PKT message, The General Theory

The following may be of interest.

Gunnar

In a recent exchange, a fellow Gang8 member made the following statement:

Missing from [Keynes's] intellectual legacy is any coherent theory of interest rates. It is widely agreed in the Gang that interest rates have the opposite effect on inflation from that fondly believed by most central bankers around the world.

I responded as follows:

Not so!

Here is Keynes in Ch. 24 of the General Theory - Concluding Notes Of The Social Philosophy Towards Which The General Theory Might Lead - on the subject matter:

"The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes....

"I feel sure that the demand for capital is strictly limited in the sense that it would not be difficult to increase the stock of capital up to a point where its marginal efficiency had fallen to a very low figure. [Sorry about that - this whole line of reasoning is analytical nonsense, but Keynes makes amends at the end of his discussion. So read on - insert Gunnar]. This would not mean that the use of capital instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment. In short, the aggregate return from durable goods in the course of their life would, as in the case of short-lived goods, just cover their labour-costs of production plus an allowance for risk and the costs of skill and supervision. [Hear, hear! - now Keynes is back on the track which leads inexorably to the following - again, read on.]

"Now, though this state of affairs would be quite 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. [Which, of course, is zero, considering that there is no inherent reason why would-be entrepreneurs could not issue IOUs in whatever amount they needed to undertake worthwhile investment projects. With this, Keynes puts all analytical nonsense behind and tells it like it is.] Interest to-day rewards no genuine sacrifice, and more than does the rent of land."

My fellow Gang8 member responded as follows:

Those bits from Keynes which you quote mix nonsense with sense often within the same sentence. He was not a clear-thinking genius. Again, his vocubulary is so ornate one loses the thread. In short, he may have HAD a coherent theory of interest rates in his head, but that's where it stayed. It did NOT become part of his earthly legacy.

My response - termed "The Tomasson Summation Of Keynes" by a third Gang8 member - follows:

"The writer of a book such as this," Keynes wrote in Preface to the General Theory, "treading along unfamiliar paths, is extremely dependent on criticism and conversation if he is to avoid an undue proportion of mistakes. It is astonishing what foolish things one can temporarily believe if one thinks too long alone, particularly in economics (along with the other moral sciences), where it is often impossible to bring one's ideas to a conclusive test either formal or experimental. In this book, even more perhaps than in writing my Treatise on Money, I have depended on the constant advice and constructive criticism of Mr. R. F. Kahn. There is a great deal in this book which would not have taken the shape it has except at his suggestion. I have also had much help from Mrs. Joan Robinson, Mr. R. G. Hawtrey and Mr. R. F. Harrod, who have read the whole of the proof-sheets...

"The composition of this book has been for the author a long struggle of escape, and so must the reading of it be for most readers if the author's assault upon them is to be successful, - 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, for those brought up as most of us have been, into every corner of our minds."

Here is my "translation":

I had an "extremely simple" idea - that maldistribution of income generated in the production process can cause demand to fall short of supply of final output, setting in motion a downward spiral of increased unemployment, incomes and demand - which made no sense to my neo-classical (automatic-full-employment) Cambridge peers.

With so much at stake (how to end the world depression and save the market-alternative to the soviet system), I decided to sell my idea to my Cambridge peers (and, through them, to policy makers) by inviting them to become, as it were, co-authors of this book. In the process, I co-opted their "analytical" approach and, as chief author, tailored it Cinderella Step-mother fashion, to serve a pre-determined end, namely, promotion of my "extremely simple" idea.

And, while the result may be a pig's breakfast of an economic model, it may give academics and policy-makers around the world an excuse to do the right thing and use the monetary mechanism to inflate aggregated demand from the world-economy-depressing levels of recent years.

Later, when this immediate objective has been accomplished, I plan to resume my long-standing effort at re-educating my Cambridge peers in analytical economics viewed as "an apparatus of the mind, a technique of thinking" as I put it in 1922 - at shepherding them away "from [their] habitual modes of thought and _expression_".

Gunnar

The General Theory - An Interpretation