Keynes and Einstein

["RICHARD P.F. HOLT" <holtri@xxxxxxxxxxxxx>]

>From James K. Galbraith
> SUBJECT: KEYNES AND EINSTEIN: TWO GENERAL THEORIES
> Note to Readers of PKT and other interested parties: This article
> is forthcoming in the Winter 1994 issue of THE AMERICAN PROSPECT.
> It is Copyright 1994, by The American Prospect. It is transmitted
> over the Internet by permission, as a matter of possible interest.
> Permission is also granted to make copies for classroom and other
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> provided that this notice accompanies all copies.  Please let me
> have your comments. Thanks. JG.
> ********************
>
>            KEYNES, EINSTEIN AND SCIENTIFIC REVOLUTION
>                                by
>                        James K. Galbraith
>
>      One of the most intriguing and little-noted facts about John
> Maynard Keynes' masterwork, The General Theory of Employment
> Interest and Money, concerns the first three words of its title.
> These are evidently cribbed from Albert Einstein.* Alone that would
> be only a curiosum; but there is more. The parallels between
> Keynes' economics and relativity theory are deep enough, and
> evidently intentional enough, to provide a useful framework for
> thinking about what Keynes meant to do with his scientific
> revolution.
>
>      Keynes and Einstein had met. Keynes traveled to Berlin in 1926
> to lecture; Einstein attended. Keynes' impressions were not
> published until 1972:
>
>      Wordsworth, who had not seen him, wrote of Newton's
>      statue: `The marble index of a mind for ever Voyaging
>      through strange seas of Thought, alone.' I, who have seen
>      Einstein, have to record something apparently " perhaps
>      not really different " that he is 'a naughty boy', a
>      naughty Jew-boy, covered with ink, pulling a long nose as
>      the world kicks his bottom; a sweet imp, pure and
>      giggling.  (Collected Writings, Vol. X, p. 382.)
>
>      A second reference appears in The New Statesman and Nation of
> 21 October 1933. For this issue, Keynes prepared a short commentary
> to accompany a sketch by the artist Low, of Albert Einstein. The
> playful imagery is now gone, Keynes was by this time becoming a
> champion of Jewish refugees. Now, to Keynes' eye, Low's drawing
> evokes an Einstein under attack. Keynes quotes Einstein in the
> German:
>
>      Assuredly you too, dear reader, made acquaintance as boy
>      or girl with the proud edifice of Euclid's geometry "
>      thus begins the 'Essay on the Special and General Theory
>      of Relativity' " Assuredly by force of this bit of your
>      past you would beat with contempt anyone who casts doubts
>      on even the most out of the way fragment of any of its
>      propositions." It is so indeed. The boys, who cannot grow
>      up to adult human nature, are beating the prophets of the
>      ancient race " Marx, Freud, Einstein..." (Collected
>      Writings, Vol. XXVIII, p. 21)
>
>      The first extant complete table of contents of Keynes' next
> book, then titled simply The General Theory of Employment, was
> found in a bundle of papers dated December 1933. (Collected
> Writings, Vol. XIII, p. 421). In the first proofs of that book
> there is a sentence, deleted from later proofs, that occurs exactly
> at the point where Keynes declares that the classical theory cannot
> be applied to the problem of unemployment, and just before this
> passage:
>
>      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 " as the only remedy for
>      the unfortunate collisions which are occurring. Yet, in
>      truth, there is no remedy except to throw over the axiom
>      of parallels and to work out a non-Euclidean geometry.
>      Something similar is required in economics.
>
> The deleted sentence reads,  "We require, therefore, to work out a
> more general theory than the classical theory." (Collected
> Writings, Vol XIV, p. 366)
>
>      Mark Twain writes somewhere that "some circumstantial evidence
> is very strong, as when you find a trout in the milk."
>
>      But what, if anything, does it mean?
>
> NEWTON'S PHYSICS AND CLASSICAL ECONOMICS
>
>      Albert Einstein came of age in a world where the classical
> physics of Sir Isaac Newton still reigned. Two features of Newton's
> worldview are pertinent to understanding the classical economics
> that Keynes meant to attack.
>
>      The first is that Newton's physics presupposes an absolute
> separation of space and time. Space is Euclidean: a three-
> dimensional void stretching infinitely in all directions. The
> position of any particle in space can be defined, by means of a
> system of coordinates, with respect to any observer or any fixed
> reference point. Motion is the displacement of the particle from
> one position to another. Velocity is motion, divided by the number
> of ticks on a clock that it takes for the motion to occur. The
> clock that is used to measure velocity lies, in a conceptual sense,
> outside the universe itself. In other words, all observers of an
> event, provided they were equipped with accurate timepieces, no
> matter where they might be, would always agree on the exact time
> that the event occurred. Newton imagined time as an absolutely
> regular phenomenon that could not depend on the location of the
> clock or be affected by its movement or any other physical force.
>
>      The second feature is reductionism: Newton's universe was
> neither more nor less than the sum of its component particles.
> Gravity in Newton's system is the basic force exerted by one
> massive body on any other. Gravity produces the acceleration of a
> particle in space, according to the position and mass of all other
> particles in the universe that exert gravitational force. And, in
> Newton's view, this interaction of each particle on every other is
> all there is. Once you knew the position, mass, direction and
> velocity of every particle in the universe, you would not need to
> know anything else. Every future event would be fully determined by
> the laws of motion.
>
>      Without going into great detail, it is possible to trace out
> the role of each of the above features in the Classical economics
> of Keynes' time and -- in modern neo-Classical economics.
> The analog of space is the market. Look at any supply and demand
> diagram. The graph itself is a two-dimensional space. Every point
> on the graph is a position defined uniquely with respect to the
> origin. The relationships between variables are presented as forces
> in this space: in the labor market, demand aligns wages and
> employment in a downward sloping relation; supply aligns them along
> an upward slope. If two curves cross in that space, their point of
> intersection is an equilibrium position, where the forces balance
> and the market clears.
>
>      The analog of Newtonian time, in the classical economics, is
> money. Just as time is absolutely separated from space, money is
> absolutely separated from the market. Prices and wages may be
> measured in money terms, but this is only a convenience. The prices
> that count are  relative prices -- prices in relation to the prices
> of other goods. The wages measured in a proper labor market are
> real wages-- an hour's work in terms of the commodities that an
> hour of work can purchase. Like time, money is an invariable
> standard. And just as it does not matter whether one measures time
> in seconds or in hours, or from Andromeda or Cassiopeia, it does
> not matter whether one measures prices in dollars or dimes, in
> pesos or yen, or in dollars of 1958 or dollars of 1993. The
> quantity of money has no effect on the equilibrium of the market;
> nothing  real depends on money in any important way.
>
>      The reductionism of Newton's system is equally fundamental to
> the classical economics -- and remains so today. Economists are
> taught that societies, like Newton's universe, are nothing more
> than the sum of their individual components. Macroeconomic
> expressions, though they purport to describe the behavior of
> society as a whole, are only a shorthand for the mass of
> individual human actions. In principle, therefore, the best
> macroeconomics would be built strictly and rigidly from the theory
> of individual behavior, or  micro-foundations. If there are
> operational difficulties with this, they must lie mainly in the
> difficulty of acquiring all the information that is necessary about
> all of the individuals whose preferences and behavior must be
> considered. Fundamental difficulties of theory do not arise.
>
> EINSTEIN AND NEWTON'S MECHANICS.
>
>      By the time Keynes came along, the Newtonian view of the
> physical universe had crumbled. Einstein's theories of relativity
> had done it in.
>
>      The absolute separation of time and space collapsed with
> Einstein's introduction of a new universal constant, the speed of
> light. If light traveled through empty space, everywhere and always
> and irrespective of the direction and velocity of the observer (as
> Einstein argued and experiments have confirmed) at the same
> identical speed (186,000 miles per second), then the absolute
> simultaneity of two or more very distant events could no longer be
> defined. Clocks in different places will record these events at
> different times, and none is more correct than any other. Moreover,
> Einstein showed that space and time were interrelated " time itself
> advances more slowly near massive bodies than it does in empty
> space.
>
>      Furthermore, this newly unified concept, space-time, also
> destroyed the Euclidean concept of emptiness extending forever in
> all directions. Space-time is curved, and Einstein's relativity is
> the extension of the Riemannian geometry of curved spaces to the
> physical universe. Near any massive body the shortest distance
> between two points curves around it (as does the path of a ray of
> light, a point verified by experiment). For this reason, parallel
> lines may meet if extended far enough. (Keynes' reference to
> overthrowing Euclid's  axiom of parallels is an unmistakeable
> allusion to this feature of Einstein's theory.)
>
>      But if space-time is curved by the presence of matter, then
> the shortest distance between two points is no longer defined
> independently of the distribution of matter in space. And then the
> system is no longer reducible to its elements; you can no longer
> get to the whole merely by adding up the parts. The universe is,
> instead, more easily and more correctly understood by looking at
> the whole and placing the parts within it. The whole can impose
> rules on the parts: in a famous phrase "space tells matter how to
> move; matter tells space how to curve."
>
> RELATIVITY THEORY AND  MONETARY PRODUCTION ECONOMICS
>
>      When Keynes wrote his General Theory, he had in his gunsights
> -- I shall argue -- both Newton's reductionism and his space-time
> dichotomy, as both were reflected in the Classical economics.
> First, Keynes sought to disestablish the  absolute space of
> classical markets, and to end the separation of markets from the
> world of money. Keynes characterized his theory as a  monetary
> theory of production, giving lectures on this subject in the fall
> of 1933 as the General Theory of Employment (the preliminary title)
> was taking shape. Keynes contrasted monetary-production economics
> with what he called the  real-exchange economics of the classical
> view. In so doing, he broke down the traditional non-monetary
> concepts of a  labor market and a  capital market, suffusing both
> of these subjects with ideas --  effective demand and liquidity
> preference -- that cannot be conceived of properly except in
> monetary terms.
>
>      Monetary-production is Keynes' space-time: the marriage of
> conceptual domains previously held to be distinct. In the classical
> theory of the labor market, for example, Keynes found a  first
> postulatewhich held that the demand for labor would rise when real
> wages fell, and vice versa. This was a consequence of the principle
> of diminishing returns, and an idea that Keynes did not choose (at
> that time) to dispute. But the idea that demand for labor rises as
> wages fall cannot, by itself, establish either the actual level of
> employment or the value of the real wage.
>
>      The Classics had closed their model with a second postulate,
> which held that work-time offered would increase when real wages
> rose. This second postulate was precisely that part of the
> classical vision that reduced unemployment to a matter of
> individual decision. If a person was apparently unemployed, it
> should always be possible for him or her either to find work, or
> else to eliminate the desire to work and therefore the appearance
> of unemployment, by sufficiently cutting the wage.
>
>      For Keynes, this second postulate, the  upward-sloping supply
> curve of labor, was akin to the axiom of parallels in Euclid's
> geometry. It should likewise be rejected. In doing so, Keynes threw
> over not only the supply curve of labor but also the whole idea of
> a self-contained labor market in the normal supply-and-demand
> sense, a construct in which real wages and employment could be
> modeled together as though one depended directly on the other. In
> its place, Keynes offered the now-familiar, but then revolutionary,
> idea that employment was determined by effective monetary demand
> for output. Since there was no reason why the total demand for
> output would necessarily correspond to high or full employment,
> involuntary unemployment in the strict sensewould now be possible
> in economics.
>
>      But what would determine effective demand? Such demand could
> be divided into two major elements: the consumption demand of
> households, and the investment demands of business. Here Keynes'
> reasoning led him to dismantle the second metaphorical classical,
> supply-and-demand market, namely the capital market. In the
> classical theory, the supply of and demand for capital jointly
> determined a quantity, namely the total volume of savings and
> investment, and a price, namely the rate of interest.
> Investment was demanded by firms, with more being demanded at low
> interest rates than at high. Savings was supplied by individuals,
> with more being supplied at high interest than at low. Thus a
> market for capital determined how much of current output would be
> consumed, and how much saved and invested. This market, it should
> be noted, operated wholly apart from the determination of output.
> Investment and savings did not affect employment and output, but
> only the division of output between current consumption and capital
> formation.
>
>      Here again, Keynes' attacked the supply curve. Savings, he
> proposed, had nothing to do with the interest rate. They were,
> instead, merely the leftovers after consumption out of income.
> Investment, he believed, did depend on the interest rate. But a
> curve of investment demand alone could not determine both the
> volume of investment and the rate of interest. Keynes now needed an
> independent theory of the interest rate.
>
>      To get an interest rate, Keynes brought in a new market, up to
> that point largely ignored in economics: the market for debt
> instruments and, in particular, for money. Interest, he proposed,
> was not a reward for saving, but the reward for giving up the
> liquidity, the easy access to immediate purchasing power, that
> could be had by holding money. As anyone who has bought a bond or
> a CD knows, the longer the term (the greater the liquidity
> foregone), the higher the rate of interest. Keynes argued that the
> interest rate thus reconciled the supply of liquidity (quantity of
> money) with the demand for it. And in Keynes' new sequence, the
> interest rate determined in the money market in turn determined the
> volume of investment.
>
>      To complete his theory, Keynes tied these elements together.
> The market for money determined interest. Interest (together with
> the state of business confidence) determined investment.
> Investment, alongside consumption, determined effective demand for
> output. Demand for output determined output and employment.
> Consumption out of incomes determined savings. Employment
> determined the real wage.
>
>      In this world, a change in monetary policy, such as a cut in
> interest rates leading to an increase in bank credit, now had
> fundamental real consequences. The classical dichotomy, in
> economics as in physics, had been broken. And with the
> deconstruction of labor and capital markets, the reductionist idea
> of microfoundations had also necessarily to be abandoned. Workers,
> Keynes pointed out, bargain for money wages, not real wages. The
> act of dropping money wages would generate feedbacks through
> previously unrecognized -- monetary -- channels in the system. In
> particular, prices would fall, and real wages (the ratio of wages
> to prices) would therefore not necessarily change. Falling prices
> might, however, depress business profit expectations and so cut
> into demand for investment. This would actually reduce the demand
> for workers and prevent total employment from rising. The system
> interacts with itself, and an equilibrium of full employment cannot
> be achieved within the labor market. Economic space-time is curved.
>
> CONSEQUENCES
>
>      In the long run, Keynes did not achieve what he hoped. His
> parallel to Einstein went virtually unnoticed. Lawrence Klein,
> writing an early interpretation in his 1947 work, The Keynesian
> Revolution, did emphasize Keynes' attacks on microeconomic supply
> curves. But in the United States the prevailing view became that of
> Paul Samuelson, who transposed Keynes' unemployment theory into the
> proposition that  wages are "sticky." In this interpretation,
> unemployment occurs simply because labor markets, characterized by
> supply and demand curves just as in the good old days, do not
> clear. What Samuelson did -- and he is, I think, too good a student
> of physics not to have known it -- was to push the daemon of
> Keynesian relativity back into its box. And modern American
> Keynesians, even down to the New  Keynesians presently in fashion
> around Harvard, MIT, Princeton and the Council of Economic
> Advisers, are Newtonian and Samuelsonian to the core (though with
> a touch of Von Neumann thrown in nowadays). As such, they have
> denied themselves the high ground of principle Keynes sought to
> claim, conceding an enormous advantage to classical free market
> conservatives on every important policy matter.
>
>      Too bad. For one cannot say, as one can with Newtonian
> physics, that Newtonian economics is good enough for practical
> situations. The scale of the whole, in the economic case, is not
> that of the universe or the solar system; it is merely that of the
> nation state or the global region. Interdependence afflicts us all.
> The global irrationality of wage cutting, American budget
> balancing, zero-inflation Federal Reserve targets and Third World
> austerity programs is an everyday occurrence. The failure of
> Keynesian macroeconomics to establish full theoretical independence
> from the classical labor market and the classical neutrality of
> money means that we are, in effect, now denied fair discussion of
> Keynesian solutions to policy problems. The end result is that we
> cannot cope now, any more than could the classics in their day,
> with stagnation and involuntary unemployment.
>
> *****************
> FOOTNOTE TO PAGE ONE
>
> * This point was first made to me in private conversation by Robert
> Skidelsky. The economists Ching-Yao Hsieh and Meng-Hua Ye devote a
> short chapter in their excellent book to relativity and economics,
> stating it would not be an exaggeration to assert that Keynes's
> theory of involuntaryunemployment was inspired by Einstein. They do
> not, however, explore the parallelism between space-time and
> monetary production. Nor does Skidelsky, who discusses the Einstein
> link in his second volume on Keynes. Philip Mirowski, whose 1989
> book More Heat that Light is a fundamental treatment of the
> relationship between physics and economics, also leaves out the
> Keynes-Einstein tale.
>
> ******************
> REFERENCES
>
> Ching-Yao Hsieh and Meng-Hua Ye, Economics, Philosophy and Physics,
> Armonk, ME Sharpe 1991.
>
> Lawrence Klein, The Keynesian Revolution, New York: MacMillan,
> 1947.
>
> Axel Leijonhufvud, On Keynesian Economics and the Economics of
> Keynes, New York: Oxford University Press, 1968.
> Philip Mirowski, More Heat Than Light: Economics as Social Physics,
> Physics as Nature's Economics, Cambridge: Cambridge University
> Press, 1989.
>
> Robert Skidelsky, John Maynard Keynes: The Economist as Saviour,
> 1920-1937, London: MacMillan, 1993.
>
> *****************
>
> James K. Galbraith is co-author with William Darity, jr. of
> Macroeconomics, a new textbook from Houghton-Mifflin. This article
> will be published in the Winter 1994 issue of The American
> Prospect. Comments are welcome, and may be sent directly to the
> author at GALBRAITH.JAMES@xxxxxxxxxxxxxxxxxxx
>