There's a lot of shadow boxing in this chapter. Keynes is well aware that he just made a radical move in treating savings as a pure residual (see my discussion of chapter six). Now he is looking to cover his tracks, make it sound reasonable, and show that other people don't really have a better approach.
Section I recaps. When Keynes writes "It would certainly be very inconvenient and misleading not to mean this" you should be just a bit astonished. He knew exactly what he was trying to cram in here and I suspect Keynes himself was smirking when he wrote that line.
Section II covers Hawtrey, an economist hardly discussed these days. (But wait, the issue pops up here, today! And here! Fama I think is wrong but read his 1980 "Banking in the Theory of Finance," Journal of Monetary Economics, for his underlying model)
Section III says that there exists a contorted interpretation of Keynes's earlier Treatise on Money which is consistent with the GT.
Sections IV and V whack the Austrians (again), drawing heavily on Piero Sraffa's 1932 "Dr. Hayek on Money and Capital." Keynes's basic point is that inflation can push around the redistribution of wealth, and expenditure flows, but that the new allocation of resources will be self-sustaining rather than self-reversing. He was basically right, unless you are willing to adopt some ancillary doctrine of market failure when specifying how adjustment processes occur.
The first paragraph of Section V is interesting but I don't think it is a correct account of why the Austrians differ from Keynes on this point. The Austrians had confusing terminology and here I think Keynes is taking them too literally.
The last two paragraphs of this chapter are a nice statement of what macroeconomics is all about.
Psychologically, Keynes feels he has neutralized the alternative approaches to savings and investment, and so he will proceed with the approach which we now call Keynesian. This chapter is Keynes trying to reassure himself, and reassure the reader. It's Keynes, the conscious revolutionary, trying to sound conservative.
Tyler, please be clear that when you write “whack” the Austrians and “Austrian capital theory falls off the map.”, etc. that you are interpreting Keynes. This is not your opinion (it may be partly, but in these cases you are just relaying Keynes).
You may think I am being a drama queen, but DeLong just skims and picks things out of your summaries and then goes on to attribute Keynes to you. Last time he blogged that YOU are saying the Austrian capital theeory falls off the map.
I am not suprised that DeLong only needs to read something like this to declare victory without reading Hayek, but you have obligation to be clear so that even DeLong cannot falsely attribute Keynes OPINIONS to you.
Let’s stop talking about “the Austrians” as if Keynes knew any Austrian capital theory. He didn’t
What had happened is that Keynes had just been utterly destroyed and humiliated by Hayek’s demolition of Keynes’ 1930 work on investment, savings, and capital theory.
And he’d exchanged a handful of letters with Hayek on the topic of savings, investment and capital theory.
Hayek’s well considered judgment after intense study and interaction with Keynes — including personal conversations — was the Keynes hadn’t mastered “Austrian” capital, savings and investment theory, and hadn’t even really read it.
Likewise, in Hayek’s well considered view Keynes didn’t even know or understand the very similar capital theory of Jevons or really even Mill.
As a result of his letter and journal interaction with Hayek, Keynes arrived at a superficial understanding — at best — of what Hayek was up to. But Hayek’s well considered judgment is that Keynes work revealed ultimately an utter failure to comprehend Hayek’s ideas on savings, investment and capital theory (which built on the work of Jevons and Bohm-Bawerk and Wieser).
So the whole idea that Keynes is “responding” to Hayek or “the Austrians”, is from Hayek’s point a view a joke.
I’ll add more later.
What’s the point of book forum if don’t interact, Tyler?
I’ve been following this book forum and have found it flat and unhelpful because you don’t communicate or take on points being made.
Everyone comments and then you go “OK, next chapter…”
Let’s rehearse what has happened here in chapters 6 and 7.
In 1930 Hayek destroyed Keynes’ account of savings, investment and production, exposing in painful detail the contractions, ambiguities, and incoherence of Keynes’ account.
In his review of Keynes Hayek gave an extremely truncated account of savings and investment, without bothering to place those within the wider framework of the explanatory strategy and production model of Menger, Bohm-Bawerk and Wieser, which Hayek falsely assumed Keynes knew. Hayek then published in English some some more complicated explications of his own work on the topic, and also exchanged letters explaining to Keynes the baby version of his account of savings and investment, again absent the context of the explanatory framework and production resources / capital goods model this work assumed.
If you read Hayek’s review of Keynes, and his letters to Keynes, you see that in chapter 6 Keynes’ essentially adopts Hayek’s baby version of savings and investment — absent the context of the Menger/Bohm-Bawerk/Wieser explanation strategy and production resources logic. And what Keynes does with Hayek’s baby version of savings and investment is that he translates it into a Marshallian frame, incoherently blending together “pure theory”/ real term analysis with actual world money economy analysis, as well as backward looking objective cost and forward looking subjective cost analysis (a re-run of the old “Marshallian scissors”).
What we have every reason to believe is that Keynes had no comprehension of what the Menger/Bohm-Bawerk/Wieser production resource model and explanatory frame was. For Keynes the wider frame in which Hayek’s account of savings and investment actually make sense simply doesn’t exist — because he completely fails to understand it, mostly because Keynes is utterly ignorant of it.
Hayek went through specific after specific showing how Keynes 1930 account of savings and investment was contradictory,, incoherent, and ambiguous. Keynes weak and pathetic rejoinder to Hayek on page 76 is to give no specifics and no sense even that he knows what he’s talking about in an empty counter charge that he, Keynes, has failed to find a passage where Austrian terms are defined to his satisfaction — as if he’s made the effort. And then he make the utterly empty charge that the logic of production resource use worked out by Menger, Bohm-Bawerk and others “does not much advance matters” — without _any_ specifics and without _any_ specific argument, and when we have every reason to believe that Keynes was talking through his hat about a logic he failed to master.
I am not an economist, maybe someone can help me with this.
What is the problem with calling savings “residual”, after you raised the decision to consume to theoretical prominence?
The decisions to save and to consume are more or less the same, aren´t they? When I choose to consume I choose not to save, and vice-versa. So I don´t think the whole range of phenomena involving the decision to save is being expelled from the model.
Am I wrong?
By the way, a couple of posts above this one Tyler makes a point about savings that I think is a possibility implied by this chapter, isn´t it so?
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