Keynes on consumption, chapters eight and nine

There are many lovely and insightful discussions in these two chapters; it should be enough to persuade anyone that the GT is fun to read.

For instance Keynes's discussion of the interest elasticity of savings on p.93 persuaded a whole generation of economists.  Or on p.95 he references theories of spending based on expectations about the future; only in their most extreme form will they render Keynesian results impossible.

Much of these chapters are dedicated to the simple idea that consumption does not rise indefinitely with income (and other influences).  The ultimate point is to establish how much aggregate demand relies on investment demand, which it turns out is, to Keynes, highly unstable.

Keynes's continuing allegiance to some elements of classical (!) economics pops up in chapter eight (e.g., pp.100, 105), specifically his view that a society can run out of profitable investment opportunities.  He feared secular stagnation and thought that government management of investment might be needed to stave off this possibility.  We hear all about Keynesian economics and the short run but in reality part of Keynes was still under the spell of Ricardo and Malthus and the idea of the classical stationary state (p.106).

For the same reason Keynes thought the private sector would run out of good investment opportunities, he also thought that by 2009 (what exactly was the date he gave?  Brad DeLong knows) the problem of scarcity might be largely overcome.  It hasn't worked out that way.

A number of commentators keep on bringing up Henry Hazlitt's book on Keynes in the comments section.  Hazlitt's book makes many good points and has many "gotchas" on Keynes's errors.  Still, Hazlitt cannot bring himself to see or admit there are conditions under which Keynes can be right and thus I don't regard it as a convincing critique.  The best critical approaches to the GT are those which figure out under which conditions it might be correct and then examine empirically whether those conditions in fact hold.


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