Patinkin, Don, “Keynes, John Maynard,” The New Palgrave: A Dictionary of Economics, Vol. 3 (K to P), John Eatwell et al., eds. (Macmillan Press, 1987), pp. 19–41.

John Maynard Keynes was one of the great intellectual innovators of the first half of our century, and certainly its greatest political economist. He was born in Cambridge on 5 June 1883, and died at Tilton (in Sussex) on 21 April 1946. His father was John Neville Keynes, also an economist, author of The Scope and Method of Political Economy (1891), and later registrary of Cambridge University.

With the help of a scholarship, Keynes was educated at Eton. He then went on to King’s College, Cambridge, where he took a degree in mathematics in 1905. Afterward he spent an additional year at Cambridge studying economics under the then-doyen of British economics, Alfred Marshall, as well as under the latter’s student and successor-to-be as Professor of Political Economy at Cambridge, Arthur Pigou. Keynes then entered the Civil Service, where he worked for over two years in the India Office, though he never actually visited India. Out of this work grew his first book in economics, Indian Currency and Finance (1913), which was largely descriptive in nature, and whose main concern was not the Indian monetary system as such—and a fortiori not the Indian economy—but with this system as an example of the workings of a gold-exchange standard. This work also led to Keynes’s first major participation in public life as a member of the Royal Commission on Indian Finance and Currency (1913–14).

In 1908 Keynes returned to Cambridge as a Lecturer in Economics (some of Keynes’s notes for his lectures during this period have survived and are reproduced in JMK XII, pp. 689–783). During that year he continued his work on A Treatise on Probability, which he successfully submitted to King’s College as a fellowship dissertation in 1909. This dissertation was published in a revised form in 1921 and continues to be recognized as a pioneering work in the field.

Shortly after the outbreak of World War I, Keynes took a leave of absence from Cambridge to enter the Treasury. Here his exceptional ability and capacity for work led to his rapid advancement, and by 1919 he was principal Treasury representative at the Peace Conference at Versailles. His passionate disagreement with what he considered to be the harsh clauses of the Versailles Peace Treaty led to his resignation from the British delegation and to the writing of his vehement denunciation of the treaty in his Economic Consequences of the Peace (1919), which was translated into many languages and overnight made him a world celebrity. From then on Keynes was an international figure whose voice was heard on all major economic problems that arose in interwar Britain and, indeed, in the Western world as a whole.

In 1925 Keynes married the Russian ballerina Lydia Lopokova, a leading member of Diaghelev’s company in the early 1920s. They had no children.

(The present essay is devoted almost entirely to the development of Keynes’s thinking about economic theory and policy. For full biographical studies of Keynes, see Austin Robinson, 1947; Harrod, 1951; Milo Keynes (ed.), 1975; Moggridge, 1980; and Skidelsky 1983 and 1988 [].)

1. In our profession, Keynes is known primarily for his fundamental contributions to monetary economics. The Tract on Monetary Reform (1923; henceforth Tract), the Treatise on Money (1930; henceforth Treatise or TM), and the General Theory of Employment, Interest and Money (1936; henceforth GT); this is the inter-war trilogy that marks the development of Keynes’s monetary thought from the quantity-theory tradition that he had inherited from his teachers at Cambridge; to his subsequent systematic attempt to dynamize and elaborate upon this theory and its applications; and, finally, to the revolutionary work (as Klein, 1947, so rightly termed it) which he wrote under the constant stimulus and criticism of his colleagues and students—and with which he changed the face of monetary theory, laid the foundation for its development into macroeconomic theory, and defined the analytical framework and research programme of this theory for decades to come.

(The following discussion draws freely on the material in Patinkin 1976a, 1977 and 1982, to which the reader is referred for further details; all references to Keynes’s writings are to the form in which they appear in the relevant volumes (most of which were edited by Donald Moggridge) of the Royal Economic Society’s edition of his Collected Writings, referred to henceforth as, e.g., JMK IX, JMK XIII, and so forth. Though it has its faults (see Patinkin, 1975, section I; 1980, pp. 2–3 (especially n.2 and n.6), p. 8 (n.14), and pp. 14–15 (n.22 and n.23); see also Schefold, 1980, and section 3 below), this edition—to paraphrase one of the famous passages of the Treatise—is verily a widow’s cruse from which students of the development of Keynes’s thought will continue to draw materials for years to come, without diminution in the profits to scholarship.)

Though I have referred to Keynes’s three books on monetary theory as a trilogy, they differ from each other greatly not only in substance (a difference that has, of course, been a major theme of all studies of the development of Keynes’s thought) but also in form and purpose. Thus the Tract is not really a book, but in large part a revision and elaboration of the series of article[s] on postwar economic policy that Keynes first published in 1922 in the “Reconstruction Supplements” (which he edited) of the Manchester Guardian Commercial, with the addition of material that is not always integrated with that from the series.

Thus chapters 1 and 3:2 of the Tract are based on these articles and deal with the pressing problems of inflation, deflation, and the resulting exchange rate disequilibrium that then beset Europe. Keynes analysed this disequilibrium in terms of the purchasing-power-parity theory, which he expounded in detail and tested with contemporary data from the countries involved. In the new material presented in chapter 4 he then provided a lucid analysis of the basic dilemma between the “alternative aims” of stability of the internal price level and stability of the exchange rate—and strongly argued the view that he was to reaffirm in the Treatise of giving precedence to the aim of internal price stability. Similarly, the brief, formal presentation of monetary theory that appears in chapter 33:1 of the Tract—and which, as Keynes tells us (Tract, p. 63, n.1) “follows the general lines of Professor Pigou … and of Dr Marshall”—is part of the material that Keynes added to these articles in making up the book.

In this context, Keynes presents the “famous quantity theory of money” in the following terms:

Let us assume that the public, including the business world, find it convenient to keep the equivalent of k consumption units in cash and a further k' available at their banks against cheques, and that the banks keep in cash a proportion r of their potential liabilities (k') to the public. Our equation then becomes

n = p(k + rk')

[where n is the quantity of money and p the price level]. So long as k, k' and r remain unchanged, we have the same result as before, namely, that n and p rise and fall together (Tract, p. 63).

This equation is nothing but a minor variation on the famous “Cambridge equation” that Pigou had first presented in print in his classic 1917 article (p. 166), to which Keynes at this point refers.

Similarly, when he goes on to explain the determinants of k and k', Keynes states that

the matter cannot be summed up better than in the words of Dr Marshall:

“In every state of society there is some fraction of their income which people find it worth while to keep in the form of currency; it may be a fifth, or a tenth, or a twentieth. A large command of resources in the form of currency renders their business easy and smooth, and puts them at an advantage in bargaining; but on the other hand it locks up in a barren form resources that might yield an income of gratification if invested, say, in extra furniture; or a money income, if invested in extra machinery or cattle.” A man fixes the appropriate fraction “after balancing one against another the advantages of a further ready command, and the disadvantages of putting more of his resources into a form in which they yield him no direct income or other benefit.” “Let us suppose that the inhabitants of a country, taken one with another (and including therefore all varieties of character and of occupation), find it just worth their while to keep by them on average ready purchasing power to the extent of a tenth part of their annual income, together with a fiftieth part of their property; then the aggregate value of the currency of the country will tend to be equal to the sum of these amounts” (Tract, p. 64).

The words are from Marshall’s Money, Credit and Commerce (1923), pp. 44–5. In this source, however, Marshall indicates that in large part they go back to his testimony before the Indian Currency Committee in 1899 (reproduced in Marshall’s Official Papers [1926], esp. pp. 267–9).

Just as this theoretical material was (by Keynes’s “revealed preference”) not necessary for an understanding of the original articles in the Manchester Guardian, so is it not really necessary for the book: its deletion would interfere very little with an understanding of the argument of the Tract at other points, as indeed Keynes indicated (Tract, p. 61n). Conversely (and this is one of the clearest manifestations of the failure of the Tract to be an integrated whole) this added theoretical material in chapter 3:1 barely reflects the penetrating and elegant analysis of inflation as a tax on real money balances (including the notion of an optimum rate of inflation!) that Keynes reproduces from the aforementioned articles in chapter 2:1 of the Tract—and that can be read with both profit and pleasure even today.

Nor does the Tract incorporate the dynamic analysis of the way in which an influx of gold operates through the banking system —and thence on prices—that Keynes (basing himself on Marshall) had summarized in his long 1911 review of Irving Fisher’s Purchasing Power of Money (1911), a review that I would essentially consider to be Keynes’s first published work on monetary theory. Thus the Tract—as a theoretical work—is not only not integrated within itself, but even fails to reflect some major aspects of Keynes’s thinking about monetary problems at the time it was published.

2. On both of these scores the Treatise (on which Keynes began working less than a year after the appearance of the Tract) is the exact opposite. It is specifically designed for a professional audience whose major concern was with the latest developments in monetary theory as the Tract was designed for a general audience whose major concern was with current policy. Indeed, from the viewpoint of traditional scholarship, the Treatise is Keynes’s most ambitious and weighty work: the two-volume work—on “The Pure Theory of Money” and “The Applied Theory of Money”—designed to endow him with an academic reputation that would match the public one he had already achieved. At its core (in Books III–IV of Volume I) is a formal, rigorous presentation of a theory of money that deals in detail with both the static and dynamic aspects of the problem. And in the slow, stately, and systematic manner in which an academic treatise customarily proceeds—but in which Keynes of the interwar period so rarely proceeded—it leads up to this core, first, by defining the nature of money and describing its historical origins (Book I); and then (in Book II) describing at length the various index numbers that can be used to measure the value of money, which (to use one of Keynes’s favourite terms) is the quaesitum of monetary theory. And afterwards comes Volume II, which begins with a lengthy description of the respective empirical magnitudes of the critical theoretical variables described in the preceding volume—as well as the institutional features of the financial sectors which bear upon these variables (Books V–VI). Only when all this is completed does Keynes finally proceed (in Book VII) to a systematic presentation of the monetary policy, both domestic and international, that he derives from his theory.

The basic problem that Keynes set out to analyse in the Treatise was that of the “credit cycle” and the fluctuations in employment and output which characterize it. His analysis was essentially a simple one: profits—by which Keynes means profits above those representing a normal return on capital—are the motive force of the economy (TM I, pp. 126, 163). The existence of profits causes firms to expand their respective outputs and hence their demands for the inputs of productive services—and conversely for losses. Now (in the Marshallian terms that Keynes used: Principles, Book III, ch. III and Book IV, ch. I), profits are the difference between the “demand price” (i.e., market price; cf. TM I, pp. 186, 189) of a unit of output and its “supply price” (i.e. cost of production). Hence the study of cyclical movements of output reduces to a study of the causes of the differential movements of prices and costs.

It is these movements that Keynes then tries to analyse rigorously by means of his “fundamental equations.” These are derived (in Chapter 10 of the Treatise) after first distinguishing between “consumption goods” and “investment goods” and then defining the following basic variables of the analysis, where all variables refer to total or aggregate quantities. (For simplicity, and since my main concern is to compare the Treatise with the General Theory, I disregard the variables relating to foreign investment, which actually plays an important role in the Treatise):

E = current money income = factor earnings (including normal return on capital = costs of production; all exclusive of abnormal profits;

O = the same, at base-period prices;

I' = that part of E earned in the investment-goods sector = current money costs of producing investment goods;

C = the same, at base-period prices;

I = the same, at current market prices, i.e. the current market value of investment goods produced;

E – I' = that part of E earned in the consumption-goods sector = current money costs of producing consumption goods; and

R = the same, at base-period prices.

Keynes then proceeds to define the price variables

P = current price level of consumption goods;

P' = the same, for investment goods; and

= the same; for output as a whole = the weighted average of P and P' = the general price level.

Keynes implicitly (and sometimes explicitly) assumes that the base period is one of the equilibrium—defined as a situation in which per-unit price = per-unit costs in both the consumption-goods and investment-goods sectors. Hence there is no difference between evaluating current output at base-period prices and evaluating it at base-period costs of production. He then defines what are effectively (1) an index of the money wages per unit of labour, W (where labour represents factors-of-production-in-general) and (2) an index of output per worker, e (or the “coefficient of efficiency”); and he implicitly assumes that both of these indexes change in exactly the same way in both sectors. From these definitions it then follows that the change in the cost of production with respect to the base period in both the consumption and investment sectors is

E / O = W / e = W₁ ,

where W₁ (which Keynes calls “the rate of efficiency earnings”) is accordingly an index of costs of production per unit of output.

From all this, Keynes then derives his two fundamental equations in the following alternative forms:

P = (E / O) + (Q₁ / R) = (W / e) + (Q₁ / R) = W₁ + (Q₁ / R) (i)

= (E / O) + (Q / O) = (W / e) + (Q / O) = W₁ + (Q / O) (ii)

where Q₁ and Q represent profits in the consumption sector and in the economy as a whole, respectively. Thus all that fundamental equation (i) consists of is the quite obvious statement that the change (with respect to the base period) in the price of consumption goods equals the change in the per-unit costs of production of these goods (the first term of equation (i)) plus the change in the per-unit (abnormal) profits, assumed zero in the base period (the second term); and equation (ii) makes a correspondingly obvious statement for output as a whole.

The deeper meaning that Keynes attributed to these equations stemmed from his demonstration that profits Q₁ and Q were related to savings and investment. In particular, he first defined current savings S as the difference between income (defined, it will be recalled, as exclusive of abnormal profits) and consumption, or

S = E – PR ,

where all variables are defined in current money terms. From this definition and those listed above, it follows that (abnormal) profits in the consumption sector are

Q₁ = PR – (E – I') = I' – S ,

whereas total (abnormal) profits in the economy are

Q = (PR + I) – E = I – S .

Thus one of the distinguishing features of the Treatise is that as a result of its special definition of income, savings and investment need not be equal even ex post. The fundamental equations can then be written as

P = E / O + (I' – S) / R (i)'

and

= E / O + (I – S) / O (ii)'

—and this, indeed, is their primary form in the Treatise (I, pp. 122–3). In this way a change in the general price level—which for Keynes of the Treatise (like other monetary economists of that time and earlier, such as Knut Wicksell, Irving Fisher, A.C. Pigou) was the central concern of monetary theory—was directly related to the excess of investment over savings. When I' = I = S, the second terms of (i)' and (ii)', respectively, disappear, so that price = cost of production (including normal return on capital), and the economy is in equilibrium.

It must be emphasized that though the relation between savings and investment plays a central role in the Treatise, this relation served there (in sharp contrast with the subsequent General Theory) to analyse in the first instance not changes in output, but changes in prices. Correspondingly, though as indicated, Keynes does discuss changes in output in the Treatise, he considers these to be derivative from the changes in prices.

Keynes recognized that his equations were identities, and indeed said so; but he also claimed that they were identities that were useful for classifying causal relationships (TM I, p. 125; see also p. 120). In particular, the causal relationship to which he assigned a crucial role in his theory was that connected with the rate of interest. Thus, if we start from a position of equilibrium, a (say) decrease in this rate would cause investment to increase and savings to decrease, thus generate an excess of the former over the latter, thus generate profits, and thus—as indicated by the second term of the second fundamental equation—cause prices to rise. In this way, says Keynes, a decrease in the rate of interest would “in itself” cause a price rise—and not only (as in the traditional quantity theory) as the result of its first generating an increase in the quantity of money (TM I, pp. 167–76, esp. p. 171). Conversely, an increase in the rate of interest would directly cause prices to fall. Explicitly following Wicksell, Keynes denotes the rate of interest that would equate savings and investment (and thus generate equilibrium in the system) “the natural rate of interest”; and the rate which actually prevails, “the market rate” (TM I, p. 139).

Keynes made use of the causal interrelationship of interest and prices to provide a dynamic analysis of the change in the price level generated by a change in the quantity of money—by which Keynes meant currency plus total bank deposits, which because of the relative unimportance of the former in a modern economy can be conveniently approximated by these deposits alone (TM I, p. 27). For this purpose he first decomposes total deposits into “the industrial circulation” (roughly, demand deposits) and “the financial circulation” (roughly, savings or time deposits) (TM I, chs 15 and 17). These in turn roughly correspond to what were to become the transactions and precautionary-speculative balances of the General Theory (pp. 167 n.1, 194–6).

Similarly, the Treatise contains some of the major features of what was to become the liquidity-preference theory of the General Theory. The presentation in the Treatise is less precise in that it does not adequately analyse the nature of the “liquidity premium” and explicitly present the corresponding functional relationship between the demand for money and the rate of interest. On the other hand, it is more precise with respect to the distinction between stocks and flows: between the stock of wealth on whose asset composition the individual must decide; and the flow of income, with respect to which the individual decides on how much to consume and how much to save, i.e. to add to his wealth (TM I, p. 127). (The emphasis on the distinction between stocks and flows and the specification of a functional relationship are the two major features which distinguish the liquidity-preference theory of the Treatise and General Theory from the Cambridge cash-balance theory which Keynes espoused in his Tract; cf. Patinkin, 1974.) In any event, Keynes explains that the volume of savings deposits (i.e. the financial circulation) is determined by the decision of individuals as to what proportion of their wealth to hold in the form of such deposits as compared with the alternative of holding securities, a decision that depends (inter alia) on the rate of interest (TM I, ch. 10, s.3). Insofar as the industrial circulation is concerned, this is determined by the basic relationship M₁V₁ = E, where M₁ is the volume of demand deposits, V₁ their velocity of circulation, and E the level of aggregate money income = aggregate money costs of production (or W₁O). In the real world, V₁ is largely determined by institutional factors and hence remains more or less constant in the short run.

Let us now start from an initial position of equilibrium in which, by definition, the market rate of interest equals the natural rate, so that I' = I = S. Assume that this equilibrium is disturbed by an increase in the quantity of money. Initially, only part of this increase will be absorbed in the industrial circulation; part will be used to bid up the price of securities and thus lower the rate of interest. Furthermore, the increase in the quantity of money will have increased the reserves of the banks, thus inducing them to lower the rate of interest at which they lend. As a result, entrepreneurs will increase their borrowings in order to finance the undertaking of new projects, so that investments will begin to exceed savings, thus generating excess profits and an increase in the price of output. But as a result of these profits, firms will begin to expand their outputs, thus generating an increased demand for labour inputs, hence an increase in the wage rate and thereby in the per-unit cost of production. That is, E = W₁O will increase, and with it the need for the industrial circulation. This process will continue until money wages have risen sufficiently to eliminate excess profits and until all of the new money has been absorbed in the increased demand for the industrial circulation generated by the increase in W₁ and hence in E. In Keynes’s words:

This [process] must continue until M₁V₁ / O has settled down at a higher figure, which is in equilibrium with the new total quantity of money and also with values of P and P' which are enhanced relatively to their old values in a degree corresponding to the amount by which M₁V₁ / O has been increased (TM I, p. 241).

This conclusion has the unmistakable ring of the quantity theory. And indeed Keynes explains that his second fundamental equation can be rewritten as

= M₁V₁ / O + (I – S) / O (ii)"

which in equilibrium (i.e. when I = S) reduces to the Fisherine

M₁V₁ = O .

Thus (emphasizes Keynes) for the purpose of comparing equilibrium positions (i.e. for purposes of comparative statics), the traditional quantity theory does indeed remain valid. The purpose of the Treatise in this context, however, is, first, to extend this theory to an economy with a developed banking system, and then to analyse the dynamics of the movement from one equilibrium position to another in such an economy. And this is the role of the interest-rate savings-investment mechanism as it manifests itself in the fundamental equations (TM I, pp. 120, 131–3, 137–8). Indeed, at the beginning of Volume II of the Treatise, Keynes summarizes the dynamic workings of his second fundamental equation by first writing the quantity equation in the form M₁V' = O and then stating that the purpose of his new theory is to explain how “during the transition from one position of equilibrium to another” the overall velocity of circulation V' deviates upwards or downwards from it normally constant level, V₁, in accordance with whether I – S > 0 or I – S < 0, respectively (TM II, pp. 4–5; Patinkin 1976a, p. 46, n.2). Thus Keynes regarded his Treatise not as a refutation of the quantity theory, but as an extension of it.

The general policy proposal of the Treatise follows directly from its theoretical analysis: if the “credit cycle” is generated by the alteration of prices with respect to costs, thus generating profits (losses) and hence increases (decreases) in output and employment, then, claimed Keynes (as had Wicksell, Fisher and Pigou before him—and the Chicago School of the 1930s afterwards: Patinkin, 1969), the way to stabilize the economy was to stabilize the price level. And, continued Keynes, the major policy variable for achieving this objective is the Bank Rate as fixed by the central bank, which should be raised when prices tend to rise and lowered when they tend to fall.

At the same time, Keynes recognized that in the gold-standard world which then existed, an undue lowering of the rate of interest in one country relative to others might generate a capital outflow and consequent dangerous loss of gold reserves; hence such “international complications” might prevent the central bank from lowering the rate of interest sufficiently to deal with a depression. And Britain—which was a major centre of international trade and finance—was particularly vulnerable in this respect. For this reason, in the Treatise (II, pp. 337–38), as in the “private evidence” that he gave before the Macmillan Committee when he was in the final stages (February–March 1930) of preparing this book (JMK XX, pp. 71, 125–32), and as in his earlier political pamphlet Can Lloyd George Do It?: An Examination of the Liberal Pledge (1929; JMK IX, pp. 118–19, 123–4)—Keynes’s policy advice for Britain at that time was to combat the depression that beset it not by further reductions in the rate of interest, but by an increase in government expenditures on public works. On the other hand, the United States—which was in much less danger of loss of gold reserves due to international capital movements—should indeed combat its depression by means of a central-bank policy of lowering the rate of interest. This policy difference between Britain and the United States was repeatedly and most explicitly stressed by Keynes in his contributions to the round-table discussions at the 1931 Harris Foundation lectures in Chicago (1931b, pp. 84, 92, 303; see Patinkin, 1979a, pp. 292–3). Accordingly, when in September 1931 Britain abandoned the gold standard, Keynes immediately advocated that it reduce the rate of interest, thus laying the basis for the well-known “cheap-money” policy of subsequent years (Moggridge and Howson, 1974; Howson and Winch, 1977, pp. 57–8; Patinkin, 1979b).

3. Keynes had great hopes for the Treatise. Thus shortly after its publication, in his June 1931 Harris Foundation lecture on “An Economic Analysis of Unemployment,” he explicitly made use of the analysis of this book and proclaimed, “That is my secret, the clue to scientific explanation of booms and slumps (and of much else, as I should claim) which I offer you” (JMK XIII, p. 354). But these hopes were not to be fulfilled. For it rapidly became clear that the theoretical part of the book was not a success and was indeed subjected to severe criticism. To a certain extent this was due to the fact (which Keynes had only in part and somewhat grudgingly recognized (see TM I, pp. 176–8, especially p. 177, n.3, and p. 178, n.2) that this theory, as well as the corresponding policy proposal, had been largely adumbrated at the turn of the century by Wicksell (1898, 1906, 1907)—which brought on Gunnar Myrdal’s (1933, pp. 8–9) chiding remark about “the attractive Anglo-Saxon kind of unnecessary originality, which has its roots in certain systematic gaps in the knowledge of the German language on the part of the majority of English economists.” (In point of fact, Keynes—at least before World War I—knew German well enough to review in the Economic Journal several books written in that language (see the reviews reprinted in JMK XI, pp. 400–403, 562–74); it is, however, not difficult to believe that in the course of fifteen years, Keynes might have lost a good deal of his proficiency in that language.) But the most telling criticism of the Treatise was that, on the one hand, its “fundamental equations” were actually tautologies, and, on the other, that the book had explained the forces that caused output to expand or contract, but had not explained what determines its actual level during any period. (See the end of section 8 below for a discussion of circumstances connected with the writing of the Treatise that also contributed to its lack of success.)

As a result of this criticism, Keynes began within a relatively short time after the appearance of the Treatise to work on a new book which ultimately developed in the General Theory (1936). The chronology of this development can in part be traced by means of the materials (including correspondence, fragments of earlier drafts, and galleys of successive proofs) that Moggridge has reproduced and annotated in JMK XIII–XIV and XXIX. There can, however, be legitimate differences of opinion about the dating of these fragments (cf. Patinkin, 1976a, p. 71, n.7; 1980, pp. 14–15, n.22 and n.23, and pp. 18–19); so we are extremely fortunate to be able to supplement them with precisely dated materials in the unique “archaeological” record of the successive “strata” of Keynes’s thought provided by Robert Bryces’s notes on Keynes’s weekly lectures during the autumn terms of the years 1932, 1933, 1934 and Lorie Tarshis’s notes for these years as well as 1935 (reproduced in Rymes (ed.), 1988). The first year after the publication of the Treatise (viz., 1930–31) was devoted to a criticism of this book, greatly aided by the detailed comments of Ralph Hawtrey and the extensive discussions that took place in the so-called “Cambridge Circus” (in the sense of “circle”)—or what today would probably be called the “Cambridge Colloquium.” The major participants of this legendary “Circus” were Keynes’s younger colleagues, Richard Kahn, James Meade, Austin Robinson, Joan Robinson and Piero Sraffa, with his former student Kahn serving as the channel of communication between Keynes and the group (JMK XIII, pp. 337–43; Kahn, 1984, pp. 105–11: Keynes at that time was in his late forties, whereas the members of the “Circus” were mostly in their mid-twenties). The aforementioned lecture notes, however, show that the central message of the General Theory (explicated below) was not fully developed until some time in 1933, well after the activities of the “Circus” as such had come to an end (Patinkin, 1976a, chs 7–8; 1977; 1982, ch. 1). However, from some of the younger members of the “Circus” (especially Kahn and Joan Robinson)—as well as from his contemporaries, Ralph Hawtrey and Dennis Robertson—Keynes continued to seek out and benefit from criticisms throughout the process of working through and revising the successive drafts of the General Theory (cf. JMK XIII, ch. 5; JMK XXIX, ch. 3; Patinkin and Leith (eds), 1977, passim).

Like the Treatise, the General Theory is—in Keynes’s words of his preface—“chiefly addressed to … fellow economists.” It differs from the Treatise in being almost exclusively concerned with theory. Indeed, this is the whole purpose of the book, as indicated by its very title. Thus the General Theory contains practically no description of institutional details. And for a work that is credited with having initiated a revolution in fiscal policy, it contains surprisingly few explicit discussions of the policy implications of its analysis. Indeed, the major new policy conclusion of the General Theory as compared with the Treatise—namely, that monetary policy directed at lowering the interest rate, though an essential component of a full-employment policy, might not be enough even in the absence of “international complications” to achieve this goal, so that an effective policy for this purpose may well require direct government spending—this conclusion is never developed systematically and in detail. Indeed, it is only referred to on one or two occasions in passing (e.g. GT, p. 164) and in brief “Concluding Notes” of a general nature (GT, pp. 372–84). Thus, the advocacy per se of public-works expenditure was not the purpose of the General Theory; rather it was to provide a theory which would, among other things, rationalize such a policy—with the actual advocacy of the policy being left for Keynes’s public activities of the period (see section 11 below).

Similarly, the problem of the relation between internal price levels and exchange rates—and indeed the whole problem of the international monetary system and its relation to domestic policies, which were a major concern of Keynes in the Treatise, as they had been in the Tract, and were again to be at Bretton Woods toward the end of World War II—are not discussed in the General Theory. The explanation for this fact too probably lies in the situation that prevailed in the Western world during the period that the General Theory was being written. In particular, this was the new world ushered in by England’s abandonment of the gold standard: a world of flexible exchange rates and/or severe restrictions on the flow of international trade, in which the aforementioned problems had accordingly largely lost their relevance. Correspondingly, the analysis of the General Theory is carried out almost entirely on the implicit assumption of a closed economy.

I should, however, emphasize that if from these viewpoints the General Theory of Employment, Interest and Money was more narrowly conceived than the Treatise on Money, from another viewpoint it is—as its title indicates—much broader. For “monetary theory” in the Treatise means, first and foremost, a theory that explains the determination of the price level. Accordingly, if the argument of the Treatise revolves about Keynes’s “fundamental equations,” these are (as the title of its chapter 10 makes clear) “The Fundamental Equations for the value of money” (TM I, p. 151, [emphasis] added). Again, Keynes prefaces Book VI of the Treatise, “The Rate of Investment and Its Fluctuations,” with the statement that it is “in the nature of digression, which is doubtfully in place in a treatise on money” (TM II, p. 85). In conformity with this view—and in sharp contrast with the systematic attempt of the General Theory to base its analysis on the marginal concepts of value theory and thus integrate monetary and value theory (GT, pp. 292–3)—the term “marginal productivity” (of labour or of capital) does not appear in the Treatise. Thus though, as noted above, Keynes attributes the term “natural rate of interest” to Wicksell, he does not follow the latter in associating this term with the marginal productivity of capital (Wicksell, 1898, pp. 102–4, 171; 1906, pp. 192–3; 1907, pp. 214–19). Finally, and as a corollary of the primary concern of the Treatise with prices, whereas that book deals with output only as derivative from changes in price and in this context indicates only the direction of change of output and employment, the General Theory presents a theory of the determination of the equilibrium levels of these variables.

A more precise specification of the basic contention of the General Theory can be obtained by letting Keynes speak for himself, as he did in a letter to Roy Harrod in August 1936, commenting on a draft of the latter’s review article of the General Theory—a letter whose first and most important point largely repeats what Keynes had written Abba Lerner two months earlier on his review (see JMK XXIX, pp. 214–16):

You don’t mention effective demand or, more precisely, the demand schedule for output as a whole, except in so far as it is implicit in the multiplier. To me the most extraordinary thing, regarded historically, is the complete disappearance of the theory of demand and supply for output as a whole, i.e., the theory of employment, after it had been for a quarter of a century the most discussed thing in economics [presumably, the quarter-century between the beginning of the Ricardo-Malthus debate on the possibility of a “general glut in the market” in 1820 and the appearance of J.S. Mill’s Principles of Political Economy in 1848; see also the reference to this period in the General Theory (pp. 32–4)]. One of the most important transitions for me, after my Treatise on Money had been published, was suddenly realizing this. It only came after I had enunciated to myself the psychological law that, when income increases, the gap between income and consumption will increase,—a conclusion of vast importance to my own thinking but not apparently, expressed just like that, to anyone else’s. Then, appreciably later, came the notion of interest being the measure of liquidity preference, which became quite clear in my mind the moment I thought of it. And last of all, after an immense amount of muddling and many drafts, the proper definition of the marginal efficiency of capital linked up one thing with another [cited from the “Editorial Introduction” to the General Theory, JMK VII, p. xv, [emphasis] in original; there are significant errors of transcription in this passage in the full text of this letter as reproduced in JMK XIV, pp. 83–6: see Patinkin, 1976a, p. 66, n.3].

Now, in the General Theory (p. 141) Keynes himself had attributed priority for the notion of the marginal efficiency of capital to Irving Fisher. Insofar as the theory of liquidity preference is concerned, this is clearly a contribution of Keynes, but (as noted above) it is one whose basic features had already been presented in the Treatise. This leaves the theory of effective demand as the distinctive analytical contribution of the General Theory and its central message (on the meaning and significance of this last term, see Patinkin 1982, chs 1 and 4).

That this is its central message is also clear from the General Theory itself. Thus Keynes tells us in its preface that, in contrast with his earlier Treatise, his new work is “primarily a study of the forces which determine changes in the scale of output and employment as a whole”; gives chapter 3 of “Book I: Introduction” the title “The Principle of Effective Demand,” and presents in it a “summary of the theory of employment” that he will develop in the book (GT, p. 27); and devotes most of the remaining chapters of the General Theory to this development.

Figure 1 reproduces the familiar diagram which has served to transmit the central message of the General Theory to generations of economics students. I wish, however, to refine the usual analysis which accompanies this diagram in one respect. In particular, what I mean by the theory of effective demand is not only that the intersection of the aggregate-demand curve E = F(Y) with the 45° line [E = Y] determines equilibrium real output Y₀ at a level that may be below that of full employment Y_F ; not only (as Leijonhufvud (1968) has also emphasized) that disequilibrium between aggregate demand and supply causes a change in output and not price; but also (and this is the distinctively novel feature) that the change in output (and hence income) itself acts as an equilibrating force. That is, if the economy is in a state of excess aggregate supply at (say) the level of output Y₁, then the resulting decline in output, and hence income, will depress supply more than demand and thus eventually bring the economy to equilibrium at Y₀. Or, in terms of the equivalent savings = investment equilibrium condition, the decline in income will decrease savings and thus eventually eliminate the excess of savings over investment that exists at Y₁. In Keynes’s words,

The novelty in my treatment of saving and investment consists, not in my maintaining their necessary aggregate equality, but in the proposition that it is, not the rate of interest, but the level of incomes which (in conjunction with certain other factors) ensures this equality (1937, p. 211; cf. also GT, p. 31, lines 16–23; p. 179, lines 2–6).

In more formal terms (which Keynes himself did not use), the theory of effective demand is concerned not only with the mathematical solution of the equilibrium equation F(Y) = Y, but with demonstrating the stability of this equilibrium as determined by the dynamic adjustment equation dY / dt = G[F(Y) – Y], where G' > 0.

Correspondingly, as Keynes emphasizes in his letter to Harrod and elsewhere, a crucial assumption of his (Keynes’s) analysis is that the marginal propensity to consume is less than unity, which in turn implies that the marginal propensity to save is greater than zero. For, if the marginal propensity to consume were equal to unity, no equilibrating mechanism would be activated by the decline in output. Specifically, as income (output) decreased, spending would decrease by exactly the same amount, so that any initial difference between aggregate demand and supply would remain unchanged. Alternatively, as income decreased, the initial excess of desired saving over investment would remain unchanged. Thus the system would be unstable. This is the major novel feature of the General Theory and its central message: the theory of effective demand as a theory which depends on the equilibrating effect of the decline in output itself to explain why “the economic system may find itself in stable equilibrium with N [employment] at a level below full employment, namely at the level given by the intersection of the aggregate demand function with the aggregate supply function” (GT, p. 30).

Since most economists today probably learned the theory of effective demand as just another chapter in their introductory course in economics, it may be difficult for them to conceive of the intellectual shock wave that this theory created when Keynes first presented it. Testimony to this impact has, however, been given by many elders of our profession who (in Samuelson’s words) were “born as economists prior to 1936” (1946, p. 315). And though my “birthyear” was about a decade after this date, I began my studies before the theory of effective demand had percolated down to the introductory course in the field. So I, too, can still remember how strange and even difficult it was during my later graduate studies to have to learn to think in terms of a demand for aggregate output as a whole—a demand that was in some way conceptually different from actual aggregate income, as if national income expended could somehow differ from national income received!

Similarly, under the influence of Marshall’s Principles (which was then still being used as a textbook), it had been thoroughly ingrained into us that the demand function for a good could be defined only under the assumption of “ceteris paribus.” Indeed, in order to insure that this assumption was fulfilled in practice, the more punctilious economists of those days were only willing to speak of the demand function for a good the total expenditure on which was small, so that variations in these expenditures as price varied would not significantly affect the “marginal utility of money” (i.e. the marginal utility of money expenditures: see ibid., Bk. III, chs iii and vi). How then could one validly speak of a demand function for the aggregate of all goods? How was it possible for “other things to be held constant” in such a case?

(The foregoing diagram does not appear in the General Theory—a fact which has in recent years led certain circles to contend that it does not represent Keynes’s theory. This, however, is an invalid inference: for with one exception, Keynes did not use analytical diagrams in any of his writings. And that one exception is the diagram which appears on p. 180 of the General Theory—a diagram which, in the accompanying footnote, Keynes attributes to Harrod. Furthermore, in his later How to Pay for the War (1940; JMK IX, pp. 416–17), Keynes analysed the expected inflationary gap in Britain by means of the C + I = Y rubric, which is of course the arithmetical counterpart of the 45° diagram. See also section 5 below for a conjecture about why Keynes presented his theory of effective demand in terms of the level of employment, and not of national income, as in the diagram.)

Needless to say, there are other interpretations of the novelty and central message of the General Theory. The preceding and following discussions implicitly (and sometimes explicitly) explain why I do not accept some of the leading ones: namely, the interpretations which contend that this message is the analysis of an economy caught in the “liquidity trap” (Hicks, 1937) and/or one in which money wages are completely inflexible downwards (Modigliani, 1944); that it is the proposition that unemployment is caused by the inadequacy of aggregate demand; that it is the analysis of the way expectations are formed and influence behaviour in an uncertain world whose uncertainty is not subject to the probability calculus (Shackle, 1967, ch. 11; Davidson, 1972); that it is the multiplier; that it is the crucial role of fluctuating investment in generating business cycles; that it is the theory of effective demand (and particularly of the aggregate supply function) as a determinant of the wage and price levels (Weintraub, 1961); and that it is the advocacy of public works as a means of combatting unemployment (the implicit interpretation of various writers who have regarded such advocacy as an anticipation of the General Theory; cf. e.g., Garvy, 1975 and Backhaus, 1985). Insofar as Leijonhufvud (1968) is concerned, he himself has subsequently admitted that his book was about “theoretical problems that were current problems in the early or mid-sixties…. What Keynes might have meant etc. was not one of the problems. Doctrine history was not what the book was about” (Leijonhufvud, 1978). (For further details, see Patinkin, 1976a, pp. 141–2; 1982, pp. 5–7, 84 fn.8, 153-8; 1984, pp. 101–2.)

To bring out the central message of the General Theory more sharply, let me contrast Keynes’s discussion in this book with the corresponding one of the Treatise. In the General Theory, a decrease in consumption—or, equivalently, an increase in savings—is represented by a downward shift of the aggregate-demand curve in Figure 1 []; the resulting decline in output will then cause a corresponding decline in the amount consumed—and hence in the amount saved—until a new equilibrium is necessarily reached at Y₂ (cf. GT, pp. 82–5, 183–4). Contrast this with Keynes’s “parable” in the Treatise of a simple “banana plantation” economy in an initial position of full-employment equilibrium which is disturbed because (in Keynes’s words) “into this Eden there enters a thrift campaign.” Making use of the analytical framework of the Treatise, Keynes explains that the resulting increased savings, unmatched by increased investment, will cause entrepreneurs to suffer losses (i.e. Q = I – S < 0) and they

will seek to protect themselves by throwing their employees out of work or reducing their wages. But even this will not improve their position, since the spending power of the public will be reduced by just as much as the aggregate costs of production. By however much entrepreneurs reduce wages and however many of their employees they throw out of work, they will continue to make losses so long as the community continues to save in excess of new investment. Thus there will be no position of equilibrium until either (a) all production ceases and the entire population starves to death, or (b) the thrift campaign is called off or peters out as a result of the growing poverty; or (c) investment is stimulated by some means or other so that its cost no longer lags behind the rate of saving (TM I, pp. 159–60).

In brief, it seems to me that—to make anachronistic use of a concept of the General Theory—Keynes is implicitly assuming here that the marginal propensity to spend is unity, so that a decline in output cannot reduce the excess of saving over investment and thus cannot act as an equilibrating force. Instead, the decline in output continues indefinitely; or alternatively, the decline might end as the result of some exogenous force that closes the gap between saving and investment—“the thrift campaign is called off,” or “investment is stimulated by some means or another.” In brief, none of these alternatives indicates that Keynes of the Treatise understood that the decline in output itself acts directly as a systematic endogenous equilibrating force.

4. The foregoing is the essence of the theory of effective demand as presented in “Book I: Introduction” of the General Theory under the explicit simplifying assumptions of a constant level of investment (which presupposes a constant rate of interest) and a constant money wage-rate (GT, pp. 27–9). (For deficiencies in this presentation—and particularly in that of the aggregate supply function—stemming primarily from Keynes’s failure to apply the marginal concept correctly, see Patinkin, 1982, pp. 142–57. In this connection it should be noted that according to Joan Robinson’s own testimony (1969, p. xi), “Keynes was not much interested in the theory of imperfect competition” that she was developing in the early 1930s, and in which marginal analysis played a central role (J. Robinson, 1933a). See also the similar statement by Austin Robinson in Patinkin and Leith, 1977, p. 79.) After a “digression” from the “main theme” (GT, p, 37) in “Book II: Definitions and Ideas” for the purpose of clarifying various concepts, Keynes then devotes most of the remainder of the book to an elaboration of the theory of effective demand which (inter alia) is free of these restrictive assumptions.

In “Book III: The Propensity to Consume” he elaborates upon the determinants of the consumption component of aggregate demand and also discusses the related multiplier (GT, pp. 114–15), referring in this context to the 1931 article of his former student, Kahn. (This article was actually the successful outcome of Kahn’s efforts—with his mentor’s encouragement—to provide a precise formula for measuring the “indirect effects” of an increase in government expenditures, effects which Keynes in his 1929 election pamphlet Can Lloyd George Do It?, had described as of “immense importance,” but impossible of measurement “with any sort of precision” (JMK IX, pp. 106–7; cf. Howson and Winch, 1977, pp. 48–9; Patinkin, 1978)).

In “Book IV: The Inducement to Invest,” Keynes drops the assumption of a constant level of investment and explains how this level is determined by the marginal-efficiency-of-capital schedule in conjunction with the rate of interest, which rate is determined in turn by the liquidity-preference schedule in conjunction with the quantity of money. I might note that Keynes’s liquidity-preference function—M = L₁(Y) + L₂(r), where M and Y respectively represent nominal money and nominal income (GT, p. 199)—actually (though in all probability, inadvertently) reflects money illusion (see Patinkin 1956 and 1965, chapter XI:1 and Supplementary Note K:2).

Chapter 12 (“The State of Long-Term Expectations”) elaborates upon the argument of Book II, chapter 5 (“Expectations as Determining Output and Employment”). The crucial influence of uncertainties on both the aforementioned schedules—and hence the necessity to make decisions with respect to them on the basis of expectations—is emphasized. As Samuelson (1946, p. 320) has however noted, Keynes’s discussion “paves the way for a theory of expectations, but it hardly provides one” (see also the detailed critique by Hart, 1947). In any event, Keynes emphasizes that the uncertainties in question are not subject to a probability calculus, so that long-run investment decisions in particular may instead be the result of “animal spirits” (GT, p. 161; see also Keynes’s 1937 QJE article as reproduced in JMK XIV, p. 114). (The distinction between risk, which is subject to such a calculus, and uncertainty, which is not, was the major point of Knight’s classic 1921 work on Risk, Uncertainty, and Profit; there may also be a hint of this distinction in chapter 6 of Keynes’s Treatise on Probability, published the same year, to which Keynes refers (GT, p. 148, n.1); see also Lawson and Pesaran, 1985.) These uncertainties are a major source of the effectively low interest-elasticity of the first of these schedules, as well as the source of the speculative demand for money, and hence the effectively high (though not infinite) interest-elasticity of the second of them. (Keynes does not always distinguish between a movement along a demand curve and a shift of the curve itself and it is the combined result of these two changes that I denote by “effective elasticity.”)

Thus the many interpretations to the contrary notwithstanding, Keynes did not base his theory on the so-called “liquidity trap.” In his words, “whilst this limiting case might become practically important in future, I know of no example of its hitherto” (GT, p. 207. See also Keynes’s brief description of the way in which, after Britain abandoned the gold standard in 1931 (see concluding paragraph of section 2 above), the monetary authorities had succeeded in gradually driving down the rate of interest. But see Patinkin, 1976a, pp. 111–13 for some indications of ambivalence in the General Theory about the relevance of the “liquidity trap.”) It is because of these elasticities that monetary policy may well be inadequate to the task of eliminating unemployment: for an increase in the quantity of money will not significantly reduce the rate of interest; and to the extent that there is such a reduction, it will not generate a significant increase in investment and hence in aggregate demand (cf. GT, pp. 164, 168–70). Book IV also includes chapter 17 on “The Essential Properties of Interest and Money,” with all of its confusions and obscurities (see Lerner, 1952; see also Hart, 1947, p. 416 and Hansen, 1953, p. 159).

Keynes concludes Book IV with a summary chapter (18) entitled “The General Theory of Employment Re-Stated.” In substance, though not in form, and certainly not with intent (see section 9 below and Patinkin, 1976a, pp. 98–100), this chapter (like the diagram on p. 180 of chapter 14) provides a general equilibrium analysis of the determination (as of a given money-wage rate and nominal quantity of money) of the equilibrium level of national income by the interactions between the commodity (consumption- and investment-goods) and money markets (GT, pp. 246–7). Thus a basic contribution of the General Theory is that it is in effect the first practical application of the Walrasian theory of general equilibrium: “practical,” not in the sense of empirical (though the General Theory did provide a major impetus to empirical work), but in the sense of reducing Walras’s formal model of n simultaneous equations in n unknowns to a manageable model from which implications for the real world could be drawn. Furthermore, like Walras’s model in the Éléments (1926, lessons 29–30), Keynes’s model in the General Theory is one that integrates the real and monetary sectors of the economy. It is this general-equilibrium aspect of the General Theory that Hicks (1937) was subsequently to develop and formalize in his influential IS-LM interpretation of the book—with respect to which Keynes wrote him that “I found it very interesting and really have next to nothing to say by way of criticism” (JMK XIV, p. 79).

Finally, in “Book V: Money-Wages and Prices,” Keynes drops the assumption of a constant money-wage rate and applies the theory of effective demand that he had developed in Books I–IV to an analysis (in the first chapter of this Book, “Chapter 19: Changes in Money Wages”) of the effects of a decline in this rate. It should be emphasized that Keynes regarded such a decline not as an abstract theoretical possibility, but as what had actually happened to money wages in the years immediately preceding the General Theory. Thus from 1925–33, money wages had declined in Britain by 7 per cent, whereas in the United States they had declined over the much shorter period 1929–33 by 28 per cent (sic!) (see Keynes’s allusion to the former on p. 276 of the General Theory, and to the latter on p. 9; on the sources of the above data, see Patinkin, 1976a, pp. 17 and 121). During these periods, however, real wages in both countries actually rose, which was that background of Keynes’s oft-cited enigmatic statement (to which I shall return below) that “there may exist no expedient by which labour as a whole can reduce its real wage to a given figure by making revised money bargains with the entrepreneurs” (GT, p. 13, italics in original).

Keynes’s basic argument in chapter 19 is that a decline in money wages (which in practice would, because of the resistance of workers, take place only very slowly: GT, p. 267; see also ibid., pp. 9, 251, 303) can increase the level of employment only by first increasing the level of effective demand; that the primary way it can generate such an increase is through its effect in increasing the quantity of money in terms of wage units, thereby decreasing the rate of interest and stimulating investment; that accordingly the policy of attempting to eliminate unemployment by reducing money wages is equivalent to a policy of attempting to do so by increasing the quantity of money at an unchanged wage rate and is accordingly subject to the [same] limitations as the latter; namely, that a moderate change “may exert an inadequate influence over the long-term rate of interest,” while an immoderate one (“even if it were practicable”) “may offset its other advantages by its disturbing effect on confidence” (GT, pp. 266–7).

Indeed, the possible adverse effect on confidence is greater in the case of a wage (and price) decline than in that of a monetary expansion, and this for two reasons: first, the decline may create the expectation of still further declines, thus leading firms to postpone carrying out any decision to increase their demand for labour; second, “if the fall of wages and prices goes far, the embarrassment of those entrepreneurs who are heavily indebted may soon reach the point of insolvency—with severely adverse effects on investment” (GT, p. 264). This adverse effect will be reinforced by the fact that the “expectation that wages are going to sag by, say, 2 per cent in the coming year will be roughly equivalent to the effect of a rise of 2 percent in the amount of interest payable for the same period” (GT, p. 265). (This use of what is essentially Fisher’s distinction between the real and nominal interest rates is somewhat inconsistent with reservations that Keynes expressed about it earlier in the General Theory, pp. 141–3.) Hence Keynes’s major conclusion—and indeed the negative component of his central message—that “the economic system cannot be made self-adjusting along these lines” (GT, p. 267). In this way Keynes finally supplies the theoretical basis for his claim in chapter 2 of “Book I: Introduction” that, contrary to the “classical” view, “a willingness on the part of labour to accept lower money-wages is not necessarily a remedy for unemployment”—a claim he had promised would be “fully elucidated … in Chapter 19” (GT, p. 18).

The analysis of chapter 19, together with Keynes’s acceptance in chapter 2 of the “classical postulate” that “the wage is equal to the marginal product of labour” (GT, p. 5), enables us to understand the enigmatic statement cited three paragraphs above. Specifically, if the effect of a decline in the money wage rate on the level of effective demand, hence output, and hence employment is indeterminate, then so too is its effect on the marginal product of labour and hence real wages. Thus Keynes’s statement is simply a reflection of his basic view that

the propensity to consume and the rate of new investment determine between them the volume of employment, and the volume of employment is uniquely related to a given level of real wages—not the other way round (GT, p. 30).

And since Keynes also accepts the classical law of diminishing returns (GT, p. 17), he contends that if a sharp decline in money wages should generate only a slight increase in the level of employment—hence only a slight decrease in the real wage rate—then it must also generate a sharp (though proportionately smaller) decrease in the price level (however, Keynes never explains the dynamic market forces that bring this about; see the discussion below of chapter 21). In Keynes’s words at the end of chapter 19:

It follows, therefore, that if labour were to respond to conditions of gradually diminishing employment by offering its services at a gradually diminishing money-wage, this would not, as a rule, have the effect of reducing real wages and might even have the effect of increasing them, through its adverse influence on the volume of output. The chief result of this policy would be to cause a great instability of prices, so violent perhaps as to make business calculations futile in an economic society functioning after the manner of that in which we live (GT, p. 269).

Accordingly, Keynes concludes chapter 19 with the policy recommendation that “the money-wage level as a whole should be maintained as stable as possible, at any rate in the short period” (GT, p. 270).

This is an appropriate point to note that though in Book III, Keynes take[s] account of what might be called the capital-gains effect on consumption (GT, pp. 92–4), he does not do so with reference to the wealth effect as such, and in particular does not do so with reference to the real-balance component of this effect. Correspondingly, his analysis in chapter 19 does not take account of the positive real-balance effect generated by a wage and price decline. But since the operation of this effect in this deflationary context suffers from the same limitations described in this chapter, I do not believe that taking account of it would have affected Keynes’s basic conclusion about the inefficacy of a wage decline as a means of increasing employment (Patinkin, 1951, pp. 272–8; 1956, pp. 234–7; 1965, pp. 336–40; 1976a, pp. 110–11).

Thus chapter 19 is the climax of the General Theory. And it is clear from it that, the many contentions to the contrary notwithstanding, the analysis of this book does not depend on the assumption of absolutely rigid money wages. What is, however, true is that, because of the aforementioned adverse effects of flexibility, the relative stability of money wages is the concluding policy recommendation of the chapter. I must also emphasize that were the General Theory to depend on the assumption of wage rigidity, there would be no novelty to its message: for the fact that such a rigidity can generate unemployment was a commonplace of classical economics. Needless to say, this does not mean that Keynes went to the opposite extreme of assuming wages to be perfectly flexible. Instead, his view of the real world was that “moderate changes in employment are not associated with very great changes in money-wages” (GT, p. 251). At the same time, Keynes emphasizes that there exists an “asymmetry” between the respective degrees of upward and downward wage flexibility: that, in particular, “workers are disposed to resist a reduction in their money-rewards, and that there is no corresponding motive to resist an increase” (GT, p. 303).

I might note that Keynes’s lack of faith in the efficacy of the market-equilibrium process in a macroeconomic context also manifests itself in such earlier writings as The Economic Consequences of Mr Churchill (1925; JMK IX, pp. 227–9 et passim) and the Treatise (I, pp. 141, 151, 244–5, 265). Nor (I conjecture) would Keynes have been impressed by the contention of some exponents of the “new classical macroeconomics” that the market would not permit a situation of unemployment to persist because contracts could then be made which would make everyone better off. Indeed, I would conjecture that, as one who had seen how the most civilized countries of the world had engaged for four long years of stalemated trench warfare in the mutual slaughter of the best of their young men, Keynes was not predisposed to believe in natural forces that always brought agents to generate a mutually beneficial situation. Because of the uncertainty of how others react to our actions, the actual world for Keynes was one that—in a macroeconomic context—could readily lead to the “globally irrational” results of the prisoner’s dilemma; not to the rational results of the Walrasian auctioneer.

Book V also contains “Chapter 21: The Theory of Prices.” In “Book I: Introduction,” Keynes had stated that “we shall find that the Theory of Prices falls into its proper place as a matter which is subsidiary to our general theory” (GT, p. 32). In particular, as already noted, the level of effective demand determines the level of employment, hence the marginal productivity of labour, and hence the real wage rate; for any given money wage rate, then, the price level is determined. In the words of chapter 21, “[t]he general price-level (taking equipment and technique as given) depends partly on the wage-unit [i.e., on the money wage rate] and partly on the volume of employment” (GT, p. 295). It should again be noted that Keynes’s discussion here is completely mechanical and provides no explanation of the dynamic market forces that cause the price level to change as a consequence of a change in money wages.

Chapter 21 also includes a discussion of the quantity theory of money. In the Treatise, as noted above, Keynes regarded this theory to be deficient only because of the absence of a dynamic analysis—which he then supplied. In the General Theory, however, Keynes saw himself as providing a new theory that replaced the quantity theory entirely. For, he claimed, the quantity theory holds only on two unrealistic conditions: first, that the speculative demand for money “will always be zero in equilibrium” (actually, this is not a necessary condition; see Patinkin 1956 and 1965, ch. XII:1); second, that the level of output is constant at full employment (GT, pp. 208–9). Thus Keynes may well have regarded the General Theory as the culminating chapter in The Saga of Man’s Struggle for Freedom from the Quantity Theory. Indeed, in his preface to the French edition of the General Theory, Keynes wrote that “the following analysis [of money and prices] registers my final escape from the confusions of the Quantity Theory, which once entangled me” (JMK VII, p. xxxiv).

The last Book of the General Theory—“Book VI: Short Notes Suggested by the General Theory”—is, as its title indicates, essentially an appendage to it, one that could have been omitted without affecting the logical integrity of the book as a whole. The Book begins with “Chapter 22: Notes on the Trade Cycle.” Here Keynes contends that the cycle is generated by changes in the marginal efficiency of capital—which changes, for reasons discussed in this chapter, “have had cyclical characteristics.” He claims no novelty for this interpretation (“these reasons are by no means unfamiliar either in themselves or as explanations of the trade cycle”) and explains that the purpose of the chapter is “to link [these reasons] up with the preceding theory” (GT, pp. 314–15). Chapter 23 is entitled “Notes on Mercantilism, the Usury Laws, Stamped Money and Theories of Under-Consumption”—whose omnibus title is a further indication that the material of Book VI is not an integral part of the book. The last chapter of the Book—and of the General Theory as a whole—is “Chapter 24: Concluding Notes on the Social Philosophy towards Which the General Theory Might Lead.” Only to a minor extent, however, is this chapter concerned with the question of short-run, full-employment policy—and in this context Keynes reiterates his scepticism of sole reliance on monetary policy and his corresponding belief “that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment” (GT, p. 378). Most of the chapter is devoted to the long-run implications of a successful full-employment policy for the accumulation of capital, hence the rate of interest and the distribution of income; for the future of laissez-faire versus state socialism; and for the prospects of war and peace.

In chapter 24, Keynes also expresses his belief in the efficacy of the market mechanism, once the “socialisation of investment” has assured the maintenance of full employment. Under these conditions, says Keynes,

there is no objection to be raised against the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed between them. Again, if we have dealt otherwise with the problem of thrift, there is no objection to be raised against the modern classical theory as to the degree of consilience between private and public advantage in conditions of perfect and imperfect competition respectively. Thus, apart from the necessity of central controls to bring about an adjustment between the propensity to consume and the inducement to invest, there is no more reason to socialise economic life than there was before (GT, pp. 378–9).

(In a similar way, Keynes was to argue in his posthumously published article on “The Balance of Payments of the United States” (1946) that it was important to establish a framework for international trade and finance “which allows the classical medicine to do its work” in establishing equilibrium in this context (JMK XXVII, pp. 444–5; see also Cairncross, 1978. But see Keynes’s 1926 essay on “The End of Laissez-Faire” (reproduced in JMK IX, pp. 272–94) for some reservations à la Knight’s classic 1923 paper on “The Ethics of Competition” about the workings of the market economy.)

5. From the foregoing it is clear that the primary concern of the General Theory is theory and not policy, though Keynes does make brief use of the theory to explain the necessity for public-works expenditures to combat severe unemployment; that the primary concern of its theory is output (or employment) and not prices; and that the primary concern of its theory of output is the explanation of equilibrium at less-than-full-employment and not cyclical variations in output.

Another point which is clear from this summary is that Keynes’s repeated use of the term “unemployment equilibrium” (GT, pp. 28, 30, 242-3, 249) in the first 18 chapters of the General Theory must, strictly speaking, be understood as referring to a Marshallian short-period equilibrium (Principles, Book V, ch. v) that is attained under the provisional assumption of a constant money-wage rate (GT, pp. 27, 247). Clearly, such an equilibrium no longer obtains once Keynes drops this assumption in the climactic chapter 19, proceeds to analyse the effects on the economy of a decline in the money wage rate, and shows that such a decline will not necessarily lead to an increase in employment and a fortiori not to the establishment of full-employment equilibrium (see above). Thus in the strict sense of the term, the General Theory is a theory of unemployment disequilibrium: it analyses the workings of an economy in which money wages and hence the rate of interest may be slowly falling, but in which “chronic unemployment” (GT, p. 249) nevertheless continues to prevail, albeit with an intensity that may be changing over time (cf. Patinkin, 1951, part III; 1956, chs XIII:1, XIV:1, and Supplementary Note K:3, reproduced unchanged in the 1965 edition; 1976a, pp.113–19).

This interpretation would seem to be in contradiction to Keynes’s emphasis that one of his major accomplishments in this book was to have demonstrated the possible existence of “unemployment equilibrium” (GT, pp. 30, 242–3). I would like to suggest that the answer lies in a letter that Keynes wrote to Roy Harrod in August 1935, in reply to the latter’s criticism that Keynes’s discussions of the classical position were carried out in an unduly polemical style that exaggerated the differences between the two positions. In Keynes’s words:

the general effect of your reaction … is to make me feel that my assault on the classical school ought to be intensified rather than abated. My motive is, of course, not in order to get read. But it may be needed in order to get understood. I am frightfully afraid of the tendency, of which I see some signs in you, to appear to accept my constructive part and to find some accommodation between this and deeply cherished views which would in fact only be possible if my constructive part has been partially misunderstood. That is to say, I expect a great deal of what I write to be water off a duck’s back. I am certain that it will be water off a duck’s back unless I am sufficiently strong in my criticism to force the classicals to make rejoinders. I want, so to speak, to raise a dust; because it is only out of the controversy that will arise that what I am saying will get understood (JMK XIII, p. 548; italics in original).

And what could “raise more dust” than a seemingly frontal attack on the “deeply cherished” classical proposition that there could not exist a state of unemployment equilibrium? Conversely, what could be more easily “accommodated” within the classical framework than the statement that a sharp decline in aggregate demand would, despite the resulting decline in the wage-unit, generate a prolonged period of disequilibrium which would be marked by a continuous state of unemployment?

It also seems to me that it is precisely the attempt to interpret the General Theory as presenting a theory of unemployment equilibrium in the fullest sense of the term that has led to its interpretation (despite the internal evidence to the contrary, and despite the facts to the contrary that existed at the time that the book was being written) as being based on the special assumptions of absolutely rigid money wages and/or the “liquidity trap.” For by definition there cannot be a state of long-run unemployment equilibrium in the sense that nothing in the system tends to change unless wages are rigid. Alternatively, if money wages are not rigid, then a necessary condition for equilibrium—in the sense of the level of employment remaining constant over time—is that the rate of interest remain constant; and a necessary condition for the rate of interest to remain constant in the face of an ever-declining money-wage and hence ever-increasing real quantity of money is that the economy be caught in the “liquidity trap.” Correspondingly, once we recognize that the General Theory is concerned, strictly speaking, with a situation of unemployment disequilibrium, we also understand that the validity of its analysis does not depend on the existence of either one of these special assumptions.

Three further observations about the General Theory: First, I have already noted that the exposition of the theory of effective demand in Book I is carried out, not in terms of national income—to which concept Keynes even expresses what he regards as methodological objections (GT, pp. 38, 40)—but in terms of the level of employment. In part, this was undoubtedly due to the fact that the level of employment was indeed his major concern. But I also feel that this provides an instructive instance in our discipline of a basic characteristic of the physical sciences: namely, the relationship between the development of theory and the development of tools of measurement. In particular, I conjecture that Keynes’s ambivalence toward the use of the national-income concept in the General Theory (for he did make use of it in his chapters on the consumption function (ch. 10) and liquidity-preference function (ch. 15), respectively) was not unrelated to the fact that at the time national-income estimates had not yet become the household concept they are today; indeed there did not then even exist current official estimates of British national income. In contrast, ever since the early 1920s, estimates of British employment—or rather unemployment, as measured by the “Number of Insured Persons Recorded as Unemployed”—were being published monthly in the Ministry of Labour Gazette. Similarly, I conjecture that the change in Keynes’s view as manifested in his 1940 How to Pay for the War (JMK IX, pp. 416–17, 429; see the discussion of Figure 1 in section 3 above)—and his willingness (albeit with reservations) to make use in it of Colin Clark’s national-income estimates, about which he had earlier expressed much scepticism—reflected in part the exigencies of wartime, and in part the increased respectability and acceptability of national-income estimates as a result of their publication (based on the work of Simon Kuznets) on an official, current annual basis by the United States beginning with 1935 (cf. Patinkin 1976b, pp. 129–30, 243–5, 248–54; cf. also the discussion of Keynes and national-income statistics in section 7 below).

Second, in the General Theory, Keynes also appears as a historian of economic thought. Thus chapter 2 in entitled “The Postulates of the Classical Economics” and references to “classical theory” are strewn throughout the book. Similarly, most of chapter 23 is devoted to his “Notes on Mercantilism,” which are largely based on Heckscher’s (1935) classic work. In a comment thirty-odd years later on his 1936 review of the General Theory, Viner (1964, p. 254)—who had in 1930 published what was essentially a monograph on mercantilism (reprinted in Viner, 1937, chs 1–2: see ibid., p. xiv)—explained that the terms of reference of his original review did not include the doctrinal aspects of the book, and went on to express reservations about the “objectivity and judiciousness” of Keynes “as a historian of thought in areas in which he was emotionally involved as a protagonist and prophet.” Viner did not specify the areas he had in mind, but Heckscher (1946) explicitly referred to Keynes’s treatment of mercantilism and charged him with citing from his (Heckscher’s) work “only … those parts of mercantilist theory that happen to coincide with his own analysis of economic behaviour” (ibid., p. 340; actually, most of Heckscher’s article is devoted to a criticism of Keynes’s theory itself). However, Hutchison (1978, pp. 127–35) and Walker (1986, part IV), basing themselves on more recent studies of mercantilism and its period, have largely supported Keynes’s treatment, particularly with respect to his emphasis on the mercantilists’ concern with the problem of unemployment, and his corresponding contention that they advocated a positive balance of trade and resulting inflow of gold not as a fetish, but as a rational means of dealing with this problem (GT, pp. 346–48). But Hutchison (1978, p. 128) also cites Blaug’s (1962, p. 15; 1964, pp. 114–15) dissenting opinion, and Walker (1986, p. 28) notes that Keynes was nevertheless guilty of “excessively broad generalizations” about the mercantilist literature.

Insofar as Keynes’s treatment of “classical economics” is concerned, both Hutchison and Walker conclude that Keynes’s discussion of Ricardo and Say’s Law, on the one hand, and Malthus’s concern with the possibility of the inadequacy of aggregate demand, on the other (GT, pp. 18–21, 32–4) constitute important contributions to the history of economic thought, though here too they indicate some inaccuracies (see also Patinkin, 1956 and 1965, Supplementary Note L, on Keynes’s misrepresentation of the passage in Mill’s discussion of Say’s Law which Keynes cites on p. 18 of the General Theory). At the same time, both Hutchison and Walker reject Keynes’s contention that classical economics in this sense continued unchallenged through the second half of the 19th century on into the 20th. In particular, Hutchison (1978, pp. 165–6, 175–99) conclusively shows that Keynes was not justified in including Pigou among the “classical economists” (GT, p. 3, n1; see also Corry, 1978, pp. 8–11; see also Walker, 1985, for a favourable view (though it too with some reservations) of Keynes as a historian of thought in his 1933 Essays on Biography).

In sum, though Keynes in the General Theory provided valuable and stimulating insights with respect to certain points in the history of economic thought, Viner did not err in saying that the balanced scholarly treatment of this subject was not Keynes’s forte (cf. also Hutchison, 1978, p. 173 and Walker, 1986, p. 29).

My third and last observation is that in order to understand why the General Theory had such a revolutionary impact on the profession—and indeed on the general public—we must take account of the circumstances that prevailed when it burst on the scene. In the early 1930s, the Western world was desperately searching for an explanation of the bewildering and seemingly endless depression that was creating untold misery for millions of unemployed and even threatening the viability of its democratic institutions. Indeed, largely as a result of the widespread social unrest caused by the mass unemployment, a totalitarian government had already taken power in Italy and a far more evil and oppressive one was doing so in Germany. And the appearance of the General Theory in 1936 offered not only an explanation, but also a confident and theoretically-supported prescription for ending depressions within a democratic framework by proper government policies. Thus the General Theory provided an answer not only to a theoretical problem, but to a burning political and social one as well. I might also add that the fact that the theoretical revolution embodied in the Keynes’s General Theory took place concurrently with the Colin Clark-Simon Kuznets revolution in national-income measurement further increased its impact on the profession: for those measurements made possible the quantification of the analytical categories of the General Theory, hence the empirical estimation of its functional relationships, and hence its application to policy problems (cf. Patinkin, 1976b).

Despite the many criticisms and discussions of the General Theory that followed its publication (cf. e.g., the review articles by Harrod, Hicks, Leontief, Lerner, Meade, Pigou, Viner et al. reprinted in Lekachman, 1964 and Wood, 1983), its basic analytical structure not only remained intact, but also defined the research programme for both theoretical and empirical macroeconomics for the following three decades and more. Truly a scientific achievement of the first order. And as with the passage of time we gain a more critical view of the accomplishments—and deficiencies—of “monetarism” and of “the new classical macroeconomics” of the last two decades, an appropriately modified Keynesian model that will take advantage of what we have learned from these developments may yet regain its place as the leading one for macroeconomic analysis (Howitt, 1986; for some conjectures about what Keynes might have thought of these developments, see Patinkin, 1984).

6. Any great work brings in its wake claims of priority for other writers—and the General Theory was no exception. Thus within a year after its publication, Bertil Ohlin (1937) claimed that there were “surprising similarities” between the analysis in this book and that which had been developed in the writings (in Swedish) of what he called the “Stockholm school,” under which rubric he included Erik Lindahl and Gunnar Myrdal as well as himself. Similarly, in a review article on the General Theory, the Polish economist Michal Kalecki (1936) claimed that he had anticipated its main arguments in a 1933 monograph in Polish on the business cycle (the “essential part” of which was published many years later in English translation in Kalecki, 1966, pp. 1, 3–16). Ohlin’s claim was presented in the Economic Journal, then the leading journal of the economics profession, and gained immediate attention—so much so that the claim of the Stockholm School became a “perennial of doctrinal history” (in Gustafsson’s, 1973, apt phrase). In contrast, Kalecki’s claim was published in Ekonomista—the professional journal of Poland’s economists, published, of course, in their own language—and so received no attention outside that country. (An English translation of this review has only recently been published; see Targetti and Kinda-Hass, 1982.) Fifteen years later, however, the claim of Kalecki was brought to the attention of the profession as a whole by Lawrence Klein (1951) and Joan Robinson (1952), and has in certain quarters received increasing support ever since.

A detailed examination of these claims, however, has led me to reject them on the grounds that the respective central messages of these writers were different from that of the General Theory (Patinkin, 1982, chs 1–4). In particular, the central message of the Stockholm school (like that of Keynes’s Treatise) was a further development of that of Wicksell, and had to do with the interrelationships of the rate of interest and prices, and only indirectly with output. And though Kalecki’s central message had to do with output, its concern was not with the forces that generate equilibrium at low levels of output, but with the forces that generate cycles of investment and hence output: more specifically, not with the feedback mechanism of the General Theory that equilibrates planned saving and investment via declines in output, but with the cyclical behaviour of investment in a capitalist economy on the implicit assumption that there always exists equality between planned savings and investment. At the same time I must emphasize that in his primary concern with quantities as against prices; in his concentration on national-income magnitudes and functional relations among them; and in his corresponding emphasis on analysing the relationship between investment and other macroeconomic variables, Kalecki came significantly closer to the General Theory than did the Stockholm School, and this was particularly true of his semi-popular 1935 paper “The Mechanism of the Business Upswing.”

7. The foregoing discussion has highlighted the differences between the respective volumes of Keynes’s trilogy. There are, however, also important similarities. Thus a common element of these books is their concern with practical policy problems, and their related concern with the empirical aspects of these problems. At the same time I must emphasize that Keynes (like the great majority of his contemporaries) largely used empirical data for illustrative purposes, or at most as a basis for rather impressionistic observations about the relations between the variables described by the data. Though there are partial exceptions (see the second paragraph below), Keynes practically never carried out a systematic statistical analysis of empirical data as a basis for conclusions.

Thus, for example, Keynes’s excellent presentation of the purchasing-power-parity theory in the Tract is supported by charts and diagrams showing the generally corresponding movements of the actual exchange rates of England, France and Italy with those respectively predicted by the theory (Tract, pp. 81–6). Similarly, Keynes’s aforementioned analysis of inflation as a tax on real cash balances—and his explanation that this tax will decrease the volume of these balances that individuals will be willing to hold—is illustrated by data from the postwar hyperinflations of Germany, Austria, and Russia (Tract, pp. 45–6). Similarly, in the second, “applied” volume of his Treatise, Keynes presents empirical estimates of the variables that play a key role in the theory he developed in the first volume: namely, the quantity of money, the velocity of circulation, the volume of working capital—and he even adds a long chapter (30) providing historical illustrations of his theory.

Though there is less emphasis on empirical data in the General Theory, it is noteworthy that Keynes was quick to make use in it (though somewhat carelessly; see the correspondence reproduced in JMK XXIX, pp. 187–206) of the Simon Kuznets’s (1934) preliminary estimates of net investment in the United States in order to illustrate his (Keynes’s) basic contention about the critical role of wide fluctuations in this variable in generating business cycles (GT, pp. 102–5). What is even more noteworthy is Keynes’s use of these data in order to make an empirical estimate (crude as it was) of the magnitude of the multiplier in the United States—and thence of the marginal propensity to consume of that country (GT, pp. 127–8). Thus Keynes not only made the marginal propensity to consume a central component of macroeconomic theory, but also provided the first estimate of its magnitude that was based on an examination of statistical time series!

I must, however, immediately add that there are many problematic aspects of this estimate, not least of which is the mystery of the source of the national-income data which Keynes used (together with Kuznets’[s] aforementioned data on investment) to estimate the multiplier. Furthermore, despite the fact that he was one of the founding members of the Econometric Society in 1933 and even served as its President during 1944–45, Keynes was actually extremely skeptical of econometric methods. Thus his oft-cited critical review (1939) of Tinbergen’s classic work was devoted not to the much better known second volume of this study on Business Cycles in the United States of America, 1919–1932 (1939), but to the first volume (published a few months earlier), A Method and Its Application to Investment Activity, in which Tinbergen set out and exemplified the principles of multiple-correlation analysis. Accordingly, the criticisms Keynes presented in this review were levelled not a Tinbergen’s ambitious 46–equation model of the United States economy, but at the use of correlation analysis to estimate a regression for even a single equation! It should, however, be noted that though not all of Keynes’s criticisms were well taken, some raised problems that continue to trouble econometricians: namely (though obviously not in the terms that Keynes used), the problems of specification bias and of simultaneous equation bias (Patinkin, 1976b, sections 1, 3; cf. also Lawson and Pesaran, 1985).

Another aspect of Keynes’s interest in the empirical aspects of our discipline was his concern with improving the scope and reliability of economic data. Thus in the course of presenting the aforementioned estimates in the second volume of the Treatise, Keynes repeatedly complains about the inadequacy of the data (TM II, pp. 78, 87). Keynes was also responsible for the final chapter in the Macmillan Report (1931), which was devoted to proposals for extending and improving available economic s[t]atistics in Britain. It is, however, noteworthy that these proposals did not include one for the construction of current national-income statistics. Similarly, in the years that followed, Keynes failed to support Colin Clark’s pioneering work in this field (1932, 1937). It was only after the outbreak of World War II that this attitude changed, and then Keynes played an important role in promoting the publication of the famous 1941 White Paper, Analysis of the Sources of War Finance and an Estimate of the National Income and Expenditure in 1938 and 1940 (Cmd. 6261), for which James Meade and Richard Stone were primarily responsible, and which marked the beginning of official British national-income statistics (Patinkin, 1976b, pp. 230–31, 244–5, 248–54).

Though all three of Keynes’s books are concerned with policy issues, they nevertheless differ in the extent and sense of immediacy with which their policy discussions are presented. In view of the origin of the Tract in articles in the Manchester Guardian, it is not surprising that discussions on current policy issues are paramount in it. Indeed, having only a short time before dealt so successfully with prime ministers in his Economic Consequences of the Peace (1919, JMK II) and in his Revision of the Treaty (1922, JMK III), Keynes had no hesitations in dispensing advice on current problems directly from the pages of the Tract to the finance ministers (or their equivalent), not only of England and the United States, but also of Czechoslovakia (p. 120), Germany (pp. 50–52), and France (pp. xxi–xxii).

In contrast—as befits a comprehensive, scientific work—Keynes’s policy recommendations of the Treatise are for the most part of a more general nature, though here too there are references to specific, immediate issues (e.g., TM II, pp. 270 ff, 348 ff). Least specific in its policy proposals, for reasons indicated in section 3 above, is the General Theory.

What were the policy problems that concerned Keynes? The major one was obviously unemployment. This had plagued Britain in the two years that preceded the publication of the Tract (1923) and it continued to be a serious problem in the five years that he was writing the Treatise (1930). In contrast, those were years of boom and prosperity in the US; and when in the early 1930s—the period of writing the General Theory (1936)—prosperity gave way to depression in the US as well, unemployment in Britain became even more serious. A common characteristic of all three of these books is Keynes’s opposition to attempts to combat unemployment by reducing the nominal wage rate. However, it seems to me that there is a difference between the Treatise and the General Theory on this point: for my impression is that in the Treatise, Keynes believed that such a reduction could theoretically help but practically could not be carried out; whereas in the General Theory, he opposed it on theoretical grounds as well. In part this difference may have stemmed from the fact that Keynes in 1930 was writing under the influence of the relative inflexibility of British money wages in the years that had preceded, whereas in 1936 he also had before him the United States experience of the sharp reduction in money wages during 1929–33 that had not succeeded in solving the unemployment problem (note again Keynes’s allusion to this experience on p. 9 of the General Theory).

At the same time, a recurrent theme of Keynes’s discussion of unemployment was that if by agreement or decree money wages could be instantaneously and uniformly reduced in all sectors of the economy, then the problem would be solved (cf. Economic Consequences of Mr. Churchill, 1925, JMK IX, pp. 211, 228–9; TM I, pp. 141, 151, 244–5, 265, and 281; GT, pp. 265, 267, and 269). For such an instantaneous reduction would be accomplished before it could create adverse expectations, and it would also not change relative wage rates as between workers in different industries (see JMK IX, p. 211 and GT, p. 14 for Keynes’s emphasis on the resistance of workers to such relative changes). Thus in the General Theory Keynes writes:

To suppose that a flexible wage policy is a right and proper adjunct of a system which on the whole is one of laissez-faire, is the opposite of the truth. It is only in a highly authoritarian society, where sudden, substantial, all-round changes could be decreed that a flexible wage-policy could function with success. One can imagine it in operation in Italy, Germany or Russia, but not in France, the United States or Great Britain (GT, p. 269).

This is a somewhat naive notion of what even a totalitarian government can do. In any event, this passage—and the context in which it and the other passages cited above appear—makes it clear that Keynes’s purpose was not to advocate the policy of wage flexibility, but to provide a “negative proof” of its impracticability for a democratic society. (Today’s version of Keynes’s statement in the foregoing passage would be that if equilibrium prices and wages were established by means of a stable recontracted tâtonnement carried out by a Walrasian auctioneer, then, by definition, full employment would always obtain.)

At the other extreme from the problem of unemployment was that of avoiding inflation. It is not surprising that this was a basic concern of Keynes during the period of the disastrous hyperinflations in Europe that followed World War I, which experience led him in his Economic Consequences of the Peace (1919, p. 148) to write that “Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency” (a statement that was actually due to Preobrazhensky; see Fetter, 1977, p. 78). Similarly, the adverse effects of inflation was a theme which Keynes most eloquently and forcefully presented in his Tract on Monetary Reform (1923). Thus in the preface to this book Keynes wrote: “Unemployment, the precarious life of the worker, the disappointment of expectation, the sudden loss of savings, the excessive windfalls to individuals, the speculator, the profiteer—all proceed in large measure from the instability of the standard of value.” I must, however, add that in this book, as well as in his subsequent writings, Keynes consistently regarded the harm caused by deflation and its accompanying unemployment to be significantly greater than that of inflation.

It was probably the traumatic post-World War I experience—still fresh in his mind—that led Keynes, even in his 1930 Treatise, after more than five years of deflation and unemployment in Britain, to continue to be concerned with the dangers of inflation. It is also noteworthy that in his Essays in Persuasion (JMK IX, pp. 57–75)–published a year later–Keynes reproduced excerpts of the discussion of the destructive effects of inflation that had appeared in his Economic Consequences of the Peace and in his Tract—including the alleged statement of Lenin’s (ibid. p. 57).

Perhaps because of the increasing severity of the depression in Britain in the years between the Treatise and the General Theory—and, even more so, because the depression had then become world-wide—the latter work is little concerned with the problems of inflation, though it does emphasize the undesirability of “great instability of prices” (GT, p. 269; see the discussion of chapter 19 in section 4 above). It should also be noted that a recurrent theme of the General Theory (pp. 173, 249, 253, 296 and 301) is that as the level of employment in an economy increases as a result of an increase in effective demand, the money wage rate begins to rise even before full employment is reached. This view may be interpreted as something of an adumbration of one aspect of the later Phillips-curve analysis: namely the co-existence of inflation and unemployment.

It is also significant that after Britain began its rearmament programme early in 1937—and when unemployment was still around 12 per cent—Keynes expressed concern with the possible inflationary outcome of such a programme that might be generated by the geographical immobility of labour. In particular, in two articles in the Times in the spring of 1937, Keynes argued (inter alia) that in order to avoid such pressures, the increased defence expenditures should be directed toward the distressed areas of the economy (JMK XXI, p. 407; see also ibid., pp. 385–6; cf. also Hutchison, 1977, pp. 10–14). And once war broke out, Keynes wrote his influential pamphlet on How to Pay for the War (1940), whose major purpose was to present a programme for financing the war without generating inflation—the main component of the programme being a proposal to adopt compulsory savings.

Two points should be made about the relationship between theory and policy in the Treatise and in the General Theory. First, in both cases the major contribution of the book is with respect to theory—and the purpose of the theory is to provide a rigorous underpinning for a policy position which already had many adherents. As Keynes himself indicated in chapter 13 of the Treatise, this was certainly true for the bank-rate policy he advocated in that work. And it is also true of the public-works-expenditure policy advocated in the General Theory, a policy which had been advocated by other British and American economists as well during the 1920s and early 1930s (cf. Hutchison, 1953, pp. 409–23 and 1978, pp. 175–99; Patinkin, 1969; Stein, 1969, chs 2, 7; Winch, 1969, pp. 104–46; and Davis, 1971). Indeed, as noted above, Keynes himself had already advocated this policy in his 1929 Can Lloyd George Do It?, and even here he was basically repeating views he had expressed five years earlier in the Nation and Athenaeum (JMK XIX, pp. 221–3). Accordingly, as also noted above, the major revolution effected by the General Theory was in the field of theory, and not of policy. And if (unlike the General Theory) the Treatise did deal at length with policy, it was not because it made any basic, new contribution to this question (at least in a domestic context), but because it was—as its name indicated—a comprehensive treatise, designed, inter alia, to describe the state of the art with respect to both theory and practice.

Second, and relatedly, it seems to me that the change in Keynes’s policy views between the Treatise and the General Theory stemmed less from the transition from the fundamental equations to the C + I + G = Y equation than from British economic developments in the quinquennium between the appearance of those two books. For, as we have seen, Keynes advocated public-works expenditures for the purpose of combating unemployment even in the Treatise, albeit as a second-best policy to be carried out in special circumstances. And what caused him to advocate such expenditures as a necessary addition to interest-rate policy (which, as in the Treatise, he continued to regard as an essential component of full-employment policy; cf. GT, p. 316) was the experience of five additional years of deep depression in the face of a “cheap-money” policy that had brought the rate of interest down to unprecedented lows. In brief, I conjecture that it was this experience that led Keynes of the General Theory to conclude:

For my own part I am now somewhat sceptical of the success of a merely monetary policy directed towards influencing the rate of interest. I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views and on the basis of the general social advantage, taking an ever greater responsibility for directly organizing investment; since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital, calculated on the principles I have described above, will be too great to be offset by any practicable changes in the rate of interest (GT, p. 164).

8. Just as Keynes’s trilogy is bound together by a common concern with the problem of unemployment, so is it bound by a common lack of concern with the problem of economic growth. With respect to the Treatise and the General Theory, this omission is an understandable characteristic of the economic literature of the depression years. For at a time when a dismaying percentage of the existing productive potential was idle, it would have taken an unrealistic soul indeed to have concerned himself with the problem of assuring the further growth of this potential. But I think that this lack of concern reflected an additional element in Keynes’s thought—and probably in that of many of his contemporaries as well.

In particular, I think that Keynes originally viewed economic growth as a process that would emerge naturally—and at a satisfactory pace—from a free-market system in which households saved, and then used these savings to purchase the securities which firms issued in order to finance their expansion. “For a hundred years [before World War I] the system worked, throughout Europe, with an extraordinary success and facilitated the growth of wealth on an unprecedented scale” (Tract, p. 6)—and Keynes, like his contemporaries, was not much concerned with things outside Europe, in the broad sense of Western civilization. Now, what had seriously interfered with the growth process of Europe after the World War were the disastrous inflations, which had wiped out the real value of past savings and had accordingly discouraged further saving. Correspondingly, a necessary—and sufficient—condition to reactivate the growth process at a satisfactory pace was to reestablish the confidence of the public in the future real value of its savings (Tract, pp. 16–17).

The General Theory introduced another factor that interferes with steady growth: unemployment. And parallel to his view in the Tract, Keynes felt that once this disturbing factor was eliminated, growth would again proceed at a satisfactory pace. Indeed, if full employment could be maintained, “a properly run community equipped with modern technical resources, of which the population is not increasing rapidly, ought to be able to bring down the marginal efficiency of capital in equilibrium approximately to zero within a single generation” (GT, p. 220): the “zero” of the classical stationary state.

In brief, I would conjecture that in Keynes’s view at this time there was no need for any special analysis of the process of economic growth. All that one had to do was to ensure the maintenance of two necessary preconditions: a stable value of money and full employment. And growth—to the extent that the economy was interested in it (cf. GT, p. 377)—would take care of itself.

(Though Keynes did not concern himself with the problem of growth, the analytical framework of the General Theory served as the point of departure for the growth models which were subsequently developed. In this context it is interesting to note the transformation that took place over the years in the attitude toward saving: whereas the spirit of the General Theory hovers over the early contributions by Harrod (1939) and Domar (1946), which regard the increase in potential savings generated by increasing income as a threat to full employment, and growth as the means (via the acceleration principle) of generating the level of investment necessary for absorbing these savings and thus eliminating this threat, the later contributions regard savings as a desirable act necessary for financing the additional investment required for the growth process. Correspondingly, growth was transformed from being a means to an end to being an end in itself.)

Another common bond of the Treatise and General Theory, in quite a different plane, is the fact that the highly novel theoretical developments which mark both works were first presented to the profession at large as finished products, i.e. in the form of published books. In neither case did Keynes attempt to exploit the relatively long period of preparation that was involved (roughly, five years) in order to publish articles in the leading scientific journals on the salient features of his new theories and thus to benefit from the exposure of these theories to the criticism of the profession at large before formulating them in final book form. It is true that such a “research strategy” was much less customary at the time Keynes wrote than it became later. But I would conjecture that Keynes’s failure to follow such a strategy also reflected his belief that the quintessence of economic knowledge was in Cambridge—which geographical point need at most be extended to a triangle that would include London and Oxford. So why bother publishing articles in order to benefit from criticism, if the most fruitful criticisms could be reaped more conveniently and efficiently simply by circulating draft-manuscripts and galley proofs among his colleagues in this fertile triangle?

And as the materials in JMK XIII show us, this is indeed the procedure that Keynes employed in the writing of the General Theory. On the other hand, there is little if any evidence that the Treatise was subjected to much effective prepublication criticism even within this triangle. And this is particularly true for what Keynes considered to be its major theoretical innovation—the fundamental equations (Patinkin, 1976a, pp. 20–21, 29–32). Correspondingly, there are many serious deficiencies in the Treatise which were pointed out immediately after its publication and which (I conjecture) would have been avoided if only it had been subjected to such criticism. I would also conjecture that it was precisely this unfortunate experience with the Treatise that Keynes had in mind when in the preface to the General Theory he wrote that “It is astonishing what foolish things one can temporarily believe if one thinks too long alone, particularly in economics (along with the other moral sciences), where it is often impossible to bring one’s ideas to a conclusive test either formal or experimental”—and that accordingly made him so eager to seek out criticism at every stage of the writing of the General Theory.

Might I also digress to suggest that another cause of the deficiencies in the Treatise was the simple but frequently neglected fact that Keynes too was of flesh and blood, subject like all mortals to the inexorable constraint that there are only 24 hours in the day; and there can be little doubt that Keynes just did not have enough hours to devote to the writing of the book, and especially of its final version. In particular, in August 1929, Keynes informed his publisher that he felt he had to “embark upon a somewhat drastic rewriting” of what was then a one-volume book, for the most part already in galley and page proof (JMK XIII, pp. 117–18). But three months later Keynes was appointed to the famous Macmillan Committee and proceeded to play a leading role in its deliberations. Then at the beginning of 1930, he became a member—and a most active one—of the newly appointed Economic Advisory Council (see section 11 below). All this makes it difficult to believe that Keynes could have had enough time during 1930 to devote to the rewriting of the Treatise that he deemed necessary.

Another indication of this pressure of time is the fact that though Hawtrey had provided Keynes with basic criticisms of the Treatise before its publication (specifically, in the spring and summer of 1930), Keynes did not take account of them and did not even answer Hawtrey until a month after the book was published in October 1930. Keynes apologised then for this delay by explaining that he was, as we can well believe, “overwhelmed” with work of the Macmillan Committee, the Economic Advisory Council “and a hundred other matters” (JMK XIII, p. 133). And I suspect that this was also the reason that in 1930 Keynes did not give the series of lectures on monetary economics that it was his custom to give every autumn term at Cambridge (see section 11 below), and that in autumn 1931 he deferred his lectures to the following spring.

And though it may sound like a morality play—like a didactic reaffirmation of the victory of good scientific procedures over bad—I would like to point out that in the writing of the General Theory this pressure of time was much less evident. In particular, after the completion of the Macmillan Report in June 1931, Keynes seems to have been much less occupied than before with activities on behalf of the government. Similarly, after 1933 there was (to judge from an enumeration of the relevant entries in Hudson’s unpublished and admittedly incomplete bibliography of Keynes’s writings) a falling-off in the intensity of his journalistic activities. Correspondingly, I would conjecture that in the last two years before their respective publication, Keynes was able to concentrate far more on the writing of the General Theory than he had been able to on the writing of the Treatise.

9. I turn now to some observations on Keynes’s style—both analytical and literary. Insofar as the analytical style is concerned, let me again note Keynes’s failure to make use in his writings of graphical techniques—and this despite the fruitful precedent on this score set by his teacher Marshall, and despite the many passages (see, e.g., the reference on pp. 25 and 30 of the General Theory to the “intersection of the aggregate demand function with the aggregate supply function”) that almost cry out for a diagram. Here and there in the trilogy there are diagrams of a statistical or schematic nature (Tract, pp. 83, 87; TM I, pp. 290–91; II, p. 317). But, as noted above, in all of these books there is only one diagram of an analytical nature—and that diagram is due to Harrod (GT, p. 180, n.1). Similarly—to judge from the student notes that have survived (reproduced in Rymes (ed.), 1988)—Keynes made practically no use of diagrams in his lectures.

Keynes’s failure to use graphical techniques in the General Theory is even more puzzling in light of the fact that his chief disciples and critics during the formative period of writing the book—namely, Richard Kahn and Joan Robinson—played a leading role in the breakthrough that was then taking place in the use of such techniques! I am, of course, referring to Joan Robinson’s Economics of Imperfect Competition (1933a), in the writing of which she acknowledged the “constant assistance of Mr R.F. Kahn” (ibid, p. v).

Marshall’s influence on Keynes did, however, manifest itself in the fact that the analysis of both the Treatise and the General Theory is carried out in terms of “demand price” and “supply price” (see sections 2 and 3 above). It has also been contended in section 5 above that Keynes’s “unemployment equilibrium” in the General Theory must be understood in terms of Marshall’s short-period equilibrium. A more subtle manifestation of Marshall’s influence is the fact that the formal organization of the argument of the General Theory is that of partial-equilibrium analysis. In particular, if this argument had been organized in accordance with the Walrasian general-equilibrium approach, then (as in present-day textbooks of macroeconomics), Book III of the General Theory would have been devoted to the market for goods (both consumption and investment) and Book IV in a parallel fashion to that for money, and there would then follow a discussion of the interaction between these two markets. In point of fact, however, both Book III (“The Propensity to Consume”) and Book IV (“The Inducement to Invest”) are formally devoted to the market for goods, with the market for money being discussed in Book IV not as an equal partner, but as the source of an influence (via the rate of interest) on the market for investment goods. Nevertheless, as emphasized in the discussion in section 4 above of chapter 18 of the General Theory, the analysis of this book is essentially that of general equilibrium. The voice is that of Marshall, but the hands are those of Walras. And in his IS-LM interpretation of the General Theory, Hicks quite rightly and quite effectively concentrated on the hands.

In connection with Keynes’s analytical style, I should also note his oft-cited criticism in the General Theory of “symbolic pseudo-mathematical methods of formalizing a system of economic analysis … which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols” (GT, pp. 297–8). Let us, however, not take this statement too seriously. First of all, Keynes’s own analysis in his earlier Treatise on Money (1930) was, in fact, largely based on fairly mechanical applications of the so-called fundamental equations. Similarly, an entire chapter (20) of the Treatise is devoted to “An Exercise in the Pure Theory of the Credit Cycle,” in which Keynes explored in a very formalistic manner—and under a variety of alternative assumptions—the mathematical properties of his model of the cycle. Thus, if ever an author made use of “a maze of pretentious and unhelpful symbols,” that author was Keynes of the Treatise.

Furthermore, I strongly suspect that a comparison of the General Theory (and a fortiori the Treatise) with other works on economic theory that were written during that period would actually show Keynes’s works to be among the more mathematical of them. Indeed, in his review of the General Theory, Austin Robinson commented that “even for the ordinary economist, the argument, being largely in mathematical form, is difficult” (1936, p. 472).

It may have been Keynes’s lack of success with formal model building in the Treatise that led him to the more critical attitude expressed in the passage from the General Theory just cited. In any event, it is significant that in the General Theory—in contrast with the Treatise—Keynes did not attempt to provide a formal mathematical model of the theory of employment that constitutes the central message of the book. This was left for the subsequent exegeses of such writers as Hicks (1937) and Lange (1938). Instead, to the extent that Keynes made use of mathematical analysis in the General Theory, he did so with respect to such secondary themes as the relationship between the own-rates of interest of different goods (ch. 17, section II) and the theory of prices (ch. 21, section VI). And even in these instances, the mathematical formulation adds little to the exposition, and so could be deleted without much loss of continuity. Indeed, in a letter he wrote a year after the publication of the book in response to criticisms of the formulas in the first section of his chapter on “The Employment Function” (chapter 20), Keynes himself admitted:

I have got bogged [sic] in an attempt to bring my own terms into rather closer conformity with the algebra of others than the case really permits. When I come to revise the book properly, I am not at all sure that the right solution may not lie in leaving out all this sort of stuff altogether, since I am extremely doubtful whether it adds anything at all which is significant to the argument as a whole (JMK XXIX, p. 246).

Actually, the General Theory reveals an ambivalent attitude toward the role of mathematical analysis in economics; for with all his reservations about the usefulness of such analysis, Keynes (as one who had once been bracketed Twelfth Wrangler; see Harrod, 1951, p. 103) could not resist the temptation to show that he too could employ it. Thus the foregoing quotation from the General Theory so critical of mathematical analysis actually occurs in section III of the same chapter 21 that I have just cited as providing an instance of the use of such analysis—and indeed this quotation appears as part of Keynes’s apologia for nevertheless going ahead and resorting to it in section VI of that chapter!

Furthermore, judging from the critical literature that subsequently grew up around chapters 17 and 21, I think it fair to say that the mathematical analysis that appears in these chapters is not only not essential to the argument, but sometimes even incorrect (thus see Palander (1942) as cited by Borch (1969), as well as Naylor (1968, 1969), on the incorrect elasticity formula used to analyse the implications of the quantity theory in chapter 19 of the General Theory (p. 305); see also Patinkin (1982, p. 151, n. 33) on the erroneous formula in n.2 on p. 126). And this fact, together with the ineffectualness of the fundamental equations of the Treatise, makes it clear that whatever may have been Keynes’s attitude toward the proper role of mathematical methods in economic analysis, his strength did not lie in the use of such methods.

Nor in general did Keynes’s analytical strength lie in rigour and precision: indeed, we run the risk of distorting the original intention of Keynes’s writings—and reading meaning into them—if we try to view them through analytical lenses that are more sophisticated and more finely ground than those that he was wont to use. Thus in both the Treatise and the General Theory Keynes frequently failed to specify the exact nature of the assumptions that underlay his argument. Furthermore, there are many ambiguities in these books. And the best evidence of the existence of such ambiguities and obscurities is the fact that fifty years later disagreements continue about the role played in the General Theory by such crucial assumptions as wage rigidities, the liquidity trap, the interest elasticity of investment, unemployment equilibrium, and the like—not to speak of the protracted debate about the meaning of Keynes’s aggregate supply function.

Instead, Keynes’s analytical strength lay in his creative insights about fundamental problems that led him to make major breakthroughs, leaving for those that followed him to correct, formalize, and complete his initial achievements. In the Treatise, Keynes thought (erroneously, as it turned out) that his fundamental equations constituted such a breakthrough. In the General Theory, he saw his breakthrough as lying in his theory of effective demand—and this time he was undeniably right.

In view of this basic aspect of Keynes’s analytical style, I should in all fairness also emphasize that the aforementioned lack of rigour and completeness in part reflects the natural deficiency of many a pathbreaking work. As Keynes wrote to Joan Robinson: “My own general reaction to criticisms always is that of course my treatment is obscure and sometimes inaccurate, and always incomplete, since I was tackling completely unfamiliar ground, and had not got my own mind by any means clear on all sorts of points” (JMK XIII, p. 270). Keynes made this comment in 1932 with reference to the Treatise; it is even more relevant for the General Theory.

Another characteristic of Keynes’s style that should be noted is his constant striving to present the conclusions of his analysis in the form of paradoxes. Sometimes this is very effective, as in the case of the “paradox of thrift” in the General Theory. Sometimes, however, Keynes’s love for the paradoxical tempts him into extreme statements that do not stand up under critical scrutiny, as in the case of the paradox of the widow’s cruse in the Treatise (I, p. 125; see Joan Robinson, 1933b). And sometimes it tempts him into delphic pronouncements, such as his oft-cited contention that “there may exist no expedient by which labour as a whole can reduce its real wage to a given figure by making revised money bargains with entrepreneurs” (GT, p. 13, italics in original; but see the discussion of chapter 19 of the General Theory in section 4 above for an interpretation).

A related characteristic of his style are occasional seemingly profound statements that upon closer examination lose much (if not all) of their profundity and are sometimes even involved in error. Thus consider the following passage from the Treatise:

We have claimed to prove in this treatise that the price level of output depends on [1] the level of money incomes relatively to efficiency, on [2] the volume of investment (measured in cost of production) relatively to saving, and on [3] the “bearish” or “bullish” sentiment of capitalists relatively to the supply of savings deposits available in the banking system (TM II, p. 309, bracketed numbers added).

This is simply a verbal rendition of the second fundamental equation (itself a tautology) written as the weighted average of the respective prices of consumption goods (P) and investment goods (P'),

= (P · R + P' · C) / O

where, by definition,

O = R + C

(TM I, p. 123). More specifically, the first fundamental equation in section 2 above can be written as

P = (W / e) + (I' – S) / R (i)"

(TM I, p. 122); expressions [1] and [2] in the foregoing passage thus correspond to the first and second terms, respectively, of this equation. And expression [3] in turn is a brief summary of Keynes’s explanation of the determination of P' (TM I, pp. 127–9, 229–30). (For other instances of obscure statements in the Treatise which are simply verbal renditions of the fundamental equations, see TM I, pp. 144 and 248–9; for further details, see Patinkin, 1976a, ch. 6).

Or consider the following well-known passage at the end of chapter 19 of the General Theory:

If, as in Australia, an attempt were made to fix real wages by legislation, then there would be a certain level of employment corresponding to that level of real wages; and the actual level of employment would, in a closed system, oscillate violently between that level and no employment at all, according as the rate of investment was or was not below the rate compatible with that level; whilst prices would be in unstable equilibrium when investment was at the critical level, racing to zero whenever investment was below it, and to infinity whenever it was above it (GT, pp. 269–70).

As at other points in the General Theory, Keynes assumes here that there is a fixed consumption function, so that the level of effective demand and hence employment is determined by that of investment. In the case where that level is greater than the level of employment corresponding to the fixed real wage rate, the argument is a straightforward application of the analytical framework of the book: viz, there will then be an excess demand for goods which will drive their price higher; but since the real wage rate is being held constant, the money wage rate must increase in the same proportion. Thus prices will “race to infinity,” unless (Keynes goes on to say) the resulting decrease in the real quantity of money and consequent increase in the rate of interest will decrease investment, and hence effective demand and employment to the level corresponding to the fixed real wage rate.

It is, however, not clear why—in the case where the level of effective demand and hence employment is less than that corresponding to the fixed real wage rate—the economy should be driven down to a situation of “no employment at all.” For the firms’ marginal productivity of labour corresponding to that lower level of employment is higher than the fixed real wage rate; on the other hand, that fixed rate is higher than the minimum one upon which workers insist in order to provide that level of employment. Hence this lower level can constitute a stable equilibrium in Keynes’s sense of the term. Correspondingly, there is no reason in this situation for prices to “race to zero.” (See the discussion at the beginning of section 5 above of Keynes’s use of the term “unemployment equilibrium.”)

Note the key to interpreting the above passages: each is a mechanical application of the basic formula of the book in question (the fundamental equations in the case of the Treatise, and the theory of effective demand which determines employment hence the real wage rate in the case of the General Theory)—combined with Keynes’s propensity to shock (see his letter to Harrod cited at the beginning of section 5 above).

Obscurities such as these, as well as those mentioned above, frequently impede the flow of the reading. But despite these difficulties, there are constant reminders throughout the trilogy that we are in the presence of a master of English style. The language is generally rich and incisive, enhanced occasionally by well-turned phrases and apt literary allusions. For Keynes’s objective is to appeal not only to the intellect but also to the sense of literary appreciation.

This is particularly true of the Tract, and for two related reasons: because it is the least technical of the three books and because of its origin as a series of articles on current policy in the Manchester Guardian, where Keynes could give full expression to his brilliant journalistic style.

Least enjoyable as a reading experience is the Treatise, whose generally heavy and constrained style reflects the stately scientific objective that Keynes set for himself in it. Indeed, when one reads the Treatise against the background of Keynes’s other writings, one cannot escape the feeling that it represents a Keynes out of character, a Keynes attempting to act the role of a Professor, and a Germanic one at that.

In the General Theory we once again find the true Keynes. Here (as in so many of Keynes’s writings) is the stirring voice of a prophet who has seen a new truth and who is convinced that it—and only it—can save a world deep in the throes of crisis. It is a sharp, polemical voice directed at converting economists all over the world to the new dispensation and combating the false prophets among them who perversely continue with the erroneous teachings of the gods of classical mythology whom Keynes had already abandoned.

And so it is that these writings of Keynes are famous not only for their basic scientific contributions but also for having become part of the literary heritage of every economist. For who does not know that “in the long run we are all dead” (Tract, p. 65)? Or that

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back …. The power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas (GT, p. 383).

10. The foregoing discussion of similarities and differences among the volumes of Keynes’s trilogy brings us finally to the question of the justification for reading them today. From the substantive viewpoint, all of these volumes are now in the domain of the history of monetary doctrine: their basic scientific contributions have long since been incorporated in the current literature, so that, by definition, the volumes themselves are of importance only to students of this history.

From a broader viewpoint, however, there are sharp differences among these volumes in this respect too. Thus, in these times of worldwide inflation, one can still read with both pleasure and profit Keynes’s brilliant discussion of this problem in the Tract. On the other hand, the recent revival of interest in the Treatise notwithstanding, I can (from the viewpoint of macroeconomic theory) see little profit (and certainly no pleasure) in reading it today. Nor do I think that the Treatise is important as a key to an understanding of the major innovation of the General Theory, namely, the theory of effective demand. What the Treatise does help us understand are certain terminological aspects of Keynes’s presentation of this theory (viz., his exposition in terms of “demand price” and “supply price”; cf. GT, pp. 24–6 and TM I, pp. 186, 189); but it contributes little towards an understanding of the substance of the theory itself, which differs so fundamentally from that of the Treatise.

As for the General Theory: the work over the years of students of Keynes’s thought has deepened our understanding of this book, but has also brought to light deficiencies and errors. Some of these are due to the stylistic excesses described in section 9 above; some are inconsequential mathematical ones, like those noted in the same section; but some (e.g., the ambiguities and errors in Keynes’s discussion of the aggregate supply curve referred to in section 3 above) are more significant. But even these last should be regarded as the kind that naturally occur in a pioneering work that breaks new ground and develops a radically different analytical framework. We do no service to the place of Keynes in the history of economic thought—and a fortiori not to the history itself—by ignoring these errors. At the same time, they do not change the basic fact that this is the book that made the revolution which has continued to mould our basic ways of thinking about macroeconomic problems. And so the reading of it—at least in part—is an intellectual experience that no aspiring economist even today can afford to forego.

To this I must add the following related plea. In reading the General Theory, let us do so in order to acquaint ourselves with one of the classics of our discipline, and, more generally, in order to enjoy the pleasures of intellectual history: not in order to invoke Keynes’s alleged authority with respect to further developments in macroeconomic theory. Thus, for example, if we feel that this theory should provide a more detailed analysis of the way expectations and hence behaviour decisions are formed under conditions of uncertainty; or of the role of money wages and prices in the equilibriating process generated by the interaction between aggregate demand and supply; or of the influence of the structure of interest rates on the respective markets for money and commodities—then let us by all means devote ourselves to the analysis of these important questions. At the same time, let us make a clear distinction between this objective and that of the history of thought—and thereby do a service both to Keynes and to the further development of macroeconomic theory: for we then permit the study of Keynes’s thought to concern itself not with what Keynes might have said or should have said about current theoretical questions, but with what he actually did say; and we permit the attempts to improve upon the current state of macroeconomic theory to be judged substantively, on their own merits, without confusing the issue with arguments about “what Keynes really meant.” As Keynes said in concluding a long and tiresome correspondence in 1938 on a note that some economist had sent him on an aspect of the General Theory, “… the enclosed, as it stands looks to me more like theology than economics! … I am really driving at something extremely plain and simple which cannot possibly deserve all the exegesis” (JMK XXIX, p. 282; cf. also Patinkin, 1984, pp. 100–101).

11. Having devoted so much attention to Keynes’s trilogy, I must emphasize that it would be a serious mistake to think of Keynes as devoting his major efforts in the interwar period to writing these books in the quiet halls of academe. On the contrary, after he became a public figure in the wake of his Economic Consequences of the Peace (1919), he resigned his lectureship at Cambridge (though he continued as an active Fellow of King’s College) and earned his living from his publicistic writings and from speculation on the stock market (Johnson and Johnson, 1978, pp. 1–37; Harrod, 1951, pp. 288, 294–304). Correspondingly, Keynes’s normal routine became one in which he divided his time between London and Cambridge, living in the former during most of the week and coming down to Cambridge for long weekends. In London he was absorbed in his publicistic and political activities; during the weekends at Cambridge he dealt with both academic and (as bursar of King’s) business matters. On Monday mornings of the autumn term during most of the interwar years he also gave a course of lectures on monetary economics which were widely attended by students, faculty and visitors, and in the process of which he expounded his new theories as he developed them. It is of these lectures that we have the notes of Bryce, Tarshis and others mentioned at the beginning of section 3 above. On Monday evenings Keynes would then preside over his famous Political Economy Club, whose participants were drawn from the most promising undergraduates, and at which one of them would read a paper which would then be discussed (Harrod, 1951, pp. 149–52, 327–30; see also the reminiscences of Bryce and Tarshis of both the lectures and the Club in Patinkin and Leith (eds.), 1977, pp. 39–63, 73–74). And the following morning he would be back in London.

Keynes’s intensive public activity with respect to the policy discussions of the interwar period was reflected in the more than three-hundred articles he wrote for the “highbrow” news magazines of the time (particularly the Nation and Athenaeum—of whose board Keynes was chairman in the 1920s—and its successor, The New Statesman and Nation) as well as for the popular press. Many of the latter articles were syndicated in newspapers all over the world. A selection from these and similar writings was reissued by Keynes in 1931 under the title Essays in Persuasion. These are marked by a brilliant style, truly the work of a literary craftsman.

There was one pressing and recurrent politico-economic issue of the postwar world of the 1920s—German reparations—which Keynes discussed not only in books addressed to the general public (1919, 1922) and in numerous magazine articles (reproduced in JMK XVII–XVIII), but also in the pages of the Economic Journal (which Keynes edited from 1912 to 1944; some of the interesting correspondence which he carried out in this capacity is reproduced in JMK XII, pp. 784–868). The reference is, of course, to Keynes’s 1929 debate with Ohlin about the possibility of Germany’s carrying out the payments imposed upon it by the Versailles Treaty: the famous debate about the “transfer problem.” In light of the central role that the notion of effective demand was a few years later to play in the General Theory, it is ironic to note that in this debate it was Ohlin who emphasized the role of “buying power” in carrying out the reparations, and Keynes who overlooked it. One cannot help suspecting that Keynes’s thinking here was coloured by his violent objections to the Treaty itself (see introductory section of this essay). It should, however, be noted that a similar neglect of “buying power” characterizes Keynes’s other writings of this period: namely, his discussion of the effects of public-works expenditures in both Can Lloyd George Do [I]t? (1929) and the Treatise (1930) (see Patinkin, 1976a, p. 129).

Keynes’s accomplished literary style also characterizes his Essays in Biography (1933b), in which Keynes reprinted his impressions of the leading political figures he had known, as well as his biographical essays on various British economists. Most notable among the latter are his stimulating essay on Thomas Malthus and his perceptive and evocative memorial essay on his teacher, Alfred Marshall.

At various critical junctures in the interwar period, Keynes also published influential pamphlets in which he analysed the questions at issue and proclaimed his prescriptions. Such were his Economic Consequences of Mr Churchill (1925), in which he criticized the decision of the then Chancellor of the Exchequer to return to the gold standard at prewar parity, claiming that the resulting overvaluation of the pound generated depression in British export industries which then spread to the rest of the economy; Can Lloyd George Do It? (1929) (written with Hubert Henderson), in support of the Liberal Party’s pledge in the 1929 election campaign to reduce unemployment by means of public works; the Means to Prosperity (1933a), in further support of public works (this time making use of the newly-developed notion of the multiplier) as the depression deepened in the early 1930s; and How to Pay for the War, as in 1940 the problems of depression gave way to those of wartime inflationary pressures. (All of these pamphlets have been reproduced in JMK IX.)

I should, however, note that already in 1943 Keynes also began to concern himself with post-war problems and wrote a memorandum on “The Long-Term Problem of Full Employment” advocating a programme in which “two-thirds or three-quarters of total investment is carried out or can be influenced by public or semi-public bodies” (JMK XXVII, p. 322). And in reply to a comment on it by James Meade, he wrote (letter of 27 May 1943):

It is quite true that a fluctuating volume of public works at short notice is a clumsy form of cure and not likely to be completely successful. On the other hand, if the bulk of investment is under public or semi-public control and we go in for a stable long-term programme, serious fluctuations are enormously less likely to occur (JMK XXVII, p. 326).

Similar views were expressed by Keynes in an unpublished February 1944 “Note on Postwar Employment” and in a December 1944 letter to Beveridge (JMK XXVII, pp. 365, 381). Thus to the end of his days, Keynes continued to advocate public-works expenditures as a necessary component of a full-employment policy. It should, however, also be emphasized —as in the General Theory and a fortiori the Treatise—Keynes also continued to stress the essential role of a low rate of interest in carrying out this policy. Indeed, in a series of articles in the Times which he published in 1937 entitled “How to Avoid the Slump,” he wrote that “we must avoid it [i.e., ‘dear money’] as we would hell-fire” (JMK XXI, p. 389).

Keynes influenced policy not only through his publicistic activities, but also by his active membership in various official government bodies. Thus he was the leading figure of the Committee on Finance and Industry (the Macmillan Committee, 1929–31) and of the Economic Advisory Council (1930–39), and he also served as chairman of the Committee of Economists (1930)—all of which were charged with advising the British government on different aspects of the policies it should follow in order to overcome the serious depression in which Britain, together with the rest of the Western world, then found itself (cf. Howson and Winch, 1977). Similarly, at the outbreak of World War II, Keynes was appointed adviser to the Chancellor of the Exchequer, a position he held until his death. He also played a leading role in the negotiations with the United States government, first for lend-lease support in 1941 and again in 1944, and then for a special postwar loan in 1945. Keynes was also one of the architects of the Bretton Woods agreement (1944), which established the International Monetary Fund and the International Bank for Reconstruction and Development (the World Bank). Indeed, the Fund’s original policy of fixing par values for the various exchange rates, but permitting fluctuations of up to 10 per cent about them, is clearly reminiscent of Keynes’s advocacy in the Treatise (II, p. 303) of maintaining the fixed exchange rates of the international gold standard, but widening the gold points so as to permit fluctuations of the rates within a range of two per cent. In the foregoing capacities, Keynes wrote countless letters, memoranda, reports, draft proposals, and the like, the major ones of which are reproduced in the relevant Activities volumes of his Collected Writings (JMK XX–XXVI; see also Kahn (1976), Williamson (1983) and Moggridge (1986) on Keynes’s views on the international monetary system from his earliest writings up to and including the IMF).

As indicated above, Keynes’s concern with policy questions also exerted a strong influence on the direction of his scientific writings. This was clearly the case for his Tract on Monetary Reform (1923), which had its origins in newspaper articles that Keynes had written on current economic problems. Similarly, the predominant emphasis of the Treatise on Money (1930) on the problems of unemployment and of the workings of the international gold standard reflected the major economic concerns of the period. By the time the General Theory (1936) was being written, however, the gold standard had collapsed, while the problem of unemployment had become increasingly severe. Correspondingly, the General Theory is concerned almost exclusively with the problem of mass, long-run unemployment in a closed economy: that is, one not subject to the restrictions imposed by the gold standard.

Keynes’s interests ranged far beyond the confines of economics. He was for many years a member of the famous Bloomsbury Circle. His cultural activities included the theatre, dance, paintings, and rare-book collecting. He was instrumental in establishing the Arts Council, which provided state patronage of the arts. In all these ways Keynes played a prominent role in the cultural and intellectual life of the Britain of his day (see Harrod, 1951; White, 1974; Milo Keynes (ed.), 1975; Crabtree and Thirlwall (eds), 1980; and Skidelsky, 1983 and 1988 []).

Selected Works

1911. Review of The Purchasing Power of Money, by I. Fisher, Economic Journal 21, September, 393–98. As reprinted in Keynes, Collected Writings, Vol. XI, 275–81.

1913. Indian Currency and Finance. As reprinted in Keynes, Collected Writings, Vol. I.

1919. The Economic Consequences of the Peace. As reprinted in Keynes, Collected Writings, Vol. II.

1921. A Treatise on Probability. As reprinted in Keynes, Collected Writings, Vol. VIII.

1922. A Revision of the Treaty. As reprinted in Keynes, Collected Writings, Vol. III.

1923. (ed.) Reconstruction in Europe. Manchester Guardian Commercial, appeared in twelve instalments by different authors over the period 20 April 1922–4 January 1923.

1923. A Tract on Monetary Reform. As reprinted in Keynes, Collected Writings, Vol. IV.

1925. The Economic Consequences of Mr Churchill. As reprinted in Keynes, Collected Writings, Vol. IX, 207–30.

1926. “The end of laissez-faire.” As reprinted in Keynes, Collected Writings, Vol. IX, 272–94.

1929. The German transfer problem. Economic Journal 39, March, 1–7; The reparation problem: a rejoinder. Economic Journal 39, June, 179–81; A reply. Economic Journal 39, September, 404–8. As reprinted in Keynes, Collected Writings, Vol. XI, 451–9, 468–72, 475–80.

1929. (With Hubert Henderson) Can Lloyd George Do It?: An Examination of the Liberal Pledge. As reprinted in Keynes, Collected Writings, Vol. IX, 86–125.

1930. A Treatise on Money, Vol. I: The Pure Theory of Money. As reprinted in Keynes, Collected Writings, Vol. V.

1930. A Treatise on Money, Vol. II: The Applied Theory of Money. As reprinted in Keynes, Collected Writings, Vol. VI.

1931a. An economic analysis of unemployment. In Harris Memorial Foundation (1931a), 3–42. As reprinted in Keynes, Collected Writings, Vol. XIII, 343–67.

1931b. Essays in Persuasion. As reprinted with additions in Keynes, Collected Writings, Vol. IX.

1933a. The Means to Prosperity. As reprinted in Keynes, Collected Writings, Vol. IX, 335–66.

1933b. Essays in Biography. As reprinted with additions in Keynes, Collected Writings, Vol. X.

1936. The General Theory of Employment, Interest and Money. As reprinted in Keynes, Collected Writings, Vol. VII.

1937. The general theory of employment. Quarterly Journal of Economics 51, February, 209–23. As reprinted in Keynes, Collected Writings, Vol. XIV, 109–23.

1939. Professor Tinbergen’s method. Economic Journal 49, September, 558–70. As reprinted in Keynes, Collected Writings, Vol. XIV, 306–18.

1940. How to Pay For the War. As reprinted in Keynes, Collected Writings, Vol. IX, 367–439.

1946. The balance of payments in the United States. Economic Journal 56, June, 172–89. As reprinted in Keynes, Collected Writings, Vol. XXVII, 427–46.

1973a. Economic Articles and Correspondence: Academic. Ed. D. Moggridge, Vol. XI of Keynes, Collected Writings.

1973b. Economic Articles and Correspondence: Investment and Editorial. Ed. D. Moggridge, Vol. XII of Keynes, Collected Writings.

1973c. The General Theory and After. Part I, Preparation. Ed. by D. Moggridge, Vol. XIII of Keynes, Collected Writings.

1973d. The General Theory and After. Part II, Defence and Development. Ed. D. Moggridge, Vol. XIV of Keynes, Collected Writings.

1979. The General Theory and After: A Supplement. Ed. D. Moggridge, Vol. XXIX of Keynes, Collected Writings.

1980. Activities 1940-1946: Shaping the Post-War World: Employment and Commodities. Ed. D. Moggridge, Vol. XXVII of Keynes, Collected Writings.

1981. Activities 1922-1929: The Return to Gold and Industrial Policy. Ed. by D. Moggridge, Vol. XIX of Keynes, Collected Writings (in two parts).

1982. Activities 1931–1939: World Crises and Policies in Britain and America. Ed. D. Moggridge, Vol. XXI of Keynes, Collected Writings.

1971–88. The Collected Writings of John Maynard Keynes. Vols I–VI (1971), Vols VII–VIII (1973), Vols IX–X (1972), Vols XI–XII (1983), Vols VIII–XIV (1973), Vols XV–XVI (1971), Vols XVII–XVIII (1978), Vols XIX–XX (1981), Vol. XXI (1982), Vol. XXII (1978), Vols XXIII–XXIV (1979), Vols XXV–XXVII (1980), Vol. XXVIII (1982), Vol. XXIX (1979), Vol. XXX (Bibliography, Index []). London: Macmillan for the Royal Economic Society.

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Keynes, J.N. 1891. The Scope and Method of Political Economy. 4th edn, London: Macmillan. Reprinted, New York: Kelley and Millman, 1955.

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Knight, F.H. 1923. The ethics of competition. Quarterly Journal of Economics 37, August, 579–624. As reprinted in Knight, The Ethics of Competition and Other Essays, New York: Harper, 1935, 41–75.

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