sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except by reason of death or other grave cause, might as a useful remedy for our contemporary evils” 160
  • That way people are thinking more than just the short term: when they think their “commitment is ‘liquid’” then the investor will make riskier decisions
  • Modern stock exchange is therefore very dangerous: you can switch your decision so fast, you don’t consider your decisions carefully enough
• Modern economic world has “crises of confidence”
  • Yet any solution would be too radical, too dangerous, would create other problems
• “instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation” 161
• “the problem of thrift” 379

Chapter 24: The Social Philosophy suggested by his economics

• The problem with P E
  • “not so much in finding logical flaws in its analysis as in pointing out that its tacit assumptions are seldom or never satisfied, with the result that it cannot solve the economic problems of the actual world” 378
    • Sounds like he’s saying it’s a lovely mathematical fiction: perfectly stable system in itself, but just not realistic in the sense of accuracy
  • once you get to full employment, sure, P E will be mostly applicable…but we have to GET THERE first
    • Remember, P E generally only gives a crap about the DISTRIBUTION of whatever investment there is
    • That is why classical P E is a subset of Keynes’ general theory: his general theory covers all of the issues that you have to fulfill before you can use P E
• The problems
  • we can’t get employment for everyone
  • “arbitrary and inequitable distribution of wealth and incomes” 373
• Growth of capitalism held back by “low propensity to consume” 374
  • only time this wouldn’t be true is during full employment
• Solution: redistribution of wealth via government intervention (like strategic taxation, ie death duties) to maximize consumption
  • People think that we need to be kind to the rich b/c their savings are what lead to investment and thus to growth, but actually, abstinence by all, even the rich, impedes growth
  • Believes that there should be SOME difference (ie inquality) in incomes, but not so large as we see today 374
  • We only need just enough to keep out the carrot of the profit motive (and to keep otherwise dangerous people and energies occupied!! 364 ie self-aggrandisement: “it is better that a man should tyrannise over his bank balance than over his fellow-citizens; and whilst the former is sometimes denounced as being but a means to the latter, sometimes at least it is an alternative”): lower stakes will work just as well
  • Why? He says you can MANAGE human nature tho’ you can’t change it (what’s that human nature? “money-making passion”)
    • He’s in a halfway point between Marx pointing out the way you’re saying people are born avaricious always in human history, and Marx’s enemies here
• Full employment, low interest rate
  • What would it look like? “aggregate return for durable goods would…just cover their labour-costs of production plus an allowance for risk and the costs of skill and supervision” 375
  • “compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital.” 275-6
    • land and capital, “no genuine sacrifice” so you shouldn’t get the reward…all they do is maintain scarcity to keep value up
      • state will make sure capital isn’t scarce by having its own to use if it has to (that is it will have a savings it can use as capital)
    • rentier aspect of capitalism will soon cease 276 b/c it’s “functionless investor”
      • “will need no revolution” 376 but merely we need to wait for there to be so much capital available (“within one or two generations” 377) that it won’t be scarce, thus won’t get so much of a reward for it, thus redistribution of wealth to be fairer
      • any entrepreneur will indeed have a reward, but a reasonable one
• Lots of capital available = low rate of interest = more consumption, more investment = full employment 377
  • How will we get to this state? by making the present generation constrict their consumption = make next generation able to have “full investment”
• His System of Control
  • Leaves plenty free for the individual while still opening up areas for state control that have been free before 378
    • “a large extension of the traditional functions of government” 379
  • State controls via taxation systems and controlling interest rate
    • In other words, state ends up controlling amount of capital available and the rate of return
    • Banking alone won’t get the interest rate to the right level
  • “a somewhat comprehensive socialisation of investment” 378 along w/private investment still existing of course
  • Why isn’t this socialism?
    • B/c State won’t own means of production, nor will it decide what to make or how to make it
    • B/c won’t require “a break in the general traditions of society”
    • B/c still requires individual action and still thrives on individualism 380
      • What’s good about individualism? more efficient b/c decentralised, b/c have to be responsible for self and b/c has the motive power of self-interest; and it’s a “the best safeguard of personal liberty” b/c “widens the field for the exercise of personal choice” 380 (what of gay rights?); and safeguard for “variety of life” against the “homogeneous or totalitarian state” which will lead to best results b/c it allows the best of the past to be saved while allowing for change and imagination
      • Thus, his measures are actually what will preserve, not threaten, individuality b/c it will ensure the success of individual effort and will avoid the “destruction” of economics as we know it (hmm does he mean by avoiding revolution?)
• Goal: “to indicate the nature of the environment which the free play of economic forces requires if it is to realise the full potentialities of production” 379
  • Ah it requires coddling, protection, so we can keep effective demand up!
  • And yet wouldn’t Marx say that P E is still compromised in its core by its assumptions about human nature and the inevitability of inequality (think Mill’s wage theory)?
• Authoritarian States
  • He says they have managed to solve unemployment (me: that shows why modernists seem to overlap w/fascism: they’re all dealing w/similar problems and have similar goals, just diff methods) but “at the expense of efficiency and of freedom” 381
  • Says they can indeed solve unemployment w/out these problems
  • Think: this is 1936
• War
  • He repeatedly mentions war as one of the ways to waste resources and therefore stimulate investment
  • At end he asserts that his suggestions will lead to peace, or at least more peace
  • “economic causes of war, namely, the pressure of population and the competitive struggle for markets” 381
    • me: as if countries EXPORT their competition problem ;-)
    • blames 19th c war on this: the struggle for markets
  • How will it avoid war: well with laissez faire the country can barely do anything to help their kids when they’re in economic trouble…except finding new markets: war, which for him is just an extreme example of the “international division of labor” that everyone had applauded 382
    • What we really need to do is control DOMESTIC employment (and population, he notes, with a tiny whiff of eugenics) and then we won’t need to get prosperity at expense of other countries
      • how does this occur? for example when countries try to push their stuff off on other countries and yet import little to keep favorable balance of trade
• His idea of the mood of the times, 1936
  • “At the present moment people are unusually expectant of a more fundamental diagnosis; more particularly ready to receive it; eager to try it out, if it should be more plausible.” 383
  • Says that “economists and political philosophers…indeed the world is ruled by little else” through the “madmen in authority” who are merely “distilling their frenzy from some academic scribbler of a few years back” 383
    • So power works by “gradual encroachment of ideas” not “vested interests” (they take TIME)
      • man, boy was he right: his ideas took awhile and had a lot o’ power….