2013/07/28
A Study of Keynes's Economics 2000b by Toshiaki Hirai (Prof. of Sophia Univ., Tokyo)
A Study of Keynes's Economics
2000b by Toshiaki Hirai, Prof. , Sophia Universiy, Tokyo
The whole manuscript was written for the project funded by JSPS, and was submitted in 2000. You can DL it from the following site. It is composed of 452 pages (3.32MB).
http://yahoo.jp/box/HTdwTW
Befor that, you can see the TOC and Acknowledments and Introduction.
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ACKNOWLEDGEMENTS
INTRODUCTION
BOOK I THE STATE OF ECONOMICS BEFORE KEYNES
CHAPTER 1 THE RELATIVE DECLINE OF THE BRITISH ECONOMY
1. The Workshop of the World
2. Relative Decline
A. Industrialisation of the United States and Germany
B. The Failure to Exploit Technological Innovation
C. The Decline of Entrepreneurial Spirit
3. The Interwar Years
A. The American Economy
B. The British Economy
C. The International Monetary Crisis
CHAPTER 2 THE RISE OF NEOCLASSICAL ECONOMICS
1. The Struggle for Hegemony in the 1870s and 1880s
2. The Age of Marshall
A. Marshall's Achievements
B. The Marshallian Tradition
3. The Hegemony of Neoclassical Economics
A. Walras and Fisher
B. Cassel and Wicksell
CHAPTER 3 THE WICKSELL CONNECTION
1. Opposing Views of the Market Economy
2. Critical Views
A. Wicksell
B. Myrdal and Lindahl
C. Mises and Hayek
D. Robertson
3. Some Representative Theories
A. Wicksell
B. Myrdal
C. Hayek
D. Robertson
E. Hawtrey
4. Appendix: Cassel as a Monetary Economist
BOOK II THE DEVELOPMENT OF KEYNES'S ECONOMICS
CHAPTER 4 THE LIFE OF KEYNES
1. The Making of an Economist
2. The First World War
3. The 1920s
4. The 1930s
5. The Second World War
CHAPTER 5 KEYNES'S VIEW OF THE MARKET SOCIETY
1. Keynes's Fundamental Vision
A. The 1920s
B. The 1930s and the 1940s
2. The Mechanism of the Market Society
A. Criticism of Laissez―Faire Social Philosophy and Economics
B. Keynes's Social Philosophy
CHAPTER 6 From the Tract on Monetary Reform to the Treatise on Money
1. Monetary Policy
A. The Tract on Monetary Reform
B. The Treatise on Money
2. Consistency
A. The Year 1924
B. The Treatise's Analysis of the Real World
C. Appendix: Keynes's Advocacy of a Low Interest
Rate Policy in the 1930s and the 1940s
3. From the Tract to the Treatise
CHAPTER 7 A TREATISE ON MONEY
1. Keynes's Critique of Earlier Views
A. Bank Rate
B. Keynes's Understanding of Investment and Saving
C. Keynes's Stance on the Quantity Theory of Money
2. The Theoretical Structure of the Treatise
A. The Fundamental Assumptions
B. The Market Mechanism
C. The Investment Theory
D. The Theory of Money
E. The Consumption Theory
F. The Theory of the Credit Cycle
G. The Short and Long Periods
3. Two Problems
A. The Value of the Fundamental Equations
B. Three Dualities
4. The Key Concepts
A. Profit
B. The TM Supply Function
1. A Comparison between the Treatise and Other Wicksellian Theories
A. Similarities and Differences
B. Wicksell, Myrdal, Hayek and Keynes: A Spectrum of Theories
CHAPTER 8 AFTER THE TREATISE
1. June 1931-Early 1932
A. June 1931
B. 20 September 1931 and Two Manuscripts
2. 'The Monetary Theory of Production'
A. The Short-Period Analysis
B. The Long-Period Equilibrium - Underemployment
Equilibrium
C. The Relation of Investment to the Level of Output
D. The Origin of the Theory of Liquidity Preference
E. The Place of 'The Monetary Theory of Production'
3. The Criticisms of the Cambridge Circus: May 1932
A. The Lecture of 2 May 1932
B. The Criticisms of the Cambridge Circus:
the 'Manifesto' and Correspondence
4. Hawtrey's Economics and His Criticism of Keynes
5. Two Tables of Contents (1932)
6. Appendix: The State of Keynes's Thinking in Mid-1932
CHAPTER 9 THE TURNING POINT
1. 'The Parameters of a Monetary Economy'
A. Progessive Elements
B. An Evaluation
C. The Incompleteness: 'Model 2'
2. The Michaelmas Lectures of 1932
A. The Core Content
B. Chronological Analysis
3. Kahn's Contribution
4. Malthus and Keynes
A. Malthus's Theory
B. Keynes's View
CHAPTER 10 SEARCHING FOR A NEW THEORY OF EMPLOYMENT
1. The First Manuscript
A. The First System of Equations Leading to the
Principle of Effective Demand
B. The 'Accounting Period'
2. The Second Manuscript
A. The 'Pseudo-TM Supply Function mk2'
B. A Suggestion Regarding the Stability of the System
C. Acceptance of the First Postulate
D. The Heterogeneity of Goods
E. Two Kinds of Period Concept
F. Rejection of the Second Postulate
3. The Third Manuscript
A. Effective Demand
B. The 'Entrepreneur Economy'
C. Shortcomings of the 'Classical Economics'
4. An Evaluation of the Three Manuscripts
5. Comparison of the Three Tables of Contents of 1933
A. The First Manuscript)
B. The Second Manuscript
C. The Third Manuscript
CHAPTER 11 ESTABLISHMENT OF THE INVESTMENT AND CONSUMPTION
THEORIES
1. The Michaelmas Term Lectures of 1933
A. The Core Content
B. Chronological Analysis
2. The Two Undated Manuscripts
A. The First Undated Manuscript
B. The Second Undated Manuscript
CHAPTER 12 THE EVE OF THE GENERAL THEORY
1. 'The General Theory'
A. Effective Demand and an Employment Theory
B. The Consumption Theory
C. The Investment Theory
D. Some Other Fundamental Concepts
E. The Table of Contents
2. The Summer Manuscript
A. Effective Demand
B. The Employment Theory
C. Connections between the Summer Manuscript and
the General Theory
3. The Michaelmas Term Lectures of 1934
A. The Core Content
B. Chronological Analysis
CHAPTER 13 THE PROOFING PROCESS OF THE GENERAL THEORY (1)
1. An Outline of the Proofing Process
2. From the Pre-First Proof Typescript to First Galley III
A. The Pre-First Proof Typescript
B. First Galley I (Chapters 1-19)
C. First Galley II (Chapters 20-25)
D. First Galley III (Chapters 26-28)
CHAPTER 14 THE PROOFING PROCESS OF THE GENERAL THEORY (2)
1. Chapters 2, 3, and 6-9 of the Galley Table of Contents
E. The Great Revision
F. The Changeover
2. The Michaelmas Term Lectures of 1935
A. The Core Content
B. Chronological Analysis
3. The Formative Process
A. Order of Establishment of the Major Theories Comprising
the General Theory
B. Process of Development of the Chapters of the General Theory
CHAPTER 15 THE GENERAL THEORY
1. Views on Earlier Economists
A. Criticisms of 'Classical Economics'
B. Criticisms of 'Neoclassical Economics' (the 'Wicksell Connection')
C. Theories Defended by Keynes
2. The Monetary Economics of Underemployment Equilibrium
A. The Central Themes
B. The Theoretical Model
3. The Essence of the Keynesian Revolution
A. The Relation between the Treatise and the General Theory
B. The Essence of the General Theory
C. Remarks on Interpretations of Some Components of
the General Theory
D. Economic Policy
E. The Place of the General Theory in the History of Economics
CHAPTER 16 FROM THE TREATISE TO THE GENERAL THEORY
1. The Development of the Central Ideas and Propositions of
the General Theory
A. Propositions Maintained since the Adoption of
the Basic Position of the Treatise
B. Propositions Transformed between the Two Books
C. Propositions Adopted after the Arrival at the Worldview
of the General Theory
D. The Motivating Forces
2. A Head-to-Head Comparison between the Two Books
A. The Money Market
B. The Commodity Market
CHAPTER 17 INTERPRETATIONS OF KEYNES AND THE DEVELOPMENT OF
POSTWAR MACROECONOMICS
1. Interpretations of the General Theory
A. Keynesians
B. Anti-Keynesians
2. Interpretations of the Development of Keynes's Economics
A. Leijonhufvud
B. Meltzer
C. Dimand
D. Amadeo
3. Keynes and Postwar Macroeconomics
A. Keynesian Macroeconomics
C. Neoclassical Macroeconomics
APPENDIX TO CHAPTER 1 THE INTERWAR STATISTICAL DATA
1. The Price Index
2. The Production Index
3. National Income
4. The Rate of Unemployment
5. The Quantity of Money
6. Rates of Interest
7. Government Revenue and Expenditure
8. The Balance of Payments
9. Conclusion
APPENDIX TO CHAPTER 5 A CONFLICT BETWEEN INTERNATIONALISM
AND NATIONALISM
--- Keynes's Political Stance on the Relief Problem
1. The Initial Discussion Process
2. The 'Central Relief and Reconstruction Fund' Plan
3. A Change of Tack
4. A Degree of Compromise
5. Keynes's Response to UNRRA
6. A Strain of Nationalism
APPENDIX TO CHAPTER 7 A MATHEMATICAL FORMULATION OF THE TREATISE
THEORY
1. The Model
A. The Consumption Goods Sector
B. The Investment Goods Sector
C. The Cost-Earnings Equation
2. Solution
A. The Fundamental Reduced Equations
B. The Volume of Output of Investment Goods
C. The Volume of Output of Consumption Goods
3. Time Paths
A. The Case Where g > 0
B. The Case Where -1 < g< 0
C. Main Propositions
APPENDIX TO CHAPTER 15 THE COMMODITY MARKET IN THE GENERAL THEORY
― An Interpretation
1. Two Fundamental Assumptions
2. The Commodity Market Mechanism
A. The Characteristics of the Supply Side
B. The Investment Goods Sector
C. The Consumption Goods Sector
D. The Revised IS Curve - The Theory of Effective Demand
3. Conclusion
BIBLIOGRAPHY
1. Primary Sources
2. The Collected Writings of John Maynard Keynes
3. English Bibliography
4. Japanese Bibliography
5. Articles Related to the Present Study
TABLES AND FIGURES
Table 8-1 The Two Tables of Contents of 1932
Table 9-1 Michaelmas Term of 1932
Table 9-2 From the Treatise to 'The Parameters of a Monetary Economy'
Table 10-1 The Three Tables of Contents of 1933
Table 11-1 Michaelmas Term of 1933
Table 11-2 The Situation in 1933-1934
Table 12-1 The Table of Contents of 'The General Theory'
Table 12-2 The Situation in 1934
Table 12-3 Michaelmas Term of 1934
Table 13-1 The Proofing Process before 'The Great Revision'
Table 13-2 First Galley I and the General Theory
Table 13-3 First Galley II and the General Theory
Table 14-1 Michaelmas Term of 1935
Table 14-2 Chronological Order of Development of Major Theories of the
General Theory
Table 14-3 The Process of Development of the Chapters of the General Theory
Table 15-1 Classical Economics and Keynes's Economics
Table 16-1 The Gestation of the Main Propositions of the General Theory
Table 16-2 Michaelmas Terms: 1932-35
Table A-1 The U.K. Price Index
Table A-2 The U.K. Price Index
Table A-3 The U.K. Production Index
Table A-4 The U.K. National Income Accounts
Table A-5 Comparison of the (Nominal) Gross National Income
Table A-6 Results from Clark (1932)
Table A-7 Labour Productivity in the United Kingdom: Clark (1932)
Table A-8 Results from Clark (1937)
Table A-9 Labour Productivity in the United Kingdom: Clark (1937)
Table A-10 Employment Situation in the United Kingdom: Clark (1937)
Table A-11 Employment Situation in the United Kingdom: Feinstein (1972)
Table A-12 Employment and Unemployment in Great Britain in 1931
Table A-13 Employment Situation in the United Kingdom: Clark (1932)
Table A-14 Volume of Money in the United Kingdom
Table A-15 The Classification of Money in the Treatise
Table A-16 The Relation between the Short-Term and Long-Term
Rates of Interest
Table A-17 Consolidated Revenue and Expenditure Account of Government,
Local Authorities, and Social Insurance
Table A-18 Budgets and Performances of Government
Table A-19 Breakdown of the Consolidated Expenditure of Government,
Local Authorities, and Social Insurance
Table A-20 The U.K. Balance of Payments: Keynes (1928)
Table A-21 The U.K. Balance of Payments: Sayers (1976)
Table C-1 Time Paths
Figure 7-1 The Theoretical Structure of the Treatise
Figure 15-1 Relation between the Treatise, the Wicksell Connection and
the General Theory
Figure 15-2 The Commodity Market Mechnism
Figure 15-3 The Commodity Market Mechanism
and Relevant Chapters of the General Theory
Figure 16-1 The Relation between the Treatise and the General Theory
Figure D-1 The Demand and Supply of Individual Investment Goods
Figure D-2 The Aggregate Supply Function of the Investment Goods Sector
Figure D-3 Triangular Layer of the Investment Goods Sector
Figure D-4 The Consumption Goods Sector
Figure D-5 Triangular Layer of the Consumption Goods Sector
Figure D-6 Triangular Layer of the Economy as a Whole
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The central ideas of this book ultimately derive from various articles I have published１ and papers I have presented to academic societies２ since the early 1980s. However, its principal precursor was my earlier book, A Study of Keynes - from A Treatise on Money to The General Theory (University of Tokyo Press), which was published in Japanese in 1987. That book was indebted to many scholars, above all to Professor Takashi Negishi of the University of Tokyo, who greatly assisted by providing me with his detailed comments from the planning stage, through the first manuscript, and up to publication.３ The undertaking, with the invaluable assistance of Mr. Kenneth Benney, of an English translation of that book during my stay as a Visiting Scholar at the University of Cambridge (October 1987 to March 1988), bears witness to a long-standing wish to publish my work in English. However, I chose not to make public that English version４, as I desired to articulate the development of Keynes's thought both more fully, and in a wider perspective, than I had originally conceived. As it turned out, the complete fulfillment of my vision required considerably more time and work than anticipated, so that I am only now able to bring out the book in its present, expanded form. The result is that while the core of the book remains essentially that of its Japanese progenitor, it is not only substantially more comprehensive as far as the main theme is concerned, but also situates Keynes's theoretical work and policy-making activities in wider contexts.
Dr. G.C. Harcourt of Jesus College, University of Cambridge, generously read the (old version English) manuscript in its entirety, and gave me the benefit of his invaluable comments as well as the encouragement I needed to persevere in improving the book. His suggestions were both powerful and refreshing. Professor Thomas K. Rymes of Carleton University, Canada, was also kind enough to read the (old version English) manuscript, and to contribute his enormously valuable comments. To Emeritus Professor Takuma Yasui of Osaka University, I am indebted for the warm support he extended as a result of having read my Japanese book, and for the spiritual sustenance I drew from his endorsement of my endeavours. I was also able to get great spiritual support from Emeritus Professor Masao Hisatake of Hitotsubashi University. Much gratitude is also due to the following for many stimulating discussions and illuminating observations: Professors Masahiko Hara of Meiji University, Katsuyoshi Watarai of Hitotsubashi University, Shigeo Akashi of Seijou University, Aiko Ikeo of Kokugakuin University, Kazuo Kakimoto of Chiba University, Kenji Fujii of Aoyama Gakuin University, Yukihiro Ikeda of Keio University, Bin Sechiyama of Kyoto University, and Kiichiro Yagi of Kyoto University. I also wish to express my thanks to the contributors to the Keizai-Rironshi Seminar (the History of Economic Doctrines Seminar), whose ideas did much to help me refine my own ideas in various respects.
With regard to my program to expand the framework of my discussion of Keynes's theoretical work and his activities as a policy-maker, two projects undertaken with my colleagues in History of Economic Doctrines proved most helpful. These bore fruit as Hirai and Fukagai, eds. (1993) and Hirai and Noguchi, eds. (1995). Also of great benefit was the project of translating JMK.27, Employment and Commodities, into Japanese (1996), on which Professor Kazuo Tatewaki of Waseda University and I worked together. Equally valuable have been my recent discussions on the relative decline of the British economy with Professor Tamotsu Nishizawa of Hitotsubashi University and Professor Masaharu Hattori of Rikkyo University. I am very pleased to acknowledge also the assistance I received from Professor Yuriko Sanbe of Senshu University regarding the Appendix to Chapter 7.
I would like to express my gratitude towards Sophia University for having allowed me to continue my study abroad (August 1997 - September 1998). Without this opportunity, it would have been almost impossible to complete this project in the present form, for it had stood still for more than two years at the time of my departure. I would like to express my gratitude to the Institute of Historical Research (University of London) for having given me wonderful academic atmosphere and facilities. Special gratitude is due to Mr Simon Chung who revised and improved my English original text to a degree. Needless to say, I am completely responsible for the errors which this book is bound to contain.
Finally, I would like to dedicate this book５ to my dear parents, Shunji and Teiko Hirai, who have unreservedly supported my academic aspirations throughout my life, and whom I can never thank enough.
The Author, Faculty of Economics,
Sophia University, Tokyo, Japan
27 February, 1998
Notes
1) I list these in the Bibliography under item (5) 'Articles Related to the Present Book'.
2) These papers were presented at the following meetings of academic societies:
Japan Society of Monetary Economics, Chukyo University, 1982.
The Society for the History of Economic Thought, Toyo University, 1982.
Japan Association of Economics and Econometrics, Kobe Shouka University, 1
984.
The Society for the History of Economic Thought, Tohoku University, 1984.
The Society for the History of Economic Thought, Musashi University, 1994.
The Society for the History of Economic Thought, Seinan Gakuin University,
1995.
3) Professor Tadashi Hayasaka of the University of Tokyo has ever been an endu
ring source of guidance and advice concerning the history of economic thought. It was due to him that I was able to participate in the HOPE Seminar on the study of the history of economic doctrine, which initially stimulated my interest in the field. The HOPE Seminar has continued to promote this interest ever since. Furthermore, I was fortunate in having been able to participate in and benefit from The Workshop on Studies of Keynes conducted by Professor Hayasaka, which from 1982 to 1984 explored the economics of Keynes from various angles, and the results of which were published as Hayasaka, ed. (1986). I have also received innumerable much-appreciated suggestions from my colleagues at the Institute of Social Sciences of Senshu University through the series of workshops conducted Professors Kimihiro Masamura, Hideichiro Nakamura, Toshimasa Tsuruta, Tsuneaki Yoshioka, and Harutugu Hirakawa.
I cannot omit to thank the scholars who contributed so much to the improvement of individual chapters of my Japanese book. In this regard my discussions with Professor Hirotaka Katoh of Souka University (for Chapter 1, 'The Years during Which Keynes Lived') and with Professor Akihiko Haseda of Tokyo Gakugei University and Professor Yoshinori Tamagaki of Senshu University (for Chapter 3, ' A Treatise on Money' ), were especially instructive. As for Chapter 4, 'The Continued Period', and Chapter 5, 'The Turning Point', the comments provided by the referee of The Journal of Economics (University of Tokyo) were of much help. In addition, I am grateful for the useful insights of Professor Takamasa Shirai of Hokkaido University, who commented on my address to The Japan Association of Economics and Econometrics, and for those of Professor Eiichi Asano of Chuo University, who commented on my presentation at the HOPE Seminar.
4) The existence of this version can be confirmed by Prof. Robert Skidelsky's John Maynard Keynes - The Economist as Saviour 1920―1937 (Macmillan, 1992), in which it is listed on the 'Unpublished Papers' (p. 651).
5) This study was carried out with the financial assistance of Grant-in-Aid for Scientific Research (C) (1994-1996). The original text (No.06630010, pp. xxx+747 in terms of 80 columns ×35 rows) was submitted to the National Diet Library and the Sophia University Library as the final report in August 1998.
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There is widespread agreement that the greatest contribution of John Maynard Keynes (1883-1946) to modern economics was the construction, for the first time, of a model explaining how the level of employment is determined. At the same time, although the term 'Keynesian Economics' is frequently used effortlessly, apparently with some determinate meaning, by Keynesian and anti-Keynesian economists alike, certain facets of the evolution of Keynes's ideas have been somewhat overlooked. Though documentation of the great changes and evolutionary developments in Keynes's thought has been readily available in the Collected Writings and in Keynes's Papers (on microfilm), with the notable exception of the pioneering work of Patinkin there have been remarkably few studies attempting to trace the complicated route from A Treatise on Money (October 1930) to The General Theory of Employment, Interest and Money (February 1936). This book is the result of my endeavours to address this neglected, yet crucial, aspect of the genesis of Keynesian Economics.
Keynes was probably the most important - unquestionably the most influential - economic thinker to emerge in the era spanning the decline and disintegration of the Pax Britannica and ending with the Second World War. After his death, his influence in the spheres of macroeconomics and economic policy-making became, over the course of the third quarter of the twentieth century, so overwhelmingly dominant that the period from the 1950s to the 1970s may with some justification be designated the 'Age of Keynes'.
The evolution of Keynes's thought was informed as much by the events of the real world, in which he was himself deeply engaged, as by the world of theoretical economics. He developed a monetary approach to economics, centering on the theory of effective demand, and, on that foundation, advocated a fiscal policy to address the crushing problem of mass unemployment which marked the inter-war years. The stance Keynes took in theoretical economics and in practical affairs was closely linked to his social philosophy - the 'New Liberalism' - which insisted on the necessity for judicious intervention on the part of government１ to facilitate the orderly functioning of the economy - an outlook set squarely against nineteenth-century laissez―faire. The other influence on Keynes's thinking, his active involvement in policy-making, continued into his final years, when as the top United Kingdom representative in negotiations with the United States he contributed important proposals for the design of the postwar world order.
The principal objective of this study is to examine Keynes's development as an economic theoretician. Our main work is to analyse the processes of theory-building and re-building which constitute Keynes's intellectual journey from the Treatise to the General Theory. Attention has also be given to such topics as the historical development of various streams of economic theory, economic policy and social philosophy, as well as to British and international history to the extent that these are germane to a proper understanding of Keynes's contribution to modern economics in the wider perspective.
The structure of our investigation is as follows. Book I, The State of Economics before Keynes, (Chapters 1-3), establishes the necessary context for our examination of the development of Keynes's ideas in the transition from the Treatise to the General Theory. Chapter 1, 'The Relative Decline of the British Economy', charts the changing position of the British economy in relation to the international economy from the late nineteenth century through the interwar period. Chapter 2, 'The Rise of Neoclassical Economics', describes the development of economics from the late nineteenth to the early twentieth century. The framework for this discussion rests on the perception that the development of economics can be viewed as a conflict between real economics (the history of which can be described in terms of plutology and catallactics２) and monetary economics. The era of classical economics was predominantly one of plutology. Catallactics which is known to have existed but almost have been (to borrow from Seligman) 'neglected' by the then mainstream economists, while monetary issues had caused the hottest controversies but had failed in accomplishing monetary economics except for the quantity theory of money, as shown by the fact that Henry Thornton's great achievement had been forgotten for 100 years.３ Meanwhile, the late nineteenth century can be characterized as the high watermark of neoclassical economics, though its sway remains powerful up to the present day. In this chapter we look at Marshall and other leading neoclassical economists: Walras and Fisher on the one side, and Cassel and Wicksell on the other. In addition, we also deal with the theories of industrial fluctuations associated with Pigou and Lavington, which belong to the Marshallian tradition. Chapter 3, 'The Wicksell Connection', deals with the monetary economic tradition stemming from Knut Wicksell ('the theory of cumulative process'), and developed by a number of economists of diverse theoretical persuasions - Myrdal and Lindahl (the Stockholm School), Mises and Hayek (the Austrian School), the Keynes of the Treatise and Robertson (the Cambridge School). We designate this stream of influence the 'Wicksell Connection'. Chapter 3 occupies an important place in our effort to understand the development of Keynes's thought, for his point of departure can be traced back to the Wicksell Connection.
Book II, The Development of Keynes's Economics, (Chapters 4-17), forms the main body of our study. Chapters 4-6 cover the indispensable background provided by an examination of Keynes's activities as an economist, policy critic, policy maker and social philosopher. After Chapter 4, 'The Life of Keynes', which focuses on the academic and policy-making aspects of Keynes's life, Chapter 5, 'Keynes's View of the Market Society', examines his social philosophy. In the mid-1920s Keynes regarded the dilemma between morality and economic efficiency as an inherent feature of the market society, which he criticized harshly from a moral point of view. In the 1930s and after, however, he not only argued that the dilemma was capable of gradual resolution, but moreover seems to have come to a more positive evaluation of the morality of the market society per se. Throughout his life Keynes firmly believed in the gradual amelioration of the defects of the market society through the transformation of its constituent organizations into more benevolent forms. Chapter 6, 'Keynes's Activities in the 1920s', deals with A Tract on Monetary Reform (1923) and the development of Keynes's theory in the lead-up to the Treatise. This chapter underscores the point that Keynes consistently stressed the importance of monetary policy for controlling the economy, and that from 1924 to 1936 he consistently advanced the theoretical proposition that the value of investment, determined by the rate of interest, determines the volume of output.
In Chapters 7-17, which form the core of the book, we present our analysis of the development of Keynes's economic theories from the Treatise to the General Theory. There are two central tasks in such an analysis. The first is to fix our interpretations of the theoretical structures of the Treatise and the General Theory, the starting and finishing points of the process we are examining. The second is to interpret the manuscripts which Keynes produced in the intervening period, in order to shed light on particular stages in the developmental process. To a considerable extent the outcomes of the second task are dependent on the conclusions of the first, of course. Reciprocally, in coming to grips with the second task we substantially enrich our understanding of the major works with which we are concerned. Furthermore, in working through the manuscript material, we must be careful to keep hold of the central threads in Keynes's thought, so not to lose our way in tracking the complicated developmental trajectories of his ideas.４ Chapters 8-17 are the product of this interactive approach.
In Chapter 7, 'A Treatise on Money', we attempt to clarify the theoretical structure of the Treatise in detail, and compare it with the Wicksellian theories earlier discussed in Chapter 3. We argue that one of the most significant features of the theoretical framework of the Treatise is the uneasy co-existence of a Wicksellian theory and a theory peculiar to Keynes. The former theory explains the fluctuations of the economy in terms of the relation between the natural and money rates of interest. The latter theory conceptualizes the dynamic process of the economy in terms of a mechanism determining the price level of consumption goods and a mechanism determining the price level of investment goods, working through a third mechanism which models changes in the volume of output on the postulate that the output in any given period is determined by the profits realized in the previous period. We further argue that it is the latter theory which is most important for understanding the main line of Keynes's development. Chapter 8, 'After the Treatise', discusses the period following the completion of the Treatise up to the middle of 1932. We find that the basic outlook ― i.e. the 'theory peculiar to Keynes' - of the Treatise was maintained in Keynes's thinking throughout this period. This is confirmed by Keynes's repeated reiteration of the importance of the book's output mechanism, which we will call the 'TM supply function'.５ In Chapter 9, 'The Turning Point', we deal with the qualitative shift in Keynes's thinking from the worldview of the Treatise to that of the General Theory, which, as we shall see, occurred around the end of 1932. The manuscript entitled 'The Parameters of a Monetary Economy', the main focus of Chapter 9, dates from this time. This text can be said to represent the first step towards the General Theory in the sense that it puts forward both a new formulation of a system of commodity markets, in the form of simultaneous equations which imply an equilibrium of investment and saving ('Model 1'), and the theory of liquidity preference. Here, in substance, the TM supply function loses its role. In other words, Keynes here abandoned the idea of constructing a dynamic model using excess profit and the TM supply function. We can also ascertain Keynes's position from the surviving notes to his lectures of the Michaelmas Term of 1932. (From this point on we trace the position Keynes took in his lectures to the extent that notes on these have been preserved.) To preempt any misunderstanding, we should note immediately that Keynes did not completely abandon the TM supply function at this stage, at least in his own opinion: in Chapter 10, 'Searching for a New Theory of Employment', we see Keynes's use of the concepts we shall refer to as the 'pseudo-TM supply function' and the 'pseudo-TM supply function Mk2' which, though essentially different from the TM supply function, were regarded by Keynes as its successors. It is to express this somewhat confused feature of Keynes's thinking that we have given these concepts the designations we have.
Perhaps Keynes's most important contribution to modern economics lies in his having established the theory of underemployment. The focus of this was mainly in the sphere of commodity market analysis, a sphere in which there is no connection between the theories of the Treatise and the General Theory. One of the keys to comprehending how Keynes changed his theory in this sphere in the intervening period is to observe how he treated the TM supply function. This is because the abandonment of the TM supply function marks one of the most significant steps towards the General Theory, as the TM supply function embodied the essential elements of the Treatise's approach to the commodity market: supply-side economics and a dynamic analysis. To put this another way, abandoning the TM supply function entailed a severe upheaval in the foundations of the theoretical framework held by Keynes up to mid-1932. The main elements which comprise the General Theory, such as the consumption theory, the investment theory, and the theory of liquidity preference, were worked out in accordance with this fundamental transformation (which was largely a consequence of discussions Keynes had with the 'Cambridge Circus'). In Chapter 10 we examine the three manuscripts of 1933. 'The Parameters of a Monetary Economy' was not a terminus, but rather a turning point on the road towards the General Theory. Keynes first formulated his theory of the determination of the level of employment in the 'First Manuscript' of 1933. This formulation was the prototype of the 'principle of effective demand' put forward in Chapter 3 of the General Theory, where the demand side in the commodity market is first explicitly articulated, together with the consumption function, in the framework of the 'accounting period'. In the 'Second' and 'Third' manuscripts of 1933, effective demand is defined in terms of the 'expected sale proceeds over variable cost'. It is this function, which can be interpreted as a stability condition for the equilibrium level of employment, that we shall refer to as the 'pseudo-TM supply function mk2'.
In Chapter 11, 'Establishment of the Investment and Consumption Theories', we concentrate on the two 'Undated Manuscripts'. As far as the existing manuscripts are concerned, it is in the 'First Undated Manuscript' that Keynes appears to have first established the fundamental psychological law and the multiplier theory, and in the 'Second Undated Manuscript' that he first put forward an investment theory close to that of the General Theory. These manuscripts are reckoned to have been written either towards the end of 1933 or in the first half of 1934. At this stage Keynes already had in place the theory of the determination of the employment level with almost all the elements comprising the theoretical structure of the General Theory, as we shall see. We can therefore say that he had essentially arrived at the position of the General Theory by the end of 1933.
In Chapter 12, 'The Eve of the General Theory', we examine the manuscript entitled 'The General Theory', which was written in the spring of 1934, and also the manuscript containing revised versions of Chapters 8 and 9 of this, which was written in the summer of 1934. In the first of these manuscripts we see the establishment of the consumption and investment theories, which had already featured in the 'Undated Manuscripts', while inconsistencies in the concept of effective demand and in the theory of the determination of the employment level are again acknowledged, as they were in the First, Second, and Third Manuscripts.
The story does not end there, however. For a start, the concrete formulation of the determination of the level of employment, as well as the definitions of principal variables such as effective demand and the employment function, were to change several times before Keynes arrived at the General Theory. We therefore need to clarify the further changes in these concepts. The delineation of these changes is as important for our purposes as that of the changes in the theory made from the starting point of the Treatise, as our objective is to trace the development of Keynes's thought all the way from the Treatise to the General Theory, including the states of theoretical confusion in which Keynes got bogged down along the way.
There are two additional matters to which attention must be paid: firstly to identify the points of similarity and difference between each manuscript and those which preceded it (looking backwards, as it were), and secondly to make the same comparisons with regard to the manuscripts which followed (looking forwards). These comparisons hinge, of course, on our understanding of the General Theory. In A Reconstruction of Keynes's General Theory (1981; hereafter referred to as A Reconstruction), I examined the commodity market mechanism of the General Theory in detail, pointing out several theoretical inconsistencies, and attempted to reconstruct it anew. This interpretation of the General Theory is reflected to a greater or lesser degree in the analysis of the manuscripts in the present book. The examination of 'The General Theory' in Chapter 12 is likewise to some extent coloured by my earlier interpretation of the General Theory, in that it pays attention to the state of development of Keynes's employment theory, points out the ambiguity in the concept of effective demand, as well as some theoretical inconsistencies, while still recognizing that in 'The General Theory' Keynes put forward almost the same theoretical framework as that of the General Theory in the areas of both the consumption and the investment theories. In Chapter 13, 'The Proofing Process of the General Theory (1)', and Chapter 14, 'The Proofing Process of the General Theory (2)', we deal with the gestation of the General Theory from, respectively, the summer of 1934 up to 'First Galley III', and from the galley we refer to as the 'Great Revision' up to publication. In these two chapters we examine the production of the General Theory not only in the aspect of substance but also in that of form. With regard to substance we examine the evolution of the employment function and of fundamental concepts such as effective demand, investment, and prime cost.
In addition to Keynes's manuscripts, in Chapters 9-14 we also make use of the notes to Keynes's Michaelmas Term lectures of 1932-1935 made by several of his students, for which scholars are much indebted to Thomas K. Rymes's two painstaking works, Keynes's Lectures, 1932―35: Notes of Students, and Keynes's Lectures, 1932―35 - Notes of a Representative Student.
In Chapter 15, 'The General Theory', our goal is to clarify the theoretical structure of Keynes's magnum opus. The General Theory has two strking features. Firstly, it sees the market economy as possessing two contrasting aspects: stability, certainty and simplicity on the one hand; instability, uncertainty and complexity on the other. Secondly, it can be characterised, first and foremost, as a monetary economics which deals with underemployment equilibrium. After having looked at Keynes's stance on the history of economics (here we argue that the General Theory departs from the Wicksell Connection, though both should be regarded as monetary economics), we turn to the theoretical structure, and examine the essence of the Keynesian revolution from several angles. This chapter is, again, partly based on the interpretation of the General Theory I proposed in A Reconstruction.
In Chapter 16, 'From the Treatise to the General Theory', we discuss the evolutionary process of the propositions which form the heart of the General Theory, and make a head-to-head comparison between the theoretical structure of the Treatise and that of the General Theory.
The evolution of Keynes's thought cannot be accurately assessed without the help of the manuscripts he produced in the period between the two major works we are considering. In the course of our investigation we inevitably encounter the difficult task of identifying the continuities and discontinuities in the development of Keynes's ideas. We also encounter the equally difficult task of evaluating from the point of view of the evolution of his theories as a whole the judiciousness of Keynes's own estimation, in each period, of the continuities and discontinuities in his thought.
The topics discussed in Chapter 17, 'Interpretations of Keynes and the Development of Postwar Macroeconomics', include: the two recognized areas of interpretation relating to the General Theory (interpretations of the General Theory, and of the development of Keynes's economics), and the development of postwar macroeconomics.
The five appendices are as follows. Appendix to Chapter 1, 'The Interwar Statistical Data', exhibits Keynes's keen interest in, and precise use of, statistical data, at the same time depicting the interwar period in figures. Appendix to Chapter 5, 'A Conflict between Internationalism and Nationalism', covers Keynes's political stance, taking up the relief problem as an example of his many outstanding contributions as a policy planner and as one of the architects of the postwar world. The contents of Appendix to Chapter 7, 'A Mathematical Formulation of the Treatise Theory', is as its title suggests. Appendix to Chapter 15, 'The Commodity Market in the General Theory', shows a model graphically on the basis of the interpretation of the General Theory I put forward in A Reconstruction.
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Finally, for the sake of convenience, let us summarise here our main conclusions.
(1) It is crucially important to pay attention to the question of how Keynes dealt with the relation between profits and the volume of output. In the Treatise the importance of this relation (the 'TM supply function') is stressed as expressing the dynamic mechanism. Keynes adhered to this function after the Treatise, in spite of many criticisms. Toward the end of 1932, however, he abandoned it, though showing some hesitation, and put forward a new formula of a system of commodity markets which led up to the General Theory.
(2) The Treatise belongs to the 'Wicksell Connection', which includes Myrdal,
Lindahl, Mises, Hayek and others. We regard the Wicksell Connection as propounding monetary economics critical of neoclassical orthodoxy. The Treatise, however, included two theories - the 'Wicksellian theory' and a theory of Keynes's own ('Keynes's own theory'). Immediately after the Treatise, Keynes abandoned the former theory, and strove to maintain or improve the latter. We regard the Keynes after the Treatise as departing from the Wicksell Connection, with the result that the General Theory is completely independent of the Wicksell Connection.
(3) The Treatise and the General Theory have in common the following points: (i) both belong to monetary economics and were pitched against neoclassical orthodoxy; (ii) prices and output are treated as endogenous variables; (iii) the importance of both monetary and fiscal policies are stressed. (Throughout his life Keynes believed in the efficacy of interest rate policy in controlling the economy.)
(4) The General Theory's revolutionary feature lies in its showing, through a
presentation of a clear-cut model, that the market economy, if left to itself, falls into an underemployment equilibrium. The model shows how the volume of employment is determined, on the basis of an equilibrium analysis, contrary to the arguments of Post-Keynesians, 'Disequilibrium Approach' Keynesians and others. It was not until 1933 that Keynes came to put forward a model of how the volume of employment is determined. Thereafter he took pains to elaborate his model, continuing to revise the concept of effective demand, the concept of marginal efficiency of capital, the theory of liquidity preference and other things. We traced his efforts to such a meticulous degree. At the same time, however, we argue that in the General Theory Keynes sees the market economy as possessing two contrasting potentialities: stability, certainty and simplicity on the one hand; instability, uncertainty and complexity on the other.
(5) We put forward the essensial theoretical framework of the Treatise in term
s of Mechanisms 1 and 2 (the determination of the price levels of consumption and investment goods, respectively), and 3 (the 'TM supply function'). We also reconstruct the theoretical framework of the General Theory in terms of the 'heterogeneity-expectations approach', pointing out some flaws in the original.
Note on Methodology
Needless to say, the study of the history of economic doctrines ought to be as objective as possible. However, to suggest that this particular subject can be approached straightfowardly in this way is rather misleading. As soon as we depart from the simplest facts, such as who wrote what, when and where, we cannot but perceive reality through the filters of our own value judgements and presuppositions, whether consciously or unconsciously. Hence, however objective we strive to be, we can never completely eliminate an essential subjectivity from our work, as this is inherent in the nature of our subject itself. All we can do is strive to be as impartial as we can, an extremely delicate and difficult task. This is also why the spectrum of interpretation of the work of any great economist is often so wide.６ Predictably, the greater the impact of the economist is, the wider the spectrum of opinion tends to be. Moreover, the range of the interpretations is bound to be subject to considerable fluctuation in accordance with changes in social, political, and economic conditions. A particular understanding may be in the ascendant for a long time only to be superseded by a completely different one as the prevailing conditions change. Furthermore, influential economists often tailor a powerful traditional theory to accommodate their own tastes and predilections, or to support their own ideas. Such is the stuff of which the history of economic doctrines is made. Under these intellectual conditions, the researcher must persevere in his/her work while being exposed to yet two further pressures, namely the influences of both present and past interpretations. To progress in the study of the history of economic doctrines, his/her starting point must be to establish his/her own understanding of individual texts. In the case of Keynes these strictures are perhaps especially pressing.
Scholars inevitably draw their views of the market society, as with other economic issues, from the alternatives offered by current economic thought. While undoubtedly useful, the effect is often to distort our grasp of the history of economics unconsciously by forcing us to view earlier doctrines from ideologically biased perspectives.
From what viewpoint research should be oriented - in particular whether to take an ahistorical or a historical approach (that is, whether to endeavour to interpret historical doctrines in their original settings or not) - is necessarily a delicate problem. The approach adopted in this book is the latter; that is, we have sought to interpret Keynes's theories in the spirit of their original meanings. But this does not mean that theorization has had no place in our reasoning. It has rather been vital in enabling us to articulate (hopefully) cogent interpretations of Keynes's correspondence, manuscripts, books, and related materials. It is worth noting, too, that this approach may help us either to reaffirm the correctness of, or to locate crucial flaws in, current orthodox thinking. In any case, one cannot avoid a certain amount of intellectual tension in confronting the dilemmas posed by the various approaches one might take.
Notes
1) The view of society which underlies this thought is often referred to as the 'Harvey Road presuppositions' (Harrod, 1951). Miyazaki (1980) argues that the term is inappropriate, as Keynes's social philosophy underwent a transformation in or around 1925. For more on this, see Hayasaka (1982), Nishibe (1983), and Shionoya (1983).
2) Catallactics, which means a theory of exchange, have been used by several economists like Whately, J.S. Mill, Mises, Hayek (the latter two use 'catallaxy'). Plutology, which means a theory of wealth, was at first, so far as the English sphere is concerned, used by W. Hearn in the same meaning as catallactics. Hicks changed the meaning of plutology in such a way that it means economics aimed at analysing production, growth and distribution of wealth (= national income). Here we follow Hicks's taxonomy. See Hicks (pp. 214-215) in Latsis ed. (1976).
3) Recently O'Brien's innovative study (1993) shed light on Thomas Joplin as a monetary economist, the forerunner of Keynes's General Theory.
4) See the statement by Patinkin in Patinkin and Leith eds. (1978), pp. 125-126.
5) See Section 2 (B) of Chapter 7 of this book.
6) After the publication of the General Theory a number of eminent economists stated their interpretations of its central message. Quite apart from disagreements about how economics should be constructed, there were some rather wide discrepancies in their readings of the text. On this, see Gordon (1970).
