Keynes’s General Theory, chapter six

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.


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