I’ve recently been re-reading John Maynard Keynes’ The General Theory (TGT), along with some other tweeps, and thought I’d collect up quotes which struck me as particularly insightful. Obviously, there many such quotes in TGT, some of them quite well-known, so I’ve opted for ones you don’t see reproduced as much, and which those have not fully read TGT may not have seen before.
As an aside: I don’t know why TGT has such a reputation for being difficult to read. There are surely some difficult sections: chapter 6, the list of points on Say’s Law, the fact that Keynes insists on describing diagrams instead of just bloody drawing them. But the rest is merely a mixture of: well-known economic theories, expressed verbally; passages of (wonderful) intuitive observatory prose that even someone with no economics training could understand; basic concepts and ideas which Keynes introduces (like liquidity preference), some of which may require mulling over but none of which are particularly taxing. My hunch is that those who complain that they can’t understand it simply set out not to understand it in the first place, and are all the poorer for it.
Anyway, onto the quotes. After inquiring on Twitter, I’ve decided to retain the length of the quotes, but I’ve bolded what I see as the absolutely crucial parts.
1. In Chapter 4, in a passage about how to measure depreciation, Keynes speaks about the aggregation of capital and seems to touch on some of the points raised much later on in the Cambridge Capital Controversies:
The difficulty is even greater when, in order to calculate net output, we try to measure the net addition to capital equipment; for we have to find some basis for a quantitative comparison between the new items of equipment produced during the period and the old items which have perished by wastage. In order to arrive at the net National Dividend, Professor Pigou deducts such obsolescence, etc., “as may fairly be called ‘normal’; and the practical test of normality is that the depletion is sufficiently regular to be foreseen, if not in detail, at least in the large.” But, since this deduction is not a deduction in terms of money, he is involved in assuming that there can be a change in physical quantity, although there has been no physical change; i.e. he is covertly introducing changes in value. Moreover, he is unable to devise any satisfactory formula to evaluate new equipment against old when, owing to changes in technique, the two are not identical. I believe that the concept at which Professor Pigou is aiming is the right and appropriate concept for economic analysis. But, until a satisfactory system of units has been adopted, its precise definition is an impossible task. The problem of comparing one real output with another and of then calculating net output by setting off new items of equipment against the wastage of old items presents conundrums which permit, one can confidently say, of no solution.
Clearly, these arguments about capital had been floating around for some time before they came to a head in the 1950s/60s – in Chapter 11, Keynes notes that even Alfred Marshall was aware of them. Then, in Chapter 14, Keynes explicitly states the point that you cannot measure the ‘productivity’ of capital independent of its price:
Nor are those theories more successful which attempt to make the rate of interest depend on “the marginal efficiency of capital”. It is true that in equilibrium the rate of interest will be equal to the marginal efficiency of capital, since it will be profitable to increase (or decrease) the current scale of investment until the point of equality has been reached. But to make this into a theory of the rate of interest or to derive the rate of interest from it involves a circular argument, as Marshall discovered after he had got half-way into giving an account of the rate of interest along these lines. For the “marginal efficiency of capital” partly depends on the scale of current investment, and we must already know the rate of interest before we can calculate what this scale will be. The significant conclusion is that the output of new investment will be pushed to the point at which the marginal efficiency of capital becomes equal to the rate of interest; and what the schedule of the marginal efficiency of capital tells us, is, not what the rate of interest is, but the point to which the output of new investment will be pushed, given the rate of interest.
Clearly, this was part of Keynes’ reason for formulating a theory of the rate of interest independent of considerations about productivity, time-preference and so forth.
The equivalence between the quantity of saving and the quantity of investment emerges from the bilateral character of the transactions between the producer on the one hand and, on the other hand, the consumer or the purchaser of capital equipment.Income is created by the value in excess of user cost which the producer obtains for the output he has sold; but the whole of this output must obviously have been sold either to a consumer or to another entrepreneur; and each entrepreneur’s current investment is equal to the excess of the equipment which he has purchased from other entrepreneurs over his own user cost. Hence, in the aggregate the excess of income over consumption, which we call saving, cannot differ from the addition to capital equipment which we call investment. And similarly with net saving and net investment. Saving, in fact, is a mere residual. The decisions to consume and the decisions to invest between them determine incomes. Assuming that the decisions to invest become effective, they must in doing so either curtail consumption or expand income. Thus the act of investment in itself cannot help causing the residual or margin, which we call saving, to increase by a corresponding amount.
3. In Chapter 7, Keynes offers an argument against the Hayekian Natural Rate of Interest. This is not a comprehensive critique, but it sums up my thoughts on ABCT quite adequately: the naturalistic fallacy, along with implicit appeals to neoclassical equilibrium concepts, lurk in the background and leave some crucial points vague or undefined:
Thus “forced saving” has no meaning until we have specified some standard rate of saving. If we select (as might be reasonable) the rate of saying which corresponds to an established state of full employment, the above definition would become: “Forced saving is the excess of actual saving over what would be saved if there were full employment in a position of long-period equilibrium”. This definition would make good sense, but a sense in which a forced excess of saving would be a very rare and a very unstable phenomenon, and a forced deficiency of saving the usual state of affairs.Professor Hayek’s interesting “Note on the Development of the Doctrine of Forced Saving” shows that this was in fact the original meaning of the term. “Forced saving” or “forced frugality” was, in the first instance, a conception of Bentham’s; and Bentham expressly stated that he had in mind the consequences of an increase in the quantity of money (relatively to the quantity of things vendible for money) in circumstances of “all hands being employed and employed in the most advantageous manner”. In such circumstances, Bentham points out, real income cannot be increased, and, consequently, additional investment, taking place as a result of the transition, involves forced frugality “at the expense of national comfort and national justice”. All the nineteenth-century writers who dealt with this matter had virtually the same idea in mind. But an attempt to extend this perfectly clear notion to conditions of less than full employment involves difficulties.
4. In the excellent Chapter 19, in which Keynes refutes the idea that sticky wages are responsible for recessions, he concludes a section by sarcastically noting that if sticky wages were the cause of recessions, we should want “monetary management by the trade unions”:
If, indeed, labour were always in a position to take action (and were to do so), whenever there was less than full employment, to reduce its money demands by concerted action to whatever point was required to make money so abundant relatively to the wage-unit that the rate of interest would fall to a level compatible with full employment, we should, in effect, have monetary management by the Trade Unions, aimed at full employment, instead of by the banking system.
What say you, libertarians?
5. At the very beginning of Chapter 21, Keynes notes the tension between monetarist reasoning based on the Quantity Theory of Money and conventional microeconomic theory. The former assumes a smooth, mechanistic relationship between the stock of money and the price level, but the latter teaches us that prices depend on microeconomic ‘fundamentals’ such as preferences and technology:
So long as economists are concerned with what is called the Theory of Value, they have been accustomed to teach that prices are governed by the conditions of supply and demand; and, in particular, changes in marginal cost and the elasticity of short-period supply have played a prominent part. But when they pass in volume II, or more often in a separate treatise, to the Theory of Money and Prices, we hear no more of these homely but intelligible concepts and move into a world where prices are governed by the quantity of money, by its income-velocity, by the velocity of circulation relatively to the volume of transactions, by hoarding, by forced saving, by inflation and deflation et hoc genus omne; and little or no attempt is made to relate these vaguer phrases to our former notions of the elasticities of supply and demand.
Keynes then goes on to anticipate Joan Robinson‘s simple but (IMO) rather damning critique of the QToM and the velocity of money as a concept:
But the “income-velocity of money” is, in itself, merely a name which explains nothing. There is no reason to expect that it will be constant. For it depends, as the foregoing discussion has shown, on many complex and variable factors. The use of this term obscures, I think, the real character of the causation, and has led to nothing but confusion.
So, there we have it: in a relatively small set of quotes, Keynes has forcefully critiqued neoclassical theories of capital and the rate of interest, the Quantity Theory of Money, the Natural Rate of Interest, the idea that sticky wages are responsible for recessions, and the idea that savings create investment. Then there’s the rest of the book, where he sort of invents macroeconomics (I know, I know – but he does bring it together far more effectively than anyone else before, and adds a lot along the way). There’s a reason books like this catch on.