Keynes’s General Theory, chapter six

by on December 15, 2008 at 11:05 pm in Books, Economics | Permalink

Keynes does all this huffing and puffing about terms and finally he stumbles into his mention of Hayek.  Hayek had written some now-obscure articles about net investment and measures of the capital stock, reprinted in Profits, Interest, and Investment.  (Here is an excellent Lawrence H. White essay on this part of Hayek’s thought.)  Keynes wants to show he doesn’t have to worry about these debates.  Keynes is also trying to liberate himself from his previous (1930) two-volume Treatise on Money, a disappointing work.  At the end of section (i) you get the clincher: "For this reason, and also because I no longer require my former terms to express my ideas accurately, I have decided to discard them — with much regret for the confusion which they have caused."

Again, in part ii the bombshell comes, unannounced.  Keynes decides that he will declare savings to be a "mere residual."  Consumption and investment alone will determine income and savings is defined as whatever is left over to make the national income equations balance.

At the time this was considered by many to be an enormous sleight of hand. The Austrian and Swedish traditions focused on the question of whether planned savings was going to equal planned investment and what happens if not.  Keynes has just banished such questions to the woodshed and he has done so by a terminological maneuver.

Whether or not you think that the Austrian and Swedish traditions lead anywhere fruitful, Keynes is on shaky ground here.  He is using definitions to favor one causal account of macro over another.  That’s not right.  You can still make a plausible argument that Keynes is right on empirical grounds that planned savings is not an important force for understanding business cycles.  But so far no such empirical argument has been clinched.

In the second to last paragraph Keynes realizes that in his system savings does not and cannot constrain investment.  He notes that if animal spirits were wild enough, the price of output could fluctuate between zero and infinity.  Neither interest rates nor savings plans perform any of their traditional constraining or equilibrating functions.  At least Keynes realized how far out on a limb he was going.

Due to popular request, we’ll resume with the Keynes symposium in January but take a break for the close of the semester.

1 David Koresh December 16, 2008 at 2:22 am

Keynes has more people fooled than Jesus.

2 Greg Ransom December 16, 2008 at 2:05 pm

Or, as Hayek never tired of saying, Keynes had walked off a cliff — into a bizzaro post scarcity world. Decree that savings and produced means of production aren’t part of the explanans of economic patterns, and you’ve entered a world were all goods are mana from heaven and everything single things is effectively oversupplied in a costless “glut”. (See Hayek’s discussion in 4 of _The Pure Theory of Capital_, where he discusses the Keynesian post scarcity model.)

In alternative words, Keynes has created a bizzaro world where “Say’s Law” has been refuted by the fiat of definition (talk about Cambridge epistemology!) and neither the empirical world nor the theorizing economists are constrained by the scarcity of causally inter-related produced means of production with systematically changing valuations.

And note well, when Keynes wrote,”For this reason, and also because I no longer require my former terms to express my ideas accurately, I have decided to discard them — with much regret for the confusion which they have caused”, Hayek essentially gave up on the idea that Keynes was a serious scientists who wouldn’t abandon his most labored theoretical constructions at the drop of the hat to take up another line of argument, as the political needs of the moment demanded it. From Hayek’s perspective, Hayek had made the mistake of taking Keynes seriously, labored hard to show Keynes the error of his ways, and Keynes simply said “never mind” — and went on to construct even more elaborate and ludicrous theoretical expediencies justifying his political policies of the moment.

Hayek’s conclusion? Keynes would say “never mind” again, throwing everything overboard when his policy needs changed, turning any prior criticism of Keynes into a giant waste of time. And so Hayek ignored the temporary technical details of Keynes’ work — and instead attacked Keynes and the rest of the profession at the most fundamental level, in his papers on how to do science in the field of economics, e.g. Hayek’s papers “Economics and Knowledge” and “Scientism and the Study of Society”, and chapters 1, 2, and 3 of _The Pure Theory of Capital_ — ideas Hayek later revisited in his Nobel Prize lecture.

What Hayek never anticipated was that Keynes would never have a chance to change his mind again, do to his sudden death, nor that the whole world of politics would embrace vulgar Keynesianism, and in a related development the economists inside government and in the university would embrace various mathematical forms of Keynes as the central totems of “scientific” macroeconomics.

Tyler writes:

“In the second to last paragraph Keynes realizes that in his system savings does not and cannot constrain investment. He notes that if animal spirits were wild enough, the price of output could fluctuate between zero and infinity. Neither interest rates nor savings plans perform any of their traditional constraining or equilibrating functions. At least Keynes realized how far out on a limb he was going.”

3 Nigel December 17, 2008 at 6:02 am

>>He notes that if animal spirits were wild enough, the price of output could fluctuate between zero and infinity.<< Don't the last few months provide a little evidence to support that ?

4 Barkley Rosserr December 17, 2008 at 5:17 pm

A curious fact is that in at least the US national income and product
accounts, savings is in fact a residual. Very messy trying to figure
out what planned savings really is from those accounts.

It is probably a sign of a truly hard core Keynesian (or sub-category of
Post Keynesian) when one really does deny any autonomy to savings. Clearly
actual savings does end up being affected by what goes on in the broader
macroeconomy, but I, for one, am certainly willing to grant some meaning
to peoples’ marginal propensity to save, which as the textbooks tell us
happens to equal 1 – mpc. Certainly we do see some different attitudes and
propensities to save in different societies and in the same society over time,
with this propensity having declined in the US in the last few decades for a
variety of reasons.

One outcome of that decline was the disproof of Ricardian Equivalence. Reagan
cut income taxes in the 1981, which should have led to a rise in the savings
rate, according to Robert Barro. Instead, the rate fell. I remain mystified
why Barro is such a widely respected economist with him being high on every year’s
list for getting the Nobel (presumably for Ricardian Equivalence), although some
of his later work
on growth theory is not too bad.

5 Monica February 9, 2009 at 1:45 pm

Amazon should have charged Jameson an extra for the precious annotations. A Brazilian would say that Jameson “was born with his ass facing the moon” = lucky.

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