Keynes’s General Theory, chapter three

The material on Say’s Law is good but J.S. Mill understood similar points as early as the 1840s. 

In section ii Keynes wrote: "This particular relationship, which corresponds to the
assumptions of the classical theory, is in a sense an optimum
relationship.  But it can only exist when, by accident or design,
current investment provides an amount of demand just equal to the
excess of the aggregate supply price of the output resulting from full
employment over what the community will choose to spend on consumption
when it is fully employed."

That is one of the most important passages in the book.  Consumption
is stable and investment is the volatile variable.  For equilibrium to
obtain, C + I (forget about G for now) must absorb Y.  But "I" is ruled
by fickle forces and there is no guarantee it will play its required
role.  Consider this one of Keynes’s basic models.

Garett Jones suggested to me that Keynes is postulating a vertical
curve in this chapter.  The question is why Say’s Law doesn’t
have more force, namely why supply increases don’t translate into
aggregate demand.  Keynes thought it was the liquidity trap –receipts
get soaked up in hoards rather than spent — but I think the key
problem has to be a broken banking system.  Holdings of currency just
aren’t large enough and otherwise the held money
would end up being invested through intermediation.  In the model
Keynes is often looking for ways to "break the circular flow" but he
didn’t always succeed.

Section iii has some lovely prose.


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