Revaluations II: Keynes’s General Theory

Like many economic classics, the General Theory of Employment, Interest and Money, published in early 1936, is an ill-organized, repetitious, and quarrelsome book. Save for occasional bravura passages on Egyptian pyramids, medieval masses for the dead, and the behavior of stock market speculators, the graceful English stylist of the Economic Consequences of the Peace and the Essays in Biography is little in evidence. On key issues Keynes was frequently either obscure or mistaken. Later theoretical discussion disproved the conception, in the General Theory, of the multiplier, the savings-investment identity, and the determination of the rate of interest. Even good Keynesians have completely discarded such novelties of the master as user cost and wage units. Shortly after it was published, gifted and orderly theorists like Oskar Lange and J. E. Meade constructed systematic mathematical models of Keynes’s theory, far superior in analytic rigor to the original. Later, Roy Harrod in England and Evsey Domar in this country shifted the interest of the profession from Keynes’s central problem, the determination of national income under static short-run conditions, to the new issue of economic growth. The econometric fraternity has enjoyed the game of creating formidable systems of economic equations, suitable for the moderately accurate forecasting of what happened a year or two earlier. The version of Keynesian doctrine to be found in Samuelson’s Economics or Ackley’s more advanced Macroeconomic Theory has about the same relation to the General Theory as the Department of Commerce’s national income estimates bear to the Physiocrats’ Tableau Economique. In short, noneconomists don’t read the General Theory because they can’t and economists don’t read it because it is hopelessly behind the times, all but pre-Keynesian.

But not a word of this judgment detracts in the least from the book’s immediate importance and continuing influence. It is given to few intellectuals to invent an important new branch of their specialty. This is precisely what Keynes achieved. Although he some-what exaggerated his own iconoclasm, although he was undeniably guilty of what Myrdal pleasantly termed unnecessary originality, Keynes and no one else forced economists to supplement their traditional emphasis upon individual prices and markets with the study of the social aggregates—savings, investment, consumption, and national income. Today the study of macroeconomics is considered to be as important as microeconomics, the study of individual prices and markets. Indeed if the survivor of an elementary economics course knows little else, he is at least aware that aggregate demand and total employment are determined by the level of total spending, and that private investment and public deficits are the strategic influences upon total spending.

The last sentence implies Keynes’s second lasting contribution, the transformation of public policy toward the treatment of unemployment. The conventional wisdom of the 1930s argued that the only certain cure for depression was wage and price reductions. Governments for their part could do nothing more wholesome than set everybody a good example by balancing their own budgets. Eminent Cambridge colleagues of Keynes testified before the Macmillan Commission in 1930 that unemployment was high because wages were excessive. Just as the French nineteenth-century follower of Adam Smith, J.-B. Say, had declared, general glut would be impossible if only free competition were allowed to work itself out in the form of reduced wages and prices.

Keynes offered public officials a sensible alternative to this frustrating counsel. He told politicians that the very policies which their instinct for political survival urged them into—larger relief allocations, public works programs, and huge deficits—were also excellent economics. In this country the Employment Act of 1946, a national commitment to public support of high employment, was one testimonial to the persuasive force of this message. Possibly the most impressive testimonial of all is the 1964 Tax Act enacted in a year of economic expansion and existing budget deficit. It is the ultimate triumph that the rational segment of the business community accepted the measure as sound public policy.

As one distinguished conservative remarked in my hearing, we are all Keynesians nowadays. The judgment contains its ironies, for Keynesian teaching has suffered the fate of other powerful messages—simplification, selection, and vulgarization. In the United States popular and political Keynesianism means little more than confidence in the stimulating impact of tax reductions. But when we go back to the General Theory we encounter three different conceptions of sound public policy. There is the conservative Keynes who thinks that if central banks increase the supply of money, interest rates will drop and business investment will rise. A beneficent multiplier process will gently waft the economy to full employment. There is also the liberal Keynes, skeptical of the efficacy of monetary policy, but certain that increases in public spending (tax cuts are scarcely mentioned) can supplement lagging private investment and restore the roses to capitalism’s pale cheeks. Finally, there is the radical Keynes so despondent about capitalism’s recuperative powers as to envisage the necessity of a “somewhat comprehensive socialization of investment.”

The Keynes whom we have selected from this cast of characters is a friendly, gentle sort who simply wants us to pay less taxes and spend more money on the good things that business enterprise abundantly produces. It is this bland and winning Keynes who is supposed to have answers to the new problems of automation, urban blight, depressed regions, and persistent poverty. They show few signs of responding. Perhaps the best comment on the belated application of a soothing version of Keynes to the wrong problems is Keynes’s own restatement, at the very end of the General Theory, of his confidence in the power of human reason:

…the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.

Today’s practical men are Keynesians. Just possibly there is a moral here that Keynes for one would have relished.