1: The General Theory

As promised, here’s the first instalment of what could be many on Keynes’ General Theory. My main purpose in writing this is to understand rather than criticise, though I’ll also flag things I have a problem with.

This first chapter is so short I can quote it in full:

I have called this book the General Theory of Employment, Interest and Money, placing the emphasis on the prefix general. The object of such a title is to contrast the character of my arguments and conclusions with those of the classical [1] theory of the subject, upon which I was brought up and which dominates the economic thought, both practical and theoretical, of the governing and academic classes of this generation, as it has for a hundred years past. I shall argue 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. Moreover, the characteristics of the special case assumed by the classical theory happen not to be those of the economic society which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience.

I’m not going to look this gift horse in the mouth by picking over it word by word. But a couple of points. First, the idiosyncratic way Keynes defines ‘classical’ economics – as everything that came before him. He is the epistemic break. It’s interesting that the footnote refers to Marx as the originator of the term:

[1] “The classical economists” was a name invented by Marx to cover Ricardo and James Mill and their predecessors, that is to say for the founders of the theory which culminated in the Ricardian economics. I have become accustomed, perhaps perpetrating a solecism, to include in “the classical school” the followers of Ricardo, those, that is to say, who adopted and perfected the theory of the Ricardian economics, including (for example) J. S. Mill, Marshall, Edgeworth and Prof. Pigou.

Marx also saw himself as the epistemic break – if he didn’t include Mill and the other post-Ricardians as ‘classical’ it was because he didn’t think they were much good, hacks in fact, not because they made a major break with Ricardo.

But generally today the epistemic break is seen to come between Mill and Marshall, and Marshall is a representative of a larger group including Walras, Jevons, Edgeworth, etc. – the marginalists. Thus ‘the marginalist revolution’. These are the people who brought the differential calculus into economics, who started with all those demand and supply curves, elasticities and equilibria, and on the whole made logical rigour more important than realism. Before them, ‘classical’, after them, ‘neoclassical’.

Keynes’ reference point is clearly the neoclassicals, but it’s interesting that he lumps Ricardo in with them. This is valid in some ways, in that Ricardo’s method was rationalist rather than empirical (more so than Marshall in fact), but his overall vision was a world apart. (Incidentally, classical revivalists of the 20th century like Joan Robinson considered Marx a classical, and meant it as a compliment. It is true that Marx had much more in common with Ricardo than with the neo-classicals, but he was also right in seeing his own work as an epistemic break with Ricardo.) I don’t want to go on about this any more, since Keynes defines ‘the postulates of the classical economists’ in the next chapter.

The other thing to note is Keynes’ characteristic lack of modesty shining through. Aren’t ‘general’ and ‘special’ theories meant to remind us of Einstein? Before the publication of the General Theory Keynes wrote to George Bernard Shaw that his book would “largely revolutionise… the way the world thinks about economic problems.”

It’s interesting, then, that he chose to limit his general theory to “employment, interest and money”, rather than ‘economics’. An awful lot of economics doesn’t fall into those categories. He seems to be signalling a focus on the monetary dimension of economics in particular, and its relationship with employment. But we’ll wait and see.