Keynes’s General Theory, chapter five

Part i shows that Keynes had digested the Austrians, and especially the Swedes, far more than he let on.  He goes through considerable machinations to show that his main argument is consistent with the Swedish long vs. short-run, ex ante vs. ex post analysis that ruled Stockholm at the time, as found in Myrdal, Lindahl, Ohlin and others.  For all of Keynes’s periodic dismissiveness of his precursors, I read him as actually quite intimidated by them.  In this section he’s "looking for their approval," if only in his own mind.

In Part ii Keynes presents two bombshells, more or less from out of nowhere:

a) For the short-run, the common default expectation is that "recently realized results will continue"; this precludes entrepreneurial creativity and creation as a way out of a bad situation.  You’ll note the influence of Cambridge epistemology here, namely that we do not recreate our entire basic picture of the world de novo every day.  G.L.S. Shackle is mostly a Keynesian but on this issue his emphasis on the creative imagination of the individual is a significant revision of Keynes.

b) Long-term expectations do not adjust smoothly but rather become more bullish or bearish in volatile leaps.

Furthermore a) and b) are held together, which implies at some margin a sharp disjunction between the short-run and long-run.  I do not regard Keynes’s two assumptions as absurd, but they are hardly a "general theory."  Note that you need a) to choke off various processes of recovery and you need b) to get investment demand to be so volatile in the first place.  Let’s say you think b) is reasonable, then in my view you should also believe in possible "cascade" effects which can pull you out of a downturn in the short run.  But for Keynes, no.

Here is a comment on last week’s session.  Chapter six will be going up this afternoon.  On short vs. long-term expectation, Felix Salmon has some good points.