PKT message, The Coming of Keynesianism to America

Dear Paul:

First, let me thank you for suggesting - nay, insisting - that I read Colander and Landreth's book The Coming of Keynesianism to America. On a visit to the IMF Library today, I copied the sections beginning with Robert Bryce through Paul Samuelson (pp. 39-178) and, after a quick read through them, I thought I should share some of my reactions with you.

Briefly, while I was familiar with Keynes' lectures on The Monetary Theory of Production in the early 1930s (Tarshis, p. 55), I had not caught on to what strikes me as a key detail in the evolution of Keynes' thought during the three years that Tarshis attended his lectures:

"In the second year, he [Keynes] made the distinction between a cooperative economy and an entrepreneurial economy, where the workers were hired for a certain period of time, like a week, for a fixed money wage, and had no sharing profits or tenure. In the entrepreneurial economy unemployment occurs whenever demand falls off for the product of the employer. In the cooperative economy (he also called it a barter economy), by contrast, the worker is hired to share in the profits. In a cooperative economy where money played no significant role - except that of a lubricant - he called that a barter economy, you would also have no unemployment." (p. 60)

Let me pause here: What Keynes calls a "cooperative economy where money played no significant role - except that of a lubricant" is exactly the kind of economy of which John Stuart Mill wrote that "Demand for commodities is not demand for labour"; it is an economy in which Money = IOUs which Suppliers of Factor Inputs receive at one end of the Production Process for redemption in terms of Final Output at the other end.

"He mentioned that, in socialist and communist economies, you'd get the same results. He said the real explanation for the failure of the classical economists to have a sensible explanation for the Depression, which was under way, was that they were implicitly assuming a cooperative or barter economy. Even if they had money in it, it worked like a cooperative economy. Workers shared in the profits, but if each worker had a fixed share, say 1 per cent or something like that, if you were unskilled, or 2 per cent if you were skilled, then unemployment wouldn't occur. I thought that so damned exciting. I remember my feeling that "God! You have to listen to this as hard as you can. This is the most important thing you'll ever hear." And I listened so intently that, at that point, note-taking was interrupted." (pp. 60-61)

Another pause: Briefly, here Keynes screws up his analysis of the classical (Mill) kind of economy, for there is no room for any "profit" in a "cooperative economy" in which "money plays no significant role - except that of a lubricant", as indicated by Keynes use of the "barter economy" label for that kind of economy.

The like conceptual screwup was reflected earlier in The Treatise, as indicated by Tashis' comments: 'Remember the funny definition of saving in A Treatise. It's not "income minus consumption", it's "income in a special sense that excludes abnormal profits, minus consumption.'" (p. 56)

In the classical (Mill) kind of economy, there is no profit - period.

"I used to lecture on this when I was teaching macroeconomics at Stanford. I always used Keynes, and I always distinguished between the entrepreneurial and the cooperative economy. In the third year lectures Keynes dropped the distinction, and there's no reference to it in The General Theory." (p. 61)

And the rest is history!

For, if Keynes had cleared up the confusion rather than 'drop the distinction', then he would have arrived at a coherent Creditary View of Money and Production in comparison with which the defining monetary aspects of the General Theory itself would have stood out with crystal clarity.

Instead, Keynes 'dropped the distinction' insofar as substantive theoretical analysis was concerned, but re-inserted his conceptual confusion insofar as the classical (Mill) kind of economy was concerned through his unsubstantiated - and, as indicated in one of my recent postings to PKT on related issues, analytically spurious - assertion "that the postulates of the classical theory are applicable to a special case only and not to the general case, the situation which it assumes being a limiting point of the possible positions of equilibrium." (GT, Ch. 1)

And what, then, would have been the "defining monetary aspects of the General Theory itself"?

Briefly, they relate to use of New Credit Creation and associated buildup of Non-Entrepreneurial Debt to (a) ensure Net Aggregate Profits for Entrepreneurs, and (b) compensate for mal-distribution of Factor Incomes generated in the Production Process - both of which have been such marked features of the Credit Bubble World Economy during the past thirty years.

Here is Hansen to Lerner on related issues:

"I introduced Keynes and he was, since there were no newspaper people present, at his best; namely he looked to be responsible on occasions like that and say funny things. In the discussion you raised the question - this is your question - you said, "Mr Keynes, why don't we forget about all this business of fiscal policy, public debt and all those kinds, and have some printing presses?" To which Keynes made this reply: "It's the art of statesmanship to tell lies, but they must be plausible lies." This was supposed to squelch you for the evening and, as a matter of fact, you said nothing more." (p. 107)

Keynes' response would seem to accord perfectly with my "translation" - that is, reading between the lines - of the General Theory's Preface, which I posted to Gang8 and PKT some time ago.

Finally, I was very pleased to see Lerner's report on the following exchange:

"Keynes was worried about there not being enough investment or - he put it in his language - too much saving. I asked why we should have to worry about that: if you give people enough money they will spend more and then there will be enough spending; there's no need for any depression if you're prepared to give them more money. So he asked where would you get the extra money and I didn't say, "the printing press". I said you could borrow it. He said, you mean the national debt will keep on growing, and I said yes. "What would happen?" I said - nothing. So we talked for a moment and he said: "No, that's humbug" - that's the word he used, humbug - "the national debt can't keep on growing." And that was again when we had the same sort of "click" I was just talking about; that was the end of the discussion." (pp. 108-109)

[Re. the "click": "Keynes was a man who had a limited amount of patience that he used liberally up to a certain point, after which you could hear a sort of click as if he had said: "Well I have listened enough to this and it is not worth spending any more time on it." After we heard that click we must have been so discouraged that for many years later we didn't think about it or talk about it." p. 93]

And, to conclude, here is my own 'report' on a beyond-the-grave 'conversation' between Keynes and Samuelson:

Keynes: "You mean the national debt will keep on growing?"

Samuelson: Hold it! "Could a nation fanatically addicted to deficit spending pursue such a policy for the rest of our lives and beyond? Study of the mechanics of banking and income determination suggests that the barrier to this would not be financial." (Economics, 1976, p. 370)

Keynes: Click! "No, that's humbug, the national debt can't keep on growing."

Gunnar