Category: Books

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.

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.