PKT message, Keynes' Monetary Thought

After working my way through Keynes in the late 1970s, I concluded that the dichotomy in his monetary thought pre- and post-early 1930s was apparent rather than real.

In his Preface to the General Theory, Keynes addressed related issues as follows:

"The relation between this book and my Treatise on Money, which I published five years ago, is probably clearer to myself that it will be to others; and what in my own mind is a natural evolution in a line of thought which I have been pursuing for several years, may sometimes strike the reader as a confusing change of view. This difficulty is not made less by certain changes in terminology which I have felt compelled to make. These changes of language I have pointed out in the course of the following pages; but the general relationship between the two books can be expressed briefly as follows. When I began writing my Treatise on Money I was still moving along the traditional lines of regarding the influence of money as something so to speak separate from the general theory of supply and demand. When I finished it, I had made some progress towards pushing monetary theory back to becoming a theory of output as a whole. But my lack of emanciation from preconceived ideas showed itself in what now seems to me to be the outstanding fault of the theoretical parts of that work (namely, Books III and IV), that I failed to deal thoroughly with the effects of *changes* in the level of output. My so-called "fundamental equations" were an instantaneous picture taken on the assumption of a given output. They attempted to show HOW, assuming the given output, FORCES COULD DEVELOP WHICH INVOLVED A PROFIT-DISEQUILIBRIUM, and thus required a change in the level of output. But the dynamic development, as distinct from the instantaneous picture, was left incomplete and extremely confused. This book, on the other hand, has evolved into what is primarily a study of the forces which determine changes in the scale of output and employment as a whole; and WHILST IT IS FOUND THAT MONEY ENTERS INTO THE ECONOMIC SCHEME IN AN ESSENTIAL AND PECULIAR MANNER, TECHNICAL MONETARY DETAIL FALLS INTO THE BACKGROUND. A monetary economy, we shall find, is essentially one in which changing views about the future are capable of influencing the quantity of employment and not merely its direction. But our method of analysing the economic behaviour of the present under the influence of changing ideas about the future is one which depends on the interaction of supply and demand, and is in this way linked up with our fundamental theory of value. WE ARE THUS LED TO A MORE GENERAL THEORY, WHICH INCLUDES THE CLASSICAL THEORY with which we are familiar, AS A SPECIAL CASE."

Here is my construction of Keynes' thinking on related issues.

1. By his own admission, Keynes had become disillusioned with key parts of the Treatise even before he had finished writing it - he KNEW there was a problem but, as would later become apparent in the General Theory, Keynes did NOT KNOW the precise nature of the problem.

2. Thus, "what seem[ed] to [him] to be the outstanding fault of the theoretical parts of that work" - abstracting from *changes* in the level of output - was strictly SECONDARY to what I regard as the PRIMARY fault in the Treatise on Money, namely, Keynes' failure to recognize that NET entrepreneurial PROFITS are necessarily EXOGENOUS in a Say's Law/Circular Flow view of entrepreneurial production in a monetary economy.

3. In due course, this failure gave rise to what I regard as the two lamest points in the General Theory itself: (i) Keynes' attack on Say's Law defined as a "significant but not clearly defined" something (Ch. 2); and (ii) his obfuscatory 'definition' of his old Treatise nemesis or entrepreneurial PROFITS, of which Keynes wrote that "entrepreneurs will endeavour to fix the amount of employment at the level which they expect to maximise the excess of the [final output sale] proceeds over the factor cost." (Ch. 3)

4. Keynes then went on to state: "Thus the volume of employment is given by the point of intersection between the aggregate demand function and the aggregate supply function; for it is at this point that the entrepreneurs' expectation of profits will be maximised...Since this is the substance of the General Theory of Employment...."

5. In the Say's Law/Circular Flow scheme of things, entrepreneurial "expectations" are immaterial in the sense that geometers' "expectations" that the three angles of a Euclidean triangle may not add up to 180 degrees have no bearing on the point at issue - in both cases, the attributes of the conceptual scheme in question are wholly independent of "expectations" and other psychological variables.

6. And how does all this relate to the "apparent dichotomy" aspect of Keynes monetary ideas pre- and post-1930?

7. Briefly, BOTH the Treatise and the General Theory represented attempts by Keynes to construct coherent monetary ideas on the analytical foundations provided by Say's Law become the Circular Flow Approach to monetary analysis - in BOTH cases, failure to recognize NET entrepreneurial PROFITS as exogenous to the Says' Law become the Circular Flow Approach to monetary analysis led Keynes into an analytical quagmire from which the economics profession has yet to extricate itself.

Gunnar