New MR book club – Keynes’s *General Theory*

by on November 30, 2008 at 12:38 pm in Books | Permalink

Greg Mankiw wrote:

If you were going to turn to only one economist to understand the
problems facing the economy, there is little doubt that the economist
would be John Maynard Keynes. Although Keynes died more than a
half-century ago, his diagnosis of recessions and depressions remains
the foundation of modern macroeconomics. His insights go a long way
toward explaining the challenges we now confront.

I will go through the book, chapter by chapter, with an eye toward a deeper understanding of what Keynes wrote and why it is, as Greg says, so important.  I’m not yet sure what kind of pace I can maintain but order your copy here, nowThe Kindle version is only $3.96.  We’ll do chapters 1 and 2 by next Monday, eight days from now.

stanfo November 30, 2008 at 12:44 pm

Sweet!

JSK November 30, 2008 at 1:06 pm

Cool! Count me in.

Steve November 30, 2008 at 1:31 pm

Very nice. I’m going to head out to the bookstore soon and get my copy.

ortega November 30, 2008 at 1:42 pm

Already reading !

Speedmaster November 30, 2008 at 2:14 pm

Looking forward to it, thanks.

Jeff H. November 30, 2008 at 2:23 pm

Oh frabjous day! Callooh! Callay!

Pearl November 30, 2008 at 3:14 pm

Don’t forget to include Hazlitt’s ” The Failure of New Economics”.

bob mcmanus November 30, 2008 at 3:53 pm

“Ben Graham exhibited his own particular variant of the
“ man with a hammer † syndrome. His valuation approach was essentially
a static one, concentrating mainly on the value of a company ’ s physical
assets.” …

Keynes, like Warren Buffett after him, practiced a more dynamic
valuation methodology — one focused on projected earnings accruing
to a particular fi rm. The notional tool used in this type of analysis is the
“ dividend discount model. † This model states that the intrinsic value of
a given security is determined by the stream of its prospective dividend
payments over time, discounted back to a present value.”…Justyn Walsh, op cit

I think this difference is in the GT. Tyler’s Book Club can make you rich!

Ylight November 30, 2008 at 5:39 pm

Count me in!!
I started it and couldn’t make heads or tails of it alone.

desirae November 30, 2008 at 6:20 pm

THANK YOU SHEETWISE.

I’m with you. Keynesian economics is just what the government thinks is great because it begins and ends with them in control of the wealth.

Alan Brown November 30, 2008 at 6:24 pm

I totally agree, SheetWise.

It seems to me Keynes believed inflation created economic growth.

Not true, in my opinion. Inflation simply steals growth from the future. At some point, you pay the price. Some point is now, it seems.

And its not good growth. The investments made feasible by lower than normal rates are investments that wouldn’t otherwise make sense.

So wasted capital is the result, especially when things finally turn and those investments sour. Gee, does that ever really happen??

And wasted capital isn’t even the worst of it. The instability and deflation that can result are also quite a problem, not to mention the total destruction of the middle class when inflation runs wild.

Of course, its never too late to return to an honest dollar.

If you want to read someone that understands the evils of inflation, read Jude Wanniski’s The Way The World Works.

notedscholar November 30, 2008 at 6:25 pm

I have this book and let me tell you: DENSE. It is full of equations and old-fashioned talk.

But it is clearly the work of a genius.

In my view, an out-of-date genius. I’d prefer Galbraith’s seminal work on the Crash of 1929.

NS
http://sciencedefeated.wordpress.com/

Bill Stepp November 30, 2008 at 6:29 pm

Don’t miss this line from the preface to the German edition:

Nevertheless the theory of output as a whole, which is what the following book purports to provide, is
much more easily adapted to the conditions of a totalitarian state, than is the theory of the production
and distribution of a given output produced under conditions of free competition and a large measure of
laissez-faire.

____
That’s why Keynesians are whooping up the alleged return of depression economics, so they can pretend for a moment that they have all the answers, that the market doesn’t work and indeed was the cause of the problem, and that they can go on to mold the economy (as opposed to the catallaxy) in whatever way their hearts’ desire determines. If and when inflation heats up, courtesy of a massive increase in the monetary base, don’t look for the latest Nobel winner to remind his readers that he had predicted deflation.

Martin November 30, 2008 at 6:44 pm

My mother graduated from college in 1943 with a BA in economics and went looking for a job with the government in Washington. She told me she carried a copy of the General Theory along with her to read while waiting for interviews to start and, that, while she did not get very far in the book, it really impressed interviewers. (She ended up in the Treasury Department, supervising the cash of the Lippenzaner horses, the Trapp Family Singers, and other interesting refugees from enemy economic zones.)

steve November 30, 2008 at 7:35 pm

I’ve read this book more times than any other book. Bring it the **** on.

Bob Murphy November 30, 2008 at 8:00 pm

Tyler,

A great idea. I tried going through large sections of the GT in my second semester of the History of Economic Thought, but I found it was a bit too much for the students. Every time I taught it, I ended up assigning less and less of it, on the theory that it was better if half the class read 10 pages than if 25% of the class read 20 pages.

Having said, I must ask: Do you agree with Mankiw’s endorsement? I agree that one needs to read the GT to understand what Krugman et al are talking about, but in my opinion this is a task of understanding the source of their confusion, not their profundity.

So, do you think recessions are “about” insufficient demand?

George Selgin November 30, 2008 at 8:15 pm

Although it’s somewhat obscure, the book that tops my list of critical evaluations of the _General Theory_ is _The Economics of Illusion_, a collection of essays by German economist L. Albert Hahn. Had people paid attention to them when they first appeared, there need never have been a “new classical” revival, for Hahn already said most of what needed saying.

Personally, I don’t like the GT. It turned the economics profession away from the far richer macroeconomics of Hayek, Robertson, Myrdal, and other neo-Wicksellians (including the Keynes of the _Treatise on Money_) and thereby substituted mere obscurity for genuine subtlety and innovativeness. (For more on the unfortunate detour see Meir Kohn’s paper, “Monetary Analysis, the Equilibrium Method, and Keynes’s ‘General Theory’” JPE 1986 and Leland Yeager, “The Keynesian Diversion” in idem., _The Fluttering Veil_.)

In fact, there’s nothing very subtle about the core of the GT: understanding it is largely a matter of recognizing the premise (unstated, of course) on which its arguments rest, namely, that the economy being considered is one in which money alone is in short supply, and all other goods are superabundant. Not an absurd description of the state of things ca. 1936, to be sure; but why call it a “general” theory? And why all the terminological beating-around-the-bush?

That Mankiw can’t think of a better book to help us out of the present crisis is truly disconcerting. In recommending it Mankiw appears to buy into the canned history of macroeconomic thought that has come down to us from Keynes’s devoted followers and, ultimately from Keynes himself, with its claim that everyone prior to 1936 believed in a version of Say’s law that ruled out the very possibility of a depression due to lack of means of exchange. Anyone willing to be disabused of this nonsense is encouraged to have a closer look at what those terrible classical economists actually wrote–look, for instance, at G.P. Scropes’ discussion of the possibility of a “general glut” in his 1833 _Principles of Political Economy_, pp. 212-16. I dare anyone to find four equally comprehensible, or more pertinent, pages in the whole of Keynes’s book.

Robert Wenzel November 30, 2008 at 9:49 pm

@ bob mcmanus

Keynes as a great investor. This is a joke right?

Keynes made money in the stock market before 1929, just like current day house flippers made money until the subprime crisis.

Keynes lost his shirt in the market in 1929. He never saw it coming.

He only made his money back by buying gold stocks in the 1930′s. READ THAT AGAIN: Keynes re-couped his money by buying gold stocks at a time when there was an overall deflation and all commodties were crashing including gold. Gold stopped its descent only because FDR put a floor under gold and then raised the floor!!

FDR did this at the egging on of Bernard Baruch who closed out his famous short positions before the crash. Baruch also made his big money by buying gold stocks before FDR put a floor on the gold price and then raised the floor–all while Baruch was advising FDR to do so.

My very strung hunch is that Baruch tipped off Keynes. Without this knowledge there was zero reason for Keynes to buy gold, especially for some one who was as anti-gold as Keynes.

Baruch and Keynes REALLY made their money the old fashion way, they traded on inside knowledge of government manipulation of the markets.

Enrique November 30, 2008 at 11:06 pm

Awesome. As a young econ undergrad I’m very glad you are doing this and will be reading along with you.

Barkley Rosser December 1, 2008 at 2:17 am

Hmmm. I can see that there is a need for this seminar. A lot of people making remarks here about Keynes do not know what they are talking about.

Sheetwise,

Keynes did not support central planning, certainly not of the command sort. In his _The End of Laissez Faire_, written well before the GT, he was the first person to propose what has since come to be called “indicative planning,” used by the Japanese, the French, the South Koreans, and some others, but now largely abandoned. But he never supported Soviet or German style command planning. He says nothing about it in the GT, unless you want to call his vague recommendation in the last chapter for a “socialization of investment” such a call, with that line not followed up on in any detail, and open to a variety of interpretations.

Alan Brown,

Keynes did not support inflation. Where did you get that idea from? Presumably a self-styled critic of Keynes. You will not find praise or advocacy of inflation in the GT. During WW II, Keynes spent a lot of time worrying about keeping inflation under control in the UK.

I might note here also that while lots of people call deficit spending “Keynesian,” he was not a big fan of it either. It must be kept in mind that the context in which Keynes wrote was one in which usually the British government ran budget surpluses. So, his advocacy of fiscal stimuli was for allowing a decline of those surpluses during recessions.

David Tomlin December 1, 2008 at 2:50 am

If I understand correctly, Keynes, or his disciples, at first thought that monetary expansion would not cause inflation as long as there was significant (more than ‘frictional’) unemployment. When that turned out to be false, the theory was patched by adding the ‘Phillips curve’, positing a trade-off between inflation and unemployment. But both inflation and unemployment continued to rise, and the term ‘stagflation’ was coined.

After that ‘supply side’ became the rage, and liberal pundits could fill their columns by attacking the supply siders instead of defending Keynes. For a long time, until recently, we just didn’t hear much about Keynes.

I suppose Keynesian economists came up with another patch to account for stagflation, but it can’t have gotten much public discussion.

Matt Simpson December 1, 2008 at 3:28 am

Couldn’t you wait until after finals? I’ve had this one sitting on my bookshelf ever since you announced the first book club and mentioned that the General Theory would be one of the books you would do. No time for reading right now though.

datadave December 1, 2008 at 9:13 am

I am trying to fathom why Keynes isn’t as well known as he should be within the Economic profession. I thought he was easy to understand and obviously right about many things. Has the “Chicago School” dominated the profession so overwhelmingly that Keyne’s isn’t even taught anymore??

While in Political Science studies, I discovered few “laws” or principles to be proven, likewise in Economics perhaps? One thing in defense of govt. is one “law” of PoliSci I discovered was a little known study done back in the Thirties derived from Anthropology that to the degree that a tribe, or clan, or small primitive nation state embraces technology, the more likely that tribe, clan or nation-state has a higher percentage of people in helping the king, clanleader, rulers, or elites, maintain that technology whether arrow building, castle construction etc, in support of that ‘govt.’. Stands to reason: a primitive nation would have mostly agricultural peasants, hunter-gatherers, with a few princes, tax collectors, etc… while a highly technological state would need a higher percentage of workers in govt. to help teach, regulate, design, implement that higher technology….

thus More Technology, More Government. (in terms of higher percent of workers within the Govt. sphere) With the present financial crisis, It seems that now that the most secure places to work are indeed in Govt. (teaching, police, law, etc) than in the private sphere so can the conservatives extolling Milton Freidman or Classical Liberalism be also “Luddites”?

Alright, haven’t seen a study done in a modern context. But think about it?

steve December 1, 2008 at 11:16 am

If it weren’t for ideology, I think Austrians would realize they need to admit Keynes into their canon. The theory of liquidity preference allowed Hicks and other to situate monetary theory within an *applicable* choice theoretic context for the first time. Indeed, liquidity preference has been the, sometimes unacknowledged, basis for all sound monetary theory espoused since that time. Although Von Mises, Haberler and others developed some choice theoretic foundations for monetary policy based on real balance effects, the practical importance of this line of reasoning has been more or less completely discredited. If you want to have any kind of realistic monetary framework, liquidity preference needs to be a part of that framework. Hazlitt, Mises, Rothbard, etc. all completely failed to grasp the significance of this development and this is one of the reasons that their macro-theories have rightly been marginalized.

mobile December 1, 2008 at 5:28 pm

“If you’re so smart, why ain’t you rich?” Keynes died wealthy, and having made other people wealthy.

In the future, this phrase will metamorphasize into “If you’re so smart, why are you dead?”

Count me in. My priors align with Sheetwise, desirae, and Arnold Kling. My expectations are that the book will try to teach my how saving is bad, spending is good, and deficits are good.

indiana jim December 1, 2008 at 8:24 pm

Thank you Bill Stepp; spot on!

mickslam December 1, 2008 at 10:16 pm

Barkley,

Just read chapter 12 – thank you for the great recommendation. Reading the book, I am struck by his fearlessness, and his love and admiration of capitalism.

Chap 12 is about the “animal spirits” that have a huge impact upon how people act. His point is if people were purely rational, they would not risk as much, and not act and try to create new businesses, due to the fact that long term projections must be of poor quality. I think Keynes has an awe of this willing suspension of disbelief of the entrepreneur and business man and the incredible results of this suspension, and is greatly saddened to see it fade during times of depression. He wants to kick start the economy to get back to a psychological place where this attitude is once again prevalent. Since in the first chapter he lays out why total employment must equal consumption plus investment, he suspects the govt should artificially stimulate long-term investment during crisis times, to return overall employment to the level where the entrepreneur will once again ignore the numbers and start to employ workers against reason.

The chapter is an amazing logical chain-net linking employment, the mood of a nation, how recovery can only be caused by righting credit markets and the speculative mood but crisis can be caused by either, the relationship between speculation and enterprise, the over-importance of liquidity to investors, and how govt stimulus is dumb enough to play the long-term game when nobody else wants to.

We might even have to start a chant to get Tyler to go out of order.

Carl the EconGuy December 2, 2008 at 10:33 am

One thing people don’t usually realize when they study the GT is that Keynes himself viewed it as simply an extension of the Treatise on Money. That is, if you want to understand what’s meant by the Marginal Efficiency of Capital and the dynamics of the interest rate mechanism, you need to hark back to the ToM and Wicksell. So, before you get into the details of the GT, go back and start with the basics — which macro theorists haven’t done for about 40 years now. Have fun.

Current December 2, 2008 at 12:22 pm

Keynes abandoned his “Theory of Money” when Hayek criticized parts of it.

I think studying the General Theory is a great idea. It is full of mistakes. Even the most dyed-in-the-wool Keynesians will have difficulty defending it.

Current December 3, 2008 at 6:49 am

Carl, that is a very different interpretation of Keynes to that of others.

I look forward to discussing it with you.

Arthur James December 3, 2008 at 9:59 am

Keynes, “The General Theory”, chapter 24, pages 381-83:

“I have mentioned in passing that the new system might be more favourable to peace than the old has been. It is worth while to repeat and emphasise that aspect.

“War has several causes. Dictators and others such, to whom war offers, in expectation at least, a pleasurable excitement, find it easy to work on the natural bellicosity of their peoples. But, over and above this, facilitating their task of fanning the popular flame, are the economic causes of war, namely, the pressure of population and the competitive struggle for markets. It is the second factor, which probably played a predominant part in the nineteenth century, and might again, that is germane to this discussion.

“I have pointed out in the preceding chapter that, under the system of domestic laissez-faire and an international gold standard such as was orthodox in the latter half of the nineteenth century, there was no means open to a government whereby to mitigate economic distress at home except through the competitive struggle for markets. For all measures helpful to a state of chronic or intermittent under-employment were ruled out, except measures to improve the balance of trade on income account.

“Thus, whilst economists were accustomed to applaud the prevailing international system as furnishing the fruits of the international division of labour and harmonising at the same time the interests of different nations, there lay concealed a less benign influence; and those statesmen were moved by common sense and a correct apprehension of the true course of events, who believed that if a rich, old country were to neglect the struggle for markets its prosperity would droop and fail. But if nations can learn to provide themselves with full employment by their domestic policy (and, we must add, if they can also attain equilibrium in the trend of their population), there need be no important economic forces calculated to set the interest of one country against that of its neighbours. There would still be room for the international division of labour and for international lending in appropriate conditions. But there would no longer be a pressing motive why one country need force its wares on another or repulse the offerings of its neighbour, not because this was necessary to enable it to pay for what it wished to purchase, but with the express object of upsetting the equilibrium of payments so as to develop a balance of trade in its own favour. International trade would cease to be what it is, namely, a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases, which, if successful, will merely shift the problem of unemployment to the neighbour which is worsted in the struggle, but a willing and unimpeded exchange of goods and services in conditions of mutual advantage.”

The only discussions I know of this and related passages in the GT (including in chapter 23) on Keynes’s belief in economic causes of war and that his economics might help promote peace are:

- Hyman P Minsky, “John Maynard Keynes”, Columbia University Press, 1975, page 159
- Donald Markwell, “John Maynard Keynes and International Relations: Economic Paths to War and Peace”, Oxford University Press, 2006, pages 178-190

You might also be interested in discussion at http://hypocrisy.com/2008/11/23/tanya-white-reminds-us-of-economist-keynes-paths-to-peace/

Arthur James December 4, 2008 at 7:37 am

Keynes, “The General Theory†, chapter 24, pages 381-83:

“I have mentioned in passing that the new system might be more favourable to peace than the old has been. It is worth while to repeat and emphasise that aspect.

“War has several causes. Dictators and others such, to whom war offers, in expectation at least, a pleasurable excitement, find it easy to work on the natural bellicosity of their peoples. But, over and above this, facilitating their task of fanning the popular flame, are the economic causes of war, namely, the pressure of population and the competitive struggle for markets. It is the second factor, which probably played a predominant part in the nineteenth century, and might again, that is germane to this discussion.

“I have pointed out in the preceding chapter that, under the system of domestic laissez-faire and an international gold standard such as was orthodox in the latter half of the nineteenth century, there was no means open to a government whereby to mitigate economic distress at home except through the competitive struggle for markets. For all measures helpful to a state of chronic or intermittent under-employment were ruled out, except measures to improve the balance of trade on income account.

“Thus, whilst economists were accustomed to applaud the prevailing international system as furnishing the fruits of the international division of labour and harmonising at the same time the interests of different nations, there lay concealed a less benign influence; and those statesmen were moved by common sense and a correct apprehension of the true course of events, who believed that if a rich, old country were to neglect the struggle for markets its prosperity would droop and fail. But if nations can learn to provide themselves with full employment by their domestic policy (and, we must add, if they can also attain equilibrium in the trend of their population), there need be no important economic forces calculated to set the interest of one country against that of its neighbours. There would still be room for the international division of labour and for international lending in appropriate conditions. But there would no longer be a pressing motive why one country need force its wares on another or repulse the offerings of its neighbour, not because this was necessary to enable it to pay for what it wished to purchase, but with the express object of upsetting the equilibrium of payments so as to develop a balance of trade in its own favour. International trade would cease to be what it is, namely, a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases, which, if successful, will merely shift the problem of unemployment to the neighbour which is worsted in the struggle, but a willing and unimpeded exchange of goods and services in conditions of mutual advantage.†

The only discussions I know of this and related passages in the GT (including in chapter 23) on Keynes’s belief in economic causes of war and that his economics might help promote peace are:

- Hyman P Minsky, “John Maynard Keynes†, Columbia University Press, 1975, page 159
- Donald Markwell, “John Maynard Keynes and International Relations: Economic Paths to War and Peace†, Oxford University Press, 2006, pages 178-190

You might be interested in http://hypocrisy.com/2008/11/23/tanya-white-reminds-us-of-economist-keynes-paths-to-peace/

Sarah Haman December 8, 2008 at 4:30 pm

Gift Giveaway: Kindle Reader

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Deadline: Monday, December 15th at 11:59pm

Prizes: Kindle Reader

How to enter: Post A Comment

How to win: Random Drawing

Other info:

Gifts.com is giving away a Kindle! I know that got a lot of you are excited, but I also bet a lot of you may not know what a Kindle is.

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A complete Kindle overview here would take a while, but it’s not an understatement to say the Kindle is a game-changing gadget. Will the Kindle have the same impact on the printed word as the iPod has had on music? It may be a bit early to tell, but it’s not a stretch to imagine a world where everyone has a handheld reader that’s a does-it-all gadget for all things read-able. Bottom line: the Kindle is a great gift for tech lovers and bookworms of all ages. In fact, this gadget is so hot it’s on backorder until February, but we promise the pay-off is worth the wait.

Want to win? Post a comment and tell us who the lucky recipient of the Kindle will be (it’s okay if it’s you!) AND what the will be the first book, magazine or newspaper downloaded. Post a comment by 11:59 p.m. EST on Monday, December 15. One comment per person, please; multiple comments will be discarded. ONE randomly selected entry will win the Kindle.

Mike Beggs May 20, 2009 at 9:02 pm

I’m the Australian blogger Bob McManus refers to above… actually I only got to Chapter 17, the crazy but fascinating chapter on money, liquidity and interest rates. I got stuck on it for a while, found out a lot of people get stuck on it, and read a bunch of the secondary literature. I’m planning to finish the thing off soon. Will be interested to see what you guys make of it.

bytamer June 12, 2009 at 8:12 pm

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