ＣＨＡＰＴＥＲ １２
THE EVE OF THE ＧＥＮＥＲＡＬ ＴＨＥＯＲＹ
In this chapter we turn our attention to the theoretical developments of
1934. As we saw in the preceding chapter, by the end of 1933 Keynes had already
developed the theoretical system explaining the level of employment, as well as
the consumption function, the fundamental psychological law, the theory of
liquidity preference, the concept of the marginal efficiency of capital, and
the multiplier theory. In this chapter, we examine the large advances he made
in these areas towards the formulations we find in the General Theory.
To explore these developments we
look first at two manuscripts: (i) a typescript entitled 'The General Theory of Employment,
Interest and Money', which is thought to have been written in the spring of
1934 (JMK.13, pp. 423-456;
hereafter 'The General Theory'); and (ii) a revised version of Chapters 8 and 9 of this, written in the summer of
1934 (JMK.13, pp. 471-484;
hereafter 'The Summer Manuscript'). We will also look at Keynes's lectures for the Michaelmas term of
1934, which were delivered on the basis of a manuscript we will refer to as
'First Galley I' (see Table 13-1). An examination of these lectures is helpful for understanding the
state of Keynes's development at the end of 1934.
The story does not end with the
steps taken in these manuscripts, however. Although Keynes put forward the
system determining the level of employment, it remained incomplete. This
incompleteness was very clear in the examinations we made of the system of
equations in the First Manuscript (1933) and the argument by means of 'effective demand' in the Third Manuscript
of 1933 (see Chapter 10 of the present book). Although in 'The General Theory' Keynes puts forward a new
model to explain how the level of employment is determined, his argument as we
shall see still lacks precision. This is also true of the Summer Manuscript. It
is very important to bear in mind that in the area of employment theory,
Keynes's endeavours to coherently explain the workings of the economy were to
continue right up to the General Theory, and that in this area, even the
General Theory itself still lacks precision. This point will be
discussed in detail in later chapters.
By this period Keynes's thinking
had gone far beyond the world of the Treatise and had plunged deeply into that
of the General Theory. Thus our attention will naturally focus on the
relations of the manuscripts to the General Theory, rather than on their
relations to the Treatise. This tendency will become progressively more
pronounced as we approach the General Theory itself. The General
Theory was an epoch-making work which revolutionised macroeconomics by
providing a system explaining how the level of employment is determined. The
book's theoretical inconsistencies do not undermine this achievement, but do
deserve close attention. Naturally our examination of the development of
Keynes's theories takes into consideration our view of the book's theoretical
inconsistencies, with which we shall also deal specifically in Section 2 of
Chapter 15.
1. 'The General Theory'
Of the twenty-seven chapters (divided into five
'books') listed in the table of contents of this manuscript, we have only
Chapters 6 to 12. (Chapter 12, 'The State of Long-Term Expectation (or Confidence)', not only has
almost the same title as Chapter 12 of the General Theory, but is also
essentially 'the final printed version with very few changes'.１) The manuscript has
two features particularly worth noting. The first is the way in which the
concept of 'effective demand' and the theory of employment are discussed. The
second is the way in which the consumption theory and the investment theory are
discussed. The discussions of the first two topics are full of ambiguities,
reflecting the struggle Keynes was undergoing in his search for a new theory of
employment, while the discussions of the second two topics are very similar to
the arguments developed in the General Theory. This contrast is the most
salient characteristic of 'The General Theory'. As we saw in the
preceding two chapters, the ambiguities in the concept of 'effective demand'
and in the theory of employment were noticeable in the three 1933 manuscripts,
while the establishment of the consumption and investment theories was a
noteworthy feature of the two undated manuscripts. In fact, the three
manuscripts and the two undated manuscripts are, taken as a whole, rather ahead
of 'The General Theory'. However, this manuscript is the first to include all
the above-mentioned elements (the concept of 'effective demand' and the theory of employment, with
their ambiguities, the consumption theory, and the investment theory), and was to have a
considerable influence on the formation of the theoretical structure of the General
Theory.２ In this section, we will examine Chapters 6 to 11, focusing on three
points: (i) the ambiguities in the concept of 'effective demand' and the
inconsistency of the employment theory; (ii) the consumption theory; and (iii) the investment theory. We then briefly touch on some other fundamental
concepts of 'The General Theory', and finally consider what can be surmised
from the manuscript's table of contents.
A. Effective Demand and an Employment Theory
Let us begin with Chapter 6,
'Effective Demand and Income', and Chapter 9, 'The Functions Relating
Employment, Consumption and Investment', which are both concerned with the
sphere with which Chapter 3, 'The Principle of Effective Demand', of the General
Theory deals.
These two chapters are
interesting on two counts. Firstly, they show clearly the state of development
of Keynes's employment theory in this period. In this connection we need to pay
special attention to the ambiguity in the concept of 'effective demand'.
Secondly, the employment theory contains the same sort of inconsistencies as
the General Theory, in that the relations３ between the first postulate of classical economics and the employment
function, and between the arguments of Chapters 6 and 9, are unclear. (Let us bear in mind
that the same kind of theoretical inconsistency persists in the General
Theory. )
(a) Effective Demand
In 'The General Theory',
'effective demand' is defined as the 'present value of the expected sale
proceeds' (JMK.13, p. 425). This is different
from the concept of effective demand in the Third Manuscript, where it was
defined 'by reference to the expected excess of sale proceeds over variable
cost'. Moreover, in contrast to the Third Manuscript, it is difficult to find
any passages in which effective demand is discussed in relation to the
stability of the equilibrium level of employment.
We proceed as follows. We first
examine the relations between, and the definitions of, some key concepts in
'The General Theory', including effective demand, income, and
quasi-rent, and then show that the effective demand discussed in this
manuscript partially, though not entirely, corresponds to the 'aggregate supply
price' concept of the General Theory .
...finally I have come to the conclusion that the use of language, which
is most convenient on a balance of considerations and involves the least
departure from current usage, is to call the actual sale proceeds income and
the present value of the expected sale proceeds efffective demand.４ Thus it is the present value of the expectation of income which
constitutes the effective demand; and it is the effective demand which is the
incentive to the employment of equipment and labour. The difference between the
two we shall call entrepreneur's windfall - profit or loss, as the case may be;
so that the excess of income over effective demand is entrepreneur's windfall
profit.
The following
notation will be used.
Y for Yncome
D for effective demand
F for entrepreneur's windfall [here, not Fｕ but F is used]
These expressions are in terms of
money. Income and effective demand in terms of the wage unit will be written Yｗ and Dｗ.
The quasi―rent (Q) from a given output
of finished goods we have already defined in chapter 4 [entitled
'Expectation'] as being the excess of the expected sale proceeds of the goods over
their prime cost (NW) [N denotes employment, and W the money wage]. Thus the sum of the
quasi-rent and prime cost of a given output is equal to the effective demand
for it, i.e. D = Q + NW, which may also be written Dｗ = Qｗ + N (JMK.13, pp. 425-426).
From this, the following equations can be
extracted:
Fｕ = Y- D (1)
D = Q + NW (2)
Two characteristics are
noticeable in these formulas. Firstly, quasi-rent, which is the difference
between the expected sale proceeds D, and the prime cost NW (the variable cost), means normal
profit. This can be proved as follows. Using equation (2) to substitute for D
in equation (1), and rearranging, we obtain:
Y - NW = Fｕ + Q (3)
The left-hand side of equation (3) is the actual sale
proceeds minus the prime cost, so that it represents all the realised profit,
while Fｕ is windfall profit. Therefore Q is normal profit. As shown in equation (1), excess profit (or windfall profit) is defined as the
difference between the actual sale proceeds and the expected sale proceeds.
These two points are not found in the formulations in the three 1933
manuscripts. In those manuscripts, the difference between the expected sale
proceeds and the prime cost (the sum of normal profit and excess profit) was defined as
effective demand, and quasi-rent, Q, was defined as including excess profit.
From our examination so far, it
is evident that effective demand D is defined as the sum of normal profit (= Q) and the prime cost,
so that it corresponds, in terms of the General Theory, to the
'aggregate supply price' rather than the 'aggregate demand price'.
Thus the argument centering
around effective demand in 'The General Theory' (spring 1934) differs from that in
the three 1933 manuscripts, not only in verbal definition, but also in
theoretical content. Moreover, as we will show later, this argument ought to be
considered in connection with the fact that Chapters 6 and 9 of 'The General
Theory', which as we said correspond to Chapter 3 of the General Theory,
are theoretically inconsistent.
(b) The
Employment Theory
At this point it will be useful
to glance back at Keynes's economic-theoretical development prior to 'The General
Theory' to confirm that previously he had not explicitly adopted the method
of supply-demand equilibrium.５ The Treatise set up a world in which the TM supply function plays a
dynamic role and the price level (of consumption goods) is determined by the demand side, on the assumption that the volume of
output supplied is fixed in the period concerned. As far as the Treatise is
concerned, it is only in Investment Price Theory (1) that the method of
supply-demand equilibrium is adopted. In 'The Parameters of a Monetary Economy'
this method was not adopted, except in the theory of liquidity preference. So
far as an analysis of the commodity market is concerned, this appeared for the
first time in the First Manuscript (1933). Thereafter, Keynes progressively came to adopt a supply-demand
equilibrium approach. However, there are certain ambiguities in the way he uses
it. This is seen typically in the argument concerning the 'employment
function', to which we can now turn.
<1> The Employment Function
The employment function, which
makes its first appearance in 'The General Theory', is set up as follows:
Dｗ = F(N) is the employment function, where an effective demand equal to Dｗ leads to N units of labour being employed (JMK.13, p. 440).
A little before this, Keynes explains its
inverse function.
The above [the first postulate of classical economics] is, of course,
subject to the qualification that different classes of enterprise do not, in
fact, respond equally in the degree in which they modify the employment they
offer to equal changes in the effective demand for their product, since they
are not all working under the same conditions of supply. Thus the same
aggregate effective demand may correspond to different levels of employment
according to the way in which it is distributed between different classes of
enterprise. This will be a matter for subsequent discussion, which I mention at
once only to avoid premature criticism. But at the present stage of the
argument I shall abstract from it and assume that all firms have similar
employment functions, so that aggregate employment is a simple function of the
aggregate effective demand measured in terms of the wage unit (JMK.13, pp. 427-428).
On the one hand the employment
function seems to be a supply concept, on the other it seems to be an
equilibrium concept.６ There are three reasons for arguing that the employment function has
the appearance of a supply concept. First, Keynes puts forward the employment
function in relation to the first postulate of classical economics (which deals with the
supply behaviour of an individual firm), and, moreover, with the (temporary) assumption that 'all firms have similar employment functions', he
considers that 'aggregate employment is a simple function of the aggregate
effective demand'. This suggests that he understands the employment function as
a supply concept in the case of the whole economy, as well as in those of the
individual firm or the individual industry.７ Second, as we showed in (a) above, he puts forward effective demand as, in the terminology of the General
Theory, the aggregate supply price. Third, as will be shown in <2> below, in the
equation determining the level of employment, Keynes puts the employment
function on the left-hand side, while he puts the sum of the propensity to
spend and the propensity to invest on the right-hand side.
But the employment function also
looks like an equilibrium concept. Keynes tries to obtain aggregate employment
on the implicit assumption that the distribution ratio of aggregate effective
demand between industries is given.８ When he refers to 'the effective demand for their product', he seems to
use the concept as representing the demand side, because he argues in such a
way that 'the effective demand for their product' determines the level of
employment in each industry in connection with the 'conditions of supply' (the first postulate
of classical economics). Therefore, the effective demand in each industry is not only a demand
concept but also an equilibrium concept. The employment function is obtained by
aggregating, on the one hand, the effective demand in each industry, and, on
the other, the level of employment in each industry. Therefore, the employment
function shows a functional relation between the aggregate effective demand (an equilibrium value) and the aggregate employment
(an equilibrium level).
To look at the employment
function from a different angle, it is, as it were, only a signal for
indicating the level of employment which corresponds to the aggregate effective
demand, because the aggregate effective demand depends on the implicit and arbitrary
assumption that its distribution between industries is given. The aggregate
effective demand per se has to be determined by some other mechanism. Our
argument that the employment function has the appearance of an equilibrium
concept may be explained as follows:
Zｗ = F(N) (4)
Dｗ = Zｗ (5)
Suppose that equation (4) shows some concept
representing the supply side, while Dｗ represents the demand side. Then equation (5) equilibrates supply
with demand.９ From these two equations we obtain:
Dｗ = F(N) (6)
Therefore, we can suppose that
equation (6) (the employment function) indicates an equilibrium of commodity markets.
It should be noted that the
duality１０ which the employment function embodies (the muddled coexistence of a supply concept and an equilibrium concept) also shows up in the
General Theory. This duality originates with 'The General Theory'.
<2> The Employment Function in Relation to the
Determination of the Level of
Employment
In 'The General Theory', the
determination of the level of employment is conceptualised as follows:
Both Cｗ and Iｗ are to be interpreted in this context in terms of expectation, i.e. as
the expected rates of consumption and investment. Hence it follows that Dｗ=Cｗ+ Iｗ. Thus the level of employment, given the propensities to spend and to
invest, is given by the value of N which satisfies the equation１１
F(N) = f１(N, r, E) + f２(N, r, E)
(JMK.13, pp. 441-442. r denotes the rate of interest, E the state of
long-term expectation, f１ the propensity to spend [or consume], and f２ the propensity to invest.)
The employment function here
represents the supply side, though Keynes does not state this explicitly. It
does not depend on profit. This is in marked contrast to the position in the
First Manuscript (1933) (where the system determining the level of employment was developed for
the first time), in which the supply function (the pseudo-TM supply function) is formulated as a function of profit. We should note the possibility
that there may be a close relation between Keynes's affirmative attitude toward
the first postulate of classical economics and the change from the pseudo-TM
supply function to the employment function. On the other hand, the employment
function here is in substance the same as the employment function１２ of the General Theory, except that the former is the inverse of
the latter. We can interpret both as equilibrium concepts. In the General
Theory, the employment function is measured in wage units and defined as
the inverse of the aggregate supply function Z = φ(N), which corresponds
to equation (4). However, the actual argument is made by means of an equation similar
to equation (6), that is, not N = F－１(Zｗ), but N = F－１(Dｗ). Dｗ in the General Theory is effective demand which is defined as the
value of the aggregate demand price at the point where the aggregate demand
function intersects the aggregate supply function. Here again, we are faced
with the unfortunate ambiguous nature of the employment function.
(c) The First Postulate
In the Second Manuscript (1933)１３, Keynes expressed for the first time acceptance of the first postulate
of classical economics and rejection of the second. He maintained this view
thereafter, up to the General Theory.
The relation between profit and
the first postulate of the classical economics in 'The General Theory' is worth
noting. Normal profit is Q (which denotes quasi-rent) and contributes, in connection with the first postulate, to the
determination of the level of employment. However, at least so far as the
extant sources are concerned, we find no discussion of windfall profit (Fｕ), nor of the
stability conditions for the level of employment (cf. our discussion of
the Second and Third Manuscripts of 1933 in Chapter 10). Because of this,
Keynes's emphasis on the maximisation of quasi-rent in the argument concerning
the first postulate comes to the foreground:
Under normal assumptions of competition etc. the condition of maximum
quasi-rent will be satisfied by a volume of employment such that the prime cost
of the marginal employment will be equal to the expected sale proceeds of the
resulting increment of product....
Furthermore, in the normal case
we must assume decreasing returns for a given capital equipment (JMK.13, p. 426).
The notion of the 'condition of
maximum quasi-rent', that is, the condition of maximum normal profit, is
indicative of some development in Keynes's economic theory. In the Second and
Third Manuscripts, despite acceptance of the first postulate, Keynes assumed
'normal profit' to be constant, and did not seriously incorporate the idea of
profit-maximising entrepreneurs１４ into his system. Consequently, the first postulate was not compatible
with the fundamental theoretical system we represented as equations (7)-(17) in Chapter 10. In
'The General Theory', on the other hand, Keynes repeatedly emphasises
maximisation of quasi-rent１５, and confines profit to quasi-rent (as is seen in equation (2) above).
(d) Two Theoretical Difficulties
There are two theoretical
difficulties in 'The General Theory'. One is that the relation between the
first postulate and the employment function is unclear, the other is that the
relation between the argument of Chapter 6, 'Effective Demand and Income', and
that of Chapter 9, 'The Functions Relating Employment, Consumption and
Investment', is unclear. It should be noted that the same kind of theoretical
inconsistency persists in the General Theory: between the consumption
theory of Book III, 'The Propensity to Consume', and the investment theory of
Book IV, 'The Inducement to Invest', on the one hand, and Chapter 3, 'The
Principle of Effective Demand', on the other.１６
<1> The First Postulate and the Employment
Function
The relation between the first postulate
and the theory explaining the determination of the level of employment is taken
up seriously for the first time in 'The General Theory'. In the First
Manuscript, the supply side was represented by the sum of the cost function and
the inverse of the 'supply function'. In 'The General Theory', by contrast, the
supply side is represented by the employment function, which is connected with
the first postulate of classical economics. Keynes states:
If a more careful statistical enquiry were to confirm this, it would
indicate that the employment function tends to approximate to a straight line
drawn at a constant angle, which on the basis of the figures I have seen would
be in the neighbourhood of 45°, between the axes of the quantity of employment and the effective
demand measured in wage units; since these would be a nearly constant ration (= D/NW) between ΔD and ΔN, W, i.e. between ΔDｗ and ΔN (JMK.13, p. 446).
Allowing ourselves to reorganise
Keynes's argument, we can begin by expressing the first postulate as follows:
ΔO / ΔN = W / P (7)
where O denotes the
level of output, P the price, and ΔX an increment in X.
From equation (7) we can derive:
Δ(P.O /W) = ΔN (8)
And using the definition equation P.O = D, we
obtain:
ΔDｗ / ΔN = 1
(9)
This means that the slope of the employment
function Dｗ = F(N) is 1.
However, this method is not used
all through 'The General Theory'. The employment function presupposes a certain
distribution of aggregate effective demand between different classes of firms,
and the industry as a whole is divided into the consumption goods sector and
the investment goods sector. In consequence, the first postulate of classical
economics cannot be directly connected with the employment function.１７
<2> The Arguments of Chapters 6 and 9
In Chapter 6, 'Windfall Profit
of Entrepreneurs', the entrepreneur's windfall profit Fｕ is defined as the difference between income Y and effective demand D.
On the other hand, in Chapter 9, 'The Functions Relating Employment,
Consumption and Investment', income Y does not appear in the equation which determines
the level of employment:
F(N) = f１(N,r,E) + f２(N,r,E)
Certainly, effective demand D [Dｗ = F(N)] can be determined by this equation. However, it is not certain how the
windfall profit of entrepreneurs Fｕ is determined or how it is considered to work. No concept corresponding
to the pseudo-TM supply function mk2 of the Second Manuscript appears in 'The
General Theory'. If the arguments can be interpreted along lines similar to our
interpretation of the Second Manuscript (Section 2 of Chapter 10), we may be able to resolve the inconsistency between Chapters 6 and 9.
The definitions of normal profit and windfall profit in 'The General Theory'
differ from those in the three 1933 manuscripts. We can conclude that the
equation F ｕ = Y - D corresponds to our equation (7) in Chapter 10. Moreover, we presume that 'The General Theory' is devoid
of anything like Chapter 10's equation (8) (the pseudo-TM supply function mk2１８), though of course we
cannot completely rule out the possibility that it may have appeared in the
missing part.
Thus we can understand the
arguments of Chapters 6 and 9 in a manner which makes them consistent by
considering that Keynes puts forward the stability of the equilibrium level of
employment in Chapter 6, and the determination of the equilibrium level of
employment in Chapter 9. If we do this, we can then infer that the three 1933
manuscripts lead, by way of these two chapters of 'The General Theory', to
Chapter 3 of the General Theory.
B. The Consumption Theory
The consumption theory in 'The
General Theory' adopts that of the First Undated Manuscript, which we examined
in Section 2 (A) of Chapter 11. It deals with both the 'subjective' and the 'objective'
factors influencing the propensity to consume, and possesses the same
theoretical framework (not only in substance but also in style) as the consumption theory of the General Theory (Chapter 8, 'The
Propensity to Consume: I. The Objective Factors', and Chapter 9, 'The
Propensity to Consume: II. The Subjective Factors'). The consumption
theory of 'The General Theory' is mainly discussed in Chapter 10, 'The
Propensity to Spend'.
(a) The Subjective Factors
Concerning the subjective
factors influencing consumption, the argument in 'The General Theory' is, in
style, very similar to that of the General Theory (Section I of Chapter
9). It is therefore
fairly safe to suppose that in the missing pages Keynes would have refered to
items corresponding pretty much to the sixth, seventh and eighth of the
subjective factors - namely, '(vi) To secure a masse de manoeuvre to carry out speculative or business
projects; (vii) To bequeath a fortune; (viii) To satisfy pure miserliness, i.e. unreasonable but insistent
inhibitions against acts of expenditure as such' - listed in the General
Theory (p.108), and the first, second and third of the four saving motives of
governments and firms: '(i) The motive of enterprise... (ii) The motive of liquidity...and (iii) The motive of improvement ...' (GT, pp. 108-109).
In Section IV of Chapter 8,
'Investment and Saving', of 'The General Theory', Keynes almost completes an
argument to the effect that 'financial provision' for the future becomes an
obstacle to employment. This section is succeeded by Sections I to III of
Chapter 8, 'Investment and Saving', of the Summer Manuscript (with which we shall
deal in Section 2 below), into which Keynes incorporated Colin Clark's statistical data for the
British economy. This is further developed in Chapter 9, 'The Meaning of
Investment', of First Galley I (which we will consider in Chapter 13), and finally leads to Section IV (which mainly deals with the financial provision) of Chapter 8 of the General
Theory. In 'The General Theory', Keynes treats the financial provision in
such a way that it is added to the subjective factors, although he ceases to do
so after First Galley I.
(b) The Objective Factors
The objective factors
influencing consumption also appear for the first time in 'The General Theory'.
The discussion here corresponds to Sections II and III of Chapter 8 of the General
Theory, but there are some notable differences, not only in style but also
in substance. In 'The General Theory' Keynes lists the following as the
objective factors: (a) the quantity of employment as determining the aggregate current rate of
real income, (b) the rate of interest, and (c) the state of 'confidence' or long-term expectation (JMK.13, p.444). In the General Theory the following are given as the objective
factors: (i) a change in the wage-unit; (ii) a change in the difference between income and net income; (iii) windfall changes in capital-values not allowed for in calculating net
income; (iv) changes in the rate of time-discounting; (v) changes in fiscal
policy; and (vi) changes in expectations of the relation between the present and the
future level of income. Items (b) and (iv) are very similar in style, while (c) and (iii) have something in common, in that both pay attention to the influence
which changes in capital-values have upon consumption. In 'The General Theory'
the quantity of employment is regarded as the most important of the objective
factors, and is referred to where the consumption function is considered in
relation to the fundamental psychological law, whereas in the General Theory
it is not regarded as an objective factor at all. So far as the other factors
are concerned, there is no similarity between the two texts.
The above argument must be
understood in the following context: as far as the consumption theory is
concerned, the theoretical framework in 'The General Theory' is the same as
that in the General Theory. Among the factors which determine the
propensity to spend (consume), Keynes defines those factors which do not change in the short period
to be the 'subjective' factors, and those which do change in the short period
as the 'objective' factors. He also puts forward the consumption function in
relation to the fundamental psychological law. Compared with these
similarities, the differences between 'The General Theory' and the General
Theory in the items named as objective factors are of only secondary
importance.
C. The Investment Theory
In 'The General Theory' Keynes
improves on the investment theory of the Second Undated Manuscript and
establishes the investment theory that is to appear in the General Theory.
For a start, the conception of the marginal efficiency of capital in this
manuscript is virtually the same as that in the General Theory１９:
Given this series of annuities [the prospective yields]...there is some rate of interest on the basis of which the present
value of the series of annuities will be equal to the supply price of the
investment. The rate thus arrived at we may call the marginal yield (or efficiency) of capital (JMK.13, p. 453).
Secondly, what we called (in Section 2 (B) of the previous
chapter) Investment Theory (1) of the General Theory (i.e., the theory that the volume of demand for investment is determined
in such a way that the marginal efficiency of capital is equal to the rate of
interest), is put forward:
...new investment will be pushed to the point beyond which the marginal
yield of capital would fall short of the current rate of interest (JMK.13, p. 453)
Thirdly, the theory we called
Investment Theory (2) of the General Theory (Investment is determined in such a way that the demand price of the
investment becomes equal to the supply price of the investment２０; see Section 2 (B) of Chapter 11) is also put forward:
The series Qｒ, which can be called the prospective yield of the investment, depends
on the state of long-term expectation E; whilst the series dｒ [the present value of ￡1 deferred r years] is given by the rate of interest. The two together determine the
schedule of effective demand for investment; and, finally, the supply from this
for investment goods fixes the amount of employment which will be actually
directed towards investment corresponding to any given effective demand２１ (JMK.13, pp. 452)
.
Here the demand schedule for
investment later to be used in Investment Theory (1) of the General
Theory appears in the area belonging to Investment Theory (2). In the quoted
passage, Keynes argues that the schedule of effective demand for investment is
determined by the prospective yield of the investment and the rate of interest,
and argues that the schedule of effective demand for investment and the
'supply' determine the amount of employment which is directed toward
investment, though it is not clear what the coordinate axes on which that
schedule is measured are, or how it relates to the 'supply'.
D. Some Other Fundamental Concepts
In Chapter 8, 'Investment and
Saving', of 'The General Theory' Keynes examines some fundamental concepts,
centreing his attention on '(gross) investment' and '(gross) saving'.22 This part of the discussion is the predecessor of Chapter 8, 'Investment
and Saving', of the Summer Manuscript and the 'Pre-First Proof Typescript' (the latter we will
discuss in Section 2(A) of Chapter 13), which are the origins of Chapter 6, 'The Definition of Income, Saving
and Investment', and Sections I to III of Chapter 7, 'The Meaning of Saving and
Investment Further Considered', of the General Theory.
E. The Table of Contents
Let us start our examination of
the table of contents of 'The General Theory' (see Table 12-1 below) by comparing it with the tables of contents of the Third Manuscript of
1933 and First Galley I and III. Where helpful we will also refer to the table
of contents of the General Theory. It should be noted in advance that as
far as the texts are concerned, only two of twenty-one chapters of the Third
Manuscript, and only seven of twenty-seven chapters of 'The General Theory',
survive. Moreover, how far Keynes wrote the text on the basis of the table of
contents of 'The General Theory' is not certain.
However, we have some letters
which do provide some information about the missing chapters: (i) in a letter to his
mother dated 25 March 1934, Keynes said that the book 'was now nearing
completion' (JMK.13, p. 422); (ii) in a letter to Joan
Robinson dated 29 March 1934, Keynes wrote: 'I am going through a stiff week's
supervision from R.F.K. [Kahn] on my M.S.' (JMK.13, p. 422). The 'book' or
'M.S.' may indicate not the Third Manuscript but 'The General Theory'. There
are two reasons why this is likely. One is that Keynes left for the United
States on 9 May (where he stayed until 8 June): it would have been virtually impossible for him to have moved from the
Third Manuscript to 'The General Theory' within the short period available. The
other bit of evidence is Keynes's letter to Kahn of 13 April 1934, in which he
wrote:
I have been making rather extensive changes in the early chapters of my
book, to a considerable extent consequential on a simple and obvious, but
beautiful and important (I think) precise definition of what is meant by effective demand -
Let W be the marginal
prime cost of production when output is O.
Let P be the expected
selling price of this output.
Then OP is effective
demand.
...On my theory OW≠ OP for all values of
O, and entrepreneurs have to choose a value of O for which it is equal -
otherwise the equality of price and
marginal prime cost is infringed. This is the real starting point of everything (JMK.13, pp.422-423).
Here Keynes suggests that equilibrium
is attained only at the point at which OW = OP, and that at that point only the
first postulate of classical economics holds. In 'The General Theory', as we
discussed above, Keynes defined effective demand as 'the present value of the
expected sale proceeds' and distinguished it from income, which is defined as
the 'actual sale proceeds' (the difference between the two is entrepreneur's windfall profit). The concept in the
passage just quoted seems to differ from this. However, it is very difficult to
judge which of the two formulations precedes the other. There are two
possibilities: either (i) Keynes, after having written to Kahn, may have then rewritten some
chapters, such as Chapter 6, 'Effective Demand and Income', or (ii) he may have written
the letter after having written some of the chapters (such as Chapter 6). At any rate, it
seems most probable that the two letters refer not to the Third Manuscript, but
to 'The General Theory'.
If this is correct, we can
safely say that Keynes actually finished writing the whole of 'The General
Theory', though this does not mean of course that we do not need to proceed
cautiously in the comparisons to be made below.
(a) Comparison with the Table of Contents of the Third
Manuscript
Let us begin by comparing the
table of contents of 'The General Theory' with that of the Third Manuscript (see Table 10-1).
(1) The difference
between the two in the definition and function of 'effective demand' may have
something to do with the absence of anything corresponding to Chapter 2, 'The
Distinction between a Co-Operative Economy and an Entrepreneur Economy', of the
Third Manuscript, and may have led to Chapter 3, 'The Principle of Effective
Demand', and Chapter 6, 'Effective Demand and Income', of 'The General Theory'.
(2) Chapter 14, 'The
General Theory of Employment', and Chapter 13, 'The Conditions of Stability',
of the Third Manuscript may correspond to Chapter 19,'The Equilibrium of
Consumption and Investment', of 'The General Theory'.
In the Third Manuscript
effective demand was defined 'by reference to the expected excess of sale
proceeds over variable cost' and was related to the fluctuations in the level
of employment, while in 'The General Theory' it is defined as the 'present
value of expected sale proceeds' and is used as one of the principal factors
which determine the level of employment.
(3) The difference between the two texts in the relations of some
fundamental
concepts may have brought about the change from Chapter 4, 'Quasi-rent',
Chapter 5, 'Income', and Chapter 6, 'Disbursement', of the Third Manuscript, to
Chapter 6, 'Effective Demand and Income', of 'The General Theory'. In the Third
Manuscript quasi-rent was related to effective demand, while in 'The General
Theory' it is related to quasi-rent.
(4) Chapter 4,
'Expectation', Chapter 5, 'The Units of Quantity', and Chapter 12, 'The State
of Long-Term Expectation (or Confidence)', of 'The General Theory' were newly written. They are closely
connected with Keynes's comment that 'The three perplexities which most impeded
my progress in writing this book, so that I could not express myself
conveniently until I had found some solution for them, [were]: firstly, the choice
of the units of quantity appropriate to the problems of the economic system as
a whole; secondly, the part played by expectation in economic analysis; and,
thirdly, the definition of income' (GT, p. 37).
(5) Chapter 8, 'The Propensity to Spend', of the Third Manuscript,
corresponds to Chapter 10, 'The Propensity to Spend', of 'The General Theory'.
In the latter, both the subjective and objective factors are considered.
(6) Chapter 9, 'The
Motive to Invest', and Excursus II, 'The Marginal Efficiency of Capital', of
the Third Manuscript correspond to Chapter 11, 'The Propensity to Invest', of
'The General Theory', though the two manuscripts differ in their definitions of
the marginal efficiency of capital.
(7) As far as the theory
of the rate of interest is concerned, we find the following correspondences
between the two tables of contents: Chapter 10, 'The Problem of the Rate of
Interest', of the Third Manuscript, probably corresponds to Chapter 15, 'The
General Theory of the Rate of Interest', of 'The General Theory'; Chapter 11,
'The Concept of Liquidity Preference as Determining the Rate of Interest', of
the Third Manuscript to Chapter 16, 'The Schedules of Liquidity Preference
Further Considered', of 'The General Theory'; Excursus I, 'The Rate of Interest
in Marshall's Principles of Economics', of the Third Manuscript to Chapter 14,
'Notes on the Rate of Interest in Marshall's Principles of Economics, Ricardo's
Principles of Political Economy and Elsewhere', of 'The General Theory', though
in the latter there are some additional
comments on Ricardo's work of course; and Chapter 19, 'The Rate of Interest in
Extreme Cases', of the Third Manuscript to Chapter 17, 'The Rate of Interest in
Special Cases', of 'The General Theory'.
(8) Keeping the General
Theory in mind, it would appear that Chapter 19, '"Forced"
Saving, Hoarding and the Velocity of Money', of the Third Manuscript may have
been partly incorporated into Chapter 8, 'Investment and Saving', and partly into
Chapter 15, 'The General Theory of the Rate of Interest', of 'The General
Theory'.
(9) Chapter 12, 'The
Nature of Capital', of the Third Manuscript, corresponds to Chapter 18,
'Philosophical Considerations on the Essential Properties of Capital, Interest
and Money', of 'The General Theory'. The latter also includes philosophical
considerations on the essential properties of interest and money which first
appeared as far as manuscripts and/or table of contents are concerned.
(10) Chapter 20, 'Notes
on the Trade Cycle', of the Third Manuscript, corresponds to Chapter 24, 'Notes
on the Trade Cycle', of 'The General Theory'; and Chapter 21, 'Notes on the
History of Cognate Ideas', of the Third Manuscript to Chapter 27, 'Notes on the
History of Similar Ideas', of 'The General Theory'.
(11) Chapter 15, 'The
Supply Function', of the Third Manuscript corresponds to Chapter 20, 'The
Employment Function', of 'The General Theory'; Chapter 16, 'The Multiplier', of
the Third Manuscript to Chapter 21, 'The Multiplier Relating Employment to
Investment', of 'The General Theory'; Chapter 17, 'Real Wages and Money Wages',
of the Third Manuscript to Chapter 22, 'Changes in Money Wages', of 'The
General Theory'; and Chapter 18, 'The Equations of Price', of the Third
Manuscript to Chapter 23, 'The Theory of Prices', of 'The General Theory'.
(12) Chapter 25, 'Notes
on Mercantilism, the Balance of Trade and Foreign Investment', and Chapter 26,
'Is an Individualist Economy Capable of Providing Full Employment?', of 'The
General Theory' seem to be new.
(b) Comparison between the Table of Contents of First
Galleys I, II,
and III, and that of 'The General
Theory'
Let us turn to the comparison
between the table of contents of First Galley I, II and III (with all of which we
shall deal in Chapter 13. See Tables 13-1 - 13-4), and the table of contents of 'The General Theory', again where helpful
also considering that of the General Theory.
(1) As far as the
chapter titles are concerned, those of Chapters 1 - 3 are the same in the three
tables of contents, though the principle of effective demand differs among the
three in substance.
(2) Chapter 4,
'Expectation', of 'The General Theory', corresponds to Chapter 5, 'Expectation
as Determining Output and Employment' (First Galley I); Chapter 5, 'The Units of Quantity', of 'The General Theory' to Chapter
4, 'The Choice of Units', of First Galley I; Chapter 12, 'The State of
Long-Term Expectation (or Confidence)', of 'The General Theory' to Chapter 13, 'The State of Long-Term
Expectation', of First Galley I. The titles in First Galley I are the same as
those in the General Theory.
(3) Chapters 6 to 9 of 'The General Theory' seem to have been
completely rewritten to emerge as Chapters 6 to 9 of First Galley I, which were
in turn completely rewritten in the production of the General Theory.
(4) Chapter 10, 'The
Propensity to Spend', of 'The General Theory' corresponds to Chapter 9, 'The
Meaning of Investment', Chapter 10, 'The Propensity to Spend', and Chapter 11,
'The Psychological and Social Incentives to Spending and Saving', of First
Galley I.
(5) Chapter 11, 'The
Propensity to Invest', of 'The General Theory' may correspond to Chapter 12,
'The Marginal Efficiency of Capital', of First Galley I.
(6) Chapter 13, 'The
Classical Theory of the Rate of Interest', Chapter 14, 'Notes on the Rate of
Interest in Marshall's Principles of Economics, Ricardo's Principles of
Political Economy and Elsewhere', and Chapter 15, 'The General Theory of the
Rate of Interest', of 'The General Theory' correspond to Chapters 15, 16, and
14 of First Galley I respectively.
(7) Chapter 16, 'The
Schedules of Liquidity Preference Further Considered', of 'The General Theory'
corresponds to Chapter 17, 'The Psychological and Social Incentives to
Liquidity', of First Galley I. Chapter 17, 'The Rate of Interest in Special
Cases', of 'The General Theory' disappears thereafter.
(8) Chapter 18,
'Philosophical Considerations on the Essential Properties of Capital, Interest
and Money', of 'The General Theory' corresponds to Chapter 18, 'Sundry
Observations on the Nature of Capital', and Chapter 19, 'The Essential
Properties of Interest and Money', of First Galley I.
(9) Chapter 19, 'The
Equilibrium of Consumption and Investment', of 'The General Theory' may
correspond to Chapter 20, 'The Equilibrium of the Economic System', of First
Galley II; Chapter 20, 'The Employment Function', of 'The General Theory' to
Chapter 21, 'The Employment Function', of First Galley II; Chapter 21, 'The
Multiplier Relating Employment to Investment', of 'The General Theory' to
Chapter 22, 'The Marginal Propensity to Consume and the Multiplier', of First
Galley II; Chapter 22, 'Changes in Money Wages', of 'The General Theory' to
Chapter 23, 'Changes in Money Wages; Appendix on Professor Pigou's Theory of
Unemployment',of First Galley II; Chapter 23, 'The Theory of Prices', of 'The
General Theory' to Chapter 24, 'The Theory of Prices', of First Galley II.
(10) Chapter 24, 'Notes
on the Trade Cycle', of 'The General Theory', corresponds to Chapter 25, 'Notes
on the Trade Cycle', of First Galley II; Chapter 25, 'Notes on Mercantilism,
the Balance of Trade and Foreign Investment', to Chapter 26, 'Notes on
Mercantilism and the Usury Laws', of First Galley III; Chapter 26, 'Is an
Individualist Economy Capable of Providing Full Employment?', to Chapter 28,
'Is an Individual Economy Capable of Providing Full Employment?', of First
Galley III; and Chapter 27, 'Notes on the History of Similar Ideas', to Chapter
27, 'Notes on the History of the Notion of “Effective
Demand"', of First Galley III.
As is evident from the above considerations,
the table of contents of 'The General Theory' was the prototype for that of the
General Theory. The main problem was that the argument of the theory of
effective demand remained imperfect, so that Keynes was forced to change it
several times, changing also the definitions of several fundamental concepts.
2. The Summer Manuscript
Keynes sailed to America on 9
May 1934 to participate２３ in a ceremony at Columbia University conferring on him an honorary
Doctor of Law Degree, staying until 8 June. He resumed work on the General
Theory immediately after returning to England. The texts of five chapters
written in this period survive. Chapter 8, 'Investment and Saving', and Chapter
9, 'The Functions Relating Employment to the Independent Variables of the
System', are revisions (centring around effective demand and the employment theory), respectively, of
Chapters 8 and 9 of 'The General Theory' (JMK.13, pp. 471-485). The other three are
'first versions of what were to become Chapters 4, 5 and 11' (JMK.13, p. 471) of the General Theory (i.e. Chapter 4, 'The Choice of Units', Chapter 5, 'Expectation as
Determining Output and Employment', and Chapter 11, 'The Marginal Efficiency of
Capital'). These correspond to Chapter 5, 'The Units of Quantity', Chapter 4,
'Expectation', and Chapter 11, 'The Propensity to Invest', respectively, of
'The General Theory'. Because the last three are close to the General Theory,
we shall defer discussion of them until the next chapter. Following Moggridge,
we can refer to these collectively as 'The Pre-First Proof Typescript'.
A. Effective Demand
The viewpoint which stresses
gross investment and gross saving as the fundamental quantities in economic
analysis appears for the first time in 'The General Theory', which is succeeded
by the Summer Manuscript. Though overall quite similar to its predecessor, the
appearance of the concept of 'user cost' in the Summer Manuscript renders the
relations between some concepts in this manuscript rather different from the
corresponding relations in 'The General Theory'. The concept of user cost here
is quite akin to depreciation, and differs from the concept of user cost in the
General Theory:
Effective demand...is gross of user cost, being equal to the gross
proceeds of current output, i.e. to consumption plus investment plus the user
cost of current output (JMK.13, p. 472).
They [the entrepreneurs] sell their output for C + I + U [C denotes
consumption, I investment, and U user cost], made up of C from what is consumed, I from what is invested and U from
what is used up. Their own return Q is the excess of these sale proceeds over
E, their outgoings to the other factors of production. Thus C + I + U = E +
Q....
Their aggregate income Y is made up of the income of the earners E and
the income of the entrepreneurs Q - U; and they [the public] spend their income on current consumption C or retain it as savings S
for the acquisition of capital assets of some kind or another. Thus
E + Q - U = Y = C + S２４ (JMK.13, pp. 477-478).
Two points are worth noting here. First, effective demand is defined as
being composed of user cost and income, the latter of which is regarded not as
a net but as a gross concept. Effective demand in the Summer Manuscript
corresponds to 'income' in 'The General Theory', which is regarded as a gross
concept. Second, excess profit disappears in the Summer Manuscript. In 'The
General Theory', excess profit (entrepreneur's windfall profit) appeared explicitly. However, in the Summer Manuscript, profit (Q) is defined as
including user cost, and the sum total of excess profit and normal profit equal
the difference between profit and user cost. The argument about effective
demand and income in the Summer Manuscript shows that Keynes has yet to find a
new theory in this area, and the change in the definition of profit leads us to
reconfirm that profit ceases to play the role it had previously in his
thinking.
Let us summarise the formulation in the
Summer Manuscript:
Y = C + I (10)
Y = C + S (11)
Y = E + (Q - U) (12)
where Y denotes (net) income and I (net) investment.
Table 12-1 The Table of Contents of `The General
Theory'
|
The Table of Contents
|
Comments
|
|
Book I “Introduction"
Ch.1 “The General Theory"
Ch.2 “The Postulates of the Classical Economics" Ch.3 “The Principle of Effective Demand"
|
Same as First Galley I and the General Theory.
|
|
Book II “Definitions and Ideas"
Ch.4 “Expectation" Ch.5 “The Units of Quantity"
Ch.6 “Effective Demand and Income" Ch.7 “Consumption Goods and Investment Goods"
Ch.8 “Investment and Saving"
Ch.9 “The Functions Relating Employment, Consumption and Investment Ch.10 “The Propensity to Spend"
Ch.11 “The Propensity to Invest"
Ch.12 “The State of Long-Term Expectation (or Confidence)"
|
*Chs.6-12 of the manuscript survives. *Ch.4 corresponds to Ch.5, “Expectation as Determining Output and Employment", of the General Theory. *Ch.5 corresponds to Ch.4, “The Choice of Units", of the General Theory.
*Ch.12 is the same as Ch.12, “The State of Long-Term Expectation", of the General Theory. *Ch.10 is the same as Ch.10 of First Galley I.
|
|
Book III “The Theory of the Rate of Investment"
Ch.13 “The Classical Theory of the Rate of Interest"
Ch.14 “Notes on the Rate of Interest in Marshall"s
Principles of Economics, Ricardo's Principles of Political Economy and Elsewhere"
Ch.15 “The General Theory of the Rate of Interest"
Ch.16 “The Schedules of Liquidity Preference Further
Considered"
Ch.17 “The Rate of Interest in Special Cases" Ch.18 “Philosophical Considerations on the Essential
Properties of Capital, Interest and Money"
|
*Ch.13 corresponds to Ch.15 of First Galley I and Ch.14 of the General Theory. *Ch.14 corresponds to Ch.16 of First Galley I and Appendix to Ch.14 of the General Theory. *Ch.15 corresponds to Ch.14 of FirstGalley I and Ch.13 of the General Theory. *Ch.16 may correspond to Ch.17 of First Galley I and Ch.15 of the General Theory. *Ch.18 corresponds to Chs.18 and 19 of First Galley Ⅰ, and Chs.16 and 17 of the General Theory.
|
|
Book IV “An Outline of the General Theory"
Ch.19 “The Equilibrium of Consumption and Investment"
Ch.20 “The Employment Function"
Ch.21 “The Multiplier Relating Employment to Investment"
Ch.22 “Changes in Money Wages"
Ch.23 “The Theory of Prices"
|
*Ch.19 may correspond to Ch.20 of First Galley II. *Ch.20 corresponds to Ch.21 of First Galley II and Ch.20 of the General Theory. *Ch.21 corresponds to Ch.22 of First Galley II and Ch.10 of the General Theory. *Ch.22 corresponds to Ch.23 of First Galley II and Ch.19 of the General Theory. *Ch.23 corresponds to Ch.24 of FirstGalley II and Ch.21 of the General Theory.
|
|
Book V “Short Notes on Some Applications of The General Theory"
Ch.24 “Notes on the Trade Cycle"
Ch.25 “Notes on Mercantilism, the Balance of Trade and Foreign Investment"
Ch.26 “Is an Individualist Economy Capable of Providing Full Employment?"
Ch.27 “Notes on the History of Similar Ideas"
|
*Ch.24 corresponds to Ch.25 of First Galley II and Ch.22 of the General Theory *Chs.25 and 27 may correspond to Ch.23 of the General Theory.
|
B. The Employment Theory
In the Summer Manuscript, the
system determining the volume of employment is revised as follows:
(i) N１ = F１(Cｗ) and N２ = F２ (Iｗ) are the employment functions for consumption and investment goods
respectively, where effective demands C ｗ and Iｗ for the two classes of goods lead to volumes of employme
nt N１ and N２ respectively on producing them.
(ii) Cｗ = Q１(N, r, e) is the propensity to spend, where an aggregate employment N, a rate of
interest r, and a marginal efficiency of capital e lead to an effective demand
C ｗ for consumption
goods.
(iii) Iｗ = Q２(N, r, e) is the propensity to invest, where N, r and e lead to an effective
demand I ｗ for investment goods.
Since N = N１ + N２, the volume of employment N will be determined by the equation
N = F１｛Q１(N, r, e) ｝+ F２｛Q２(N, r, e) ｝,
which may be written
N = f１(N, r, e) + f２(N, r, e) (JMK.13, p. 483).
Four points are worth noting
here. First, the employment function is expressed as the inverse function of
the employment function in 'The General Theory'. This formulation is the same
as that of the the General Theory. Second, the propensity to spend and
the propensity to invest are directly substituted for the employment function.
This shows that the employment function is used not only as a supply concept
but also as an equilibrium concept. As far as this point is concerned, the
formulation here and in 'The General Theory' are the same. It would appear that
Keynes unconsciously uses the employment function sometimes as representing a
supply concept and sometimes as representing an equilibrium concept. It should
be noted that this tendency is also clearly apparent in the General Theory.
Third, the equation determining
the volume of employment is primarily derived from the constraint equation on
employment, N = N１ + N２. This differs from the case of 'The General Theory', in which the
equation determining the volume of employment is based on supply-demand
equilibrium. In the General Theory the idea used in the Summer
Manuscript, i.e. N = N１ + N２, is not used for determining the volume of employment, but only in
relation to the additiveness of the individual employment functions２５, while the idea used in 'The General Theory' is adopted as the equation
determining the volume of employment.
Fourth, in the Summer Manuscript,
as in 'The General Theory', the relation between the definitions of certain
concepts and the equation determining the volume of employment is not
completely clear. Although, for example, in the equation determining the volume
of employment N = F１｛Q１(N,r,e)｝+ F２｛Q２(N,r,e)｝, Cｗ anIｗ play important roles, it is not clear how this is related to effective
demand Y + U, to which Keynes attaches importance in the equation Y + U = C + I
+ U.２６
C. Connections between the Summer Manuscript and the General
Theory
In addition to the points
discussed above, there are some passages in the Summer Manuscript which are
directly related to certain passages in the General Theory. Section III
and part of Section I of Chapter 8, 'Investment and Saving', are linked to
Section IV of Chapter 8, 'The Propensity to Consume: I. The Objective Factors',
of the General Theory. Section IV of Chapter 8, in which Keynes
criticises the theory of forced saving advocated by Hayek and others２７, is linked to Section IV of Chapter 7, 'The Meaning of Saving and
Investment Further Considered', of the General Theory, via Section II of
Chapter 8, 'The Meaning of Saving', of First Galley I.
The results of our investigations in Sections
1 and 2 are summarised in Table 12-2.
3. The Michaelmas Term Lectures
of 1934
Keynes started the proofreading
of the General Theory at about the same time he began his lecture course
for 1934. The galley of the first three chapters of First Galley I (which is composed of
nineteen chapters and emerged intermittently in the period September through
December 1934 - we discuss this in the next chapter) was ready on October
10. Keynes began the lectures on the basis of these three chapters. He
subsequently sent Chapters 4 to 11 and 12 to 19 in manuscript to the
publishers. The galleys of these are estimated to have come out between early
December in 1934 and mid-January 1935. Moggridge comments on the close relation
between the galleys and the lectures as follows:
In his lectures during the Michaelmas term, Keynes basically took his
students through chapters 2-14 of the first proof version of the General
Theory, following the text sufficiently carefully that the notes we have
examined pick up quoted almost word for word, such as the references to Queen
Elizabeth and Queen Victoria on page 40 of the final text (JMK.13, p.485).
A. The Core Content
The course of lectures for the
Michaelmas term of 1934, entitled 'The General Theory of Unemployment', is
identical to that for 1933 in the most important respect - that is, both
lecture courses advance a model in which income (or the level of employment) is determined within a single period (the endogenous variables are determined simultaneously). In that sense the
two courses of lectures might be thought of as complementary to each other. In
the lectures for 1934, Keynes puts forward his model under the label 'Theory of
Effective Demand'. The model works as follows:
The 'effective demand function'
D = f(N) relates the number of men employed, N, to the expected sales of their
output (= effective demand), D. The level of employment is determined at the point at which the
effective demand function intersects the 'employment' (or supply) function D′= F(N), which relates N to the sum which will just make it worthwhile to
employ N men, or the supply price D′. Effective demand is the sum of what people are prepared to spend on
current consumption, D１, and what firms are prepared to set aside for investment, D２.
The consumption function is
defined as D１ = f１(N１) (N１ is the number of menemployed in the consumption goods sector which is
needed to meet the consumption resulting from real income). Furthermore, we
have the equation N１ =φ(N) (where 0 < ΔN１/ ΔN < 1). The investment
function is represented as D２ = f２(N２). This states that N２ (the number employed in the investment goods sector) will be increased up
to the point at which the marginal efficiency of capital becomes equal to the
rate of interest.
To sum up, the system can be expressed as
follows:
F (N) = f１(N１) + f２(N２) (1)
N１ =φ(N) (2)
Keynes then argues that given f２(N２), N and N１ are determined (though in this case N = N１ + N２ is not necessarily satisfied). The level of employment thus determined is not guaranteed to be full
employment.
Keynes expresses the above ideas very
succinctly as follows:
Table 12-2 The Situation in 1934
|
|
Period
|
Spring
|
Summer
|
| |
|
Topic
|
‘The General
Theory'
|
Summer
Manuscript
| |||
|
|
Supply Side
|
* Emphasis on the first postulate of classical economics
(The condition for
maximising quasi- rents) * Employment function
|
| ||
|
Demand side
|
* (Consumption theory) Subjective factors
(the same as those of
the General Theory)
and objective factors
(considerably
different from those
of the General
Theory)
* Establishment of an
investment theory
|
| |||
|
Equilibrium
|
* Keynes's incompleteness＄
* Employment function
|
* Employment function
(the same as that
of the General
Theory)
| |||
|
Profit
|
* Excess profit
=income - effective
demand
|
* Returns of the entrepreneurs= sale proceeds - income of earners
| |||
|
Money market
|
* Emphasis on the existence of high rates of interest as the cause of chronic unemployment
|
* Criticism of the theory of forced saving
| |||
|
Others
|
* First appearance
of the term
`wage unit'
* Effective demand
= quasi-rents
(normal profit)+
prime costs
|
* First appearance of the term `user cost'＃ (different from that of the General Theory)
* Effective demand = user cost + income
* Income = consumption + investment
| |||
(Notes) The items with *
indicate new ideas.
$: See Note 6 to Chapter 12 of
the present book.
#: The concept of user
cost in Keynes's fourth lecture of the
Michaelmas term of 1934 is, in substance, the same as that
of the General Theory.
when the propensity
to invest will absorb the output of N２ men, eq[uilibriu]m requires that agg[regate] employment should be N where N is such that, with [the] existing psych[ological] prop[ensity] to consume, this vol[ume] of employment will
lead to an am[ount] of cons[umption] that will absorb the labour [of] (N - N２) men (Rymes [Bryce], p. C-10).
given [the] propensity funct[ions] there is only one level of employment will be consistent.... There is a
level of I which leads to full employment but no reason why it should always
exist.... That is, [the] marginal efficiency of capital, the rate of interest, and the
propensity to consume will give us all (Rymes [Tarshis], p. K-5).
The argument is almost identical in content
to that of Chapter 3, 'The Principle of Effective Demand', of the General
Theory.
The point on which the 1934 lectures
certainly do differ from the lectures of 1933 is that any argument in terms of
the TM supply function has completely disappeared (moreover, the concept
of quasi-rents, Q, is dealt with as a 'realised' concept).
Besides this, we can mention the
following as new features in the 1934 lectures:
(1) The argument presented in Chapters 4 - 6 of the General Theory,
which can be traced back to the lectures of 1933, approaches completion in the
lectures of 1934. Among other things, the concept of 'user cost', which is the
same in content as the user cost of the General Theory, here makes its
first appearance, playing a central role in dealing with the relations among
various other concepts.
(2) Quasi-rents are defined in relation to realised profits.
(3) The 'subjective' factors influencing the propensity to consume make
their first appearance.
(4) The 'marginal efficiency of capital' makes its first appearance, and
the theory of investment is constructed in flow terms.
(5) The speculative motive is made clearly dependent upon the rate of
interest (in the lectures of 1933, the income, business, and precautionary motives
were made dependent upon the rate of interest, while the speculative motive was
made dependent upon the state of bearishness).
B. Chronological Analysis
As we noted, the lectures for 1934
were entitled 'The General Theory of Unemployment'. Keynes labeled Marshall,
Edgeworth, Pigou, among others, the 'classicists'. According to Keynes, the
classicists were concerned with the distribution of a given volume of resources
between various uses, and with the available amount of resources, but not with
the volume actually employed in relation to the amount of resources available.
It is a theory of what determines the latter ('The General Theory of Unemployment') that Keynes was trying to develop.
The structure of the first lecture (15 October) is essentially the
same as that of the first lecture of the previous year - that is, the classical
theory of employment is first introduced, then criticisms of its weaknesses are
developed. According to Keynes, the classical theory of employment is based on
the two classical postulates. The first postulate gives us the demand schedule
for employment, while the second gives us the supply schedule. The level of
employment is determined at the intersection of the two.
Keynes develops a two-pronged
attack on this theory. The first line of criticism simply appeals to everyday
and historical experience. At any given wage, people rarely have as much work
as they would like to have. Even if prices rise (that is, real wages decrease), the amount of labour offered will not usually decrease. The experience
of the USA in 1932, Keynes points out, was that unemployment did not decrease
in spite of the fact that labour accepted reductions in money wages.
The second line of argument is more
theoretical. The classical school believes that real wages are determined by
the money-wage bargains which workers make with their employers. Moreover, it
considers that cuts in money wages bring about corresponding falls in real wages,
while the level of prices is determined in accordance with its theory of money.
Keynes criticises the classical theory for the dichotomy it embraces between
the theory of value and distribution on the one hand and the theory of money on
the other.
The theory of money is separate from the theory of value and
distribution, so that the inter-relation is ignored. The volume of money is
considered to be independent of the level of real wages, and the price-level of
the wage-level (Rymes [Hopkin], pp. H-4 - H-5. See also Rymes [Thring], p. O-3 for the same expression).
Keynes argues that there is no
force which directly makes real wages equal to the marginal disutility of
employment or causes changes in money wages to bring about changes in real
wages. He thinks that it is the classicists' theory of the rate of interest
that lies at the bottom of these misunderstandings. The wage struggle is a
struggle over relative wages; generally workers do not demand changes in money
wages. Keynes argues that the second classical postulate assumes full
employment, and precludes the possibility of involuntary unemployment from the
start.
In the second lecture (29 October), Keynes begins by
declaring acceptance of the first classical postulate, with rejection of the
second. He then argues that the classical theory assumes Say's Law, which holds
that the total of the costs of production is spent on the output. He also
criticises the classical idea that society's savings necessarily enrich it.
The order of the lectures for
1934 differs considerably from that of the previous lecture courses, in that
Keynes develops the theory of how national income (or the level of
employment) is determined in these early lectures, while previously he had
presented it only towards the end. In the second 1934 lecture Keynes calls the
theory of national income 'The Theory of Effective Demand' (we have already
discussed this in (A) above). Keynes presents Say's Law as indicating that D = D′ holds good for any value of N, which means that full employment is
attained. He states that Say's Law is closely related to the classical theory
of the rate of interest, the quantity theory of money, the laissez―faire philosophy and
sound finance credo. Malthus, Marx, Gesell, and Major Douglas are mentioned as
opponents of Say's Law, while mainstream economists such as Marshall, Edgeworth
and Pigou are mentioned as those who accept it almost without reservation.
At this point, let us compare
the presentation in these lectures with the 'The General Theory' and 'The
Summer Manuscript'. In 'The General Theory' effective demand was defined as
'the present value of the expected sales proceeds' while income was defined as
the 'actual sales proceeds', and the difference between the two as 'the
entrepreneur's windfall profit or loss'. Here we see the remnants of Keynes's
adherence, since the Treatise, to a certain conception of profit. Further, in
The Summer Manuscript, the difference between effective demand and income was
defined as 'user cost'. In the lectures for 1934, Keynes appears to maintain
the distinction between effective demand and income he had used in the Summer
Manuscript, and therefore also the definition of user cost as the difference
between the two (as stated above, the definition of user cost is in substance the same as
that in the General Theory). As we will discuss in Chapters 13 and 14, Keynes was to maintain this
stance up to the 'Third Galley' (June 1935. See Table 13-1).
In both 'The General Theory' and
the Summer Manuscript, an employment theory was put forward by means of the
'employment function', the definition of which is in substance the same as that
in the General Theory, though in 'The General Theory' it is expressed as
its inverse function, and has the 'duality' problem. In this lecture, the
theory of employment is discussed by means of two functions - the 'effective
demand function' and the 'employment (or supply) function', which correspond to the 'aggregate demand function' and the
'aggregate supply function', respectively, of the General Theory. In
that sense Keynes moves closer to the General Theory in this lecture.
In the third (5 November) and fourth (12 November) lectures Keynes
endeavours to clarify various concepts. These discussions are the origins of
Chapters 4 - 6 of the General Theory. Keynes begins the lecture by
advancing an argument almost identical to the one we find in the General
Theory (the 'three perplexities' - the choice of units, the part played by
expectations, and the definition of income; p. 37). The only difference
is that here Keynes mentions the marginal efficiency of capital as a fourth
perplexity. In the third lecture, units and expectations are taken up, while in
the fourth lecture income is taken up together with the user cost (the marginal
efficiency of capital is dealt with in the sixth lecture).
The argument concerning units is
almost the same as that in the General Theory. The term 'wage unit' here
makes its first appearance as far as the lectures are concerned, though it had
already appeared in 'The General Theory'. Keynes then discusses certain
equations related to the employment function. This discussion might well have
provided the origins of the equations we find in Section IV of Chapter 4 of the
General Theory.
Keynes next turns to the topic
of expectations - both short-term and long-term. Short-term expectations are
the kind of forecast which producers make covering the time between the
initiation of production and the sales of the finished goods. Long-term
expectations are the kind of forecast which producers make for the returns over
the expected lifetime of the capital goods purchased. Keynes argues that 'it is
on these expect[ations] that employment depends...whether they prove [to be] right or wrong do[es] not influence
current employment.' Realised results matter only 'insofar as they modify
subsequent [actions or expectations]' (Rymes [Bryce], p. C-17). Finally Keynes mentions the concept of 'long-period employment' which
is defined as the state which would emerge if a state of expectation were to
continue long enough to work itself through to employment (the state where the
economy is in 'long-period equilibrium'). However, this can only be conceived of in theory: in reality new
expectations are always being superimposed on old ones before the influences of
the latter have had time to work themselves through.
In the fourth lecture, Keynes
discusses the concept of income (this is the origin of Section I of Chapter 6 of the General Theory). The key concept
here is 'user cost' which makes its first appearance as far as the lectures are
concerned, though as we saw the term had first appeared in the Summer Manuscript.
User cost is the sacrifice made as a result of using a piece of equipment as
against not using it - that is, the loss in the value of capital as a result of
using it to produce current output, as compared with what its value would have
been had it not been so used.
Keynes formulates user cost as follows:
U = (C′- B′) - (C - B)
C′: The value the capital equipment would have had at the end of the
period, if it had not been used;
B′: The amount one would have spent on maintenance and improvement if the
capital equipment had not been used;
C : The
value the capital equipment has at the end of the period if it has been used;
B
: the amount one has spent on maintenance and improvement when the
capital equipment has been used.
Denoting the value of newly finished goods by
A, income Y is defined by the equation
A + B - U = Y
Income Y is equal to prime costs
E plus profits P:
Y = E + P
Keynes goes on to argue that the
supply price equals marginal prime cost plus marginal user cost, and, from this
standpoint, criticises the traditional theory which maintains that the supply
price equals marginal prime cost only (the same criticism appears in Section I of the appendix to Chapter 6 of
the General Theory). Keynes presents another way of defining user cost: as the present
value of the opportunity cost of postponing replacement by not refraining from
use, less carrying costs associated with the capital involved.
Keynes next explains the
fluctuations in the relationship between the user cost and the supply price,
referring to the trade cycle, and criticises Pigou's Theory of Unemployment on
the grounds that it neglects the fact that the price of any good includes the
part represented by the marginal user cost.
Let us examine the relation between the
concept of user cost adopted here and that adopted in the General Theory.
The latter conception is defined by the equation:
U = (G′ - B′) - (G - A１)
Here G′is the same as C′and G is the same as
C. B′is as before. In a
fully integrated system, A１, the amount of finished goods which entrepreneurs buy from other
entrepreneurs, is zero. In the General Theory, B is not taken into
consideration, so that it too is zero. Thus it turns out that the user cost in
the lectures and that in the General Theory are virtually one and the
same. In the General Theory income is defined as A - U. Supposing B is
zero, this comes to the same as was proposed in the lectures. Thus we can
conclude that the arguments concerning user cost in the 1934 lectures and in
the General Theory are, in substance, the same.
In the fifth lecture (19 November)２８ Keynes mainly discusses quasi-rent and the saving-investment relation.
The argument concerning quasi-rent shadows that of the fifth lecture of 1933 (though it differs
somewhat, due to the appearance of user cost). Thus, Keynes takes up three kinds of quasi-rent: (1) the quasi-rent as
the return an investment actually earns (this is equal to (realised) profit Q plus user cost U, and also equal to A + B - E); (2) the quasi-rent to
which short-period expectations of profit pertain (this is composed of
net quasi-rent P′and U′; and (3) the quasi-rent to which long-period expectations of profit pertain (this is represented
as P″ + U″ and is equal to prospective yield Q″).
According to this classification, there are
three kinds of entrepreneurs' income - P, P′and P″. Keynes says that he
used P″ in the Treatise and
P′in the fifth lecture
of 1933, while he uses P here. He then develops a number of equations, among
which the following is worth noting:
D = P′+ U′+ E = Q + E
Here the relation P′+ U′= P + U is made use
of - that is, an assumption that short-period expectations are realised is
made. Effective demand, D, is considered to be equal to realised quasi-rent
plus prime costs. The following equation is also put forward:
D = Y′+ U′
Keynes next proceeds to discuss
saving and investment. The argument developed here might be said to be the
origins of Section II, 'Saving and Investment', of Chapter 6 of the General
Theory . Saving, S, is defined as follows.
S = Y - C
In this connection Keynes criticises
Robertson's concept of income, the concept of 'forced saving', and also the
concept of income in the Treatise (the same criticism is developed in more detail in Sections III and IV of
Chapter 7 of the General Theory).
Gross investment is equal to A +
B - C (= Y + U - C), and net investment is equal to I - U, so that net investment is equal
to saving. Keynes argues that what matters for effective demand (D) is gross investment:
D = I′+ C′
where I′is expected gross investment, C′expected consumption.
Therefore, actual gross investment is equal
to savings plus user cost.
I = S + U
What the above definitions
differ most markedly in from those of the General Theory is the definition
of investment. In the General Theory, gross investment is defined as A１ - U, net investment as A１ - U - V. The difference between the two is not so much user cost as
supplementary cost.
Keynes goes on to a discussion which seems to
be the origins of Section I of Chapter 8, and Chapter 9 of the General
Theory. He states that C differs little from actual consumption. Referring
to the general psychological law (the propensity to spend), he states that the fundamental law of employment is that employment
cannot increase unless there is either an increased propensity to invest and/or
an increased propensity to consume.
As to the propensity to consume,
Keynes argues here that it depends on the motives for saving. The motives
mentioned are almost exactly the same as the 'subjective' factors in the General
Theory. We already know that in 'The General Theory' Keynes developed an
argument virtually identical to that developed in Section I of Chapter 9 of the
General Theory. As far as subjective factors are concerned, therefore,
this would indicate that Keynes advances the same argument in the lecture.
Keynes did not mention the objective factors influencing consumption in the
1934 lectures. He was to refer to them for the first time, as far as the
lectures are concerned, only in the fourth lecture of 1935. As we know,
however, he had already referred to the 'objective factors' in 'The General
Theory', although the items mentioned there differ considerably from those in
both the fourth lecture of 1935 and the General Theory.
Lastly, after critically discussing the
classical understandings of saving and the rate of interest, Keynes argues that
the principal variable that determines the volume of saving is the volume of
real income, which, in turn, depends on the amount of investment. That is,
investment is the dominant factor, and determines the volume of saving.
In the sixth lecture (26 November), an investment
theory is developed which uses the marginal efficiency of capital for the first
time, as far as the lectures are concerned. This was the fourth perplexity
mentioned in the third lecture. We already know that the term 'marginal
efficiency of capital' made its first appearance as the title of 'Excursus II'
in the table of contents of 'The General Theory of Employment' (the Third Manuscript;
see Table 10-1), and then appeared again in the 'Second Undated Manuscript' in the
first half of 1934, although the definition there differs from that in the General
Theory.
The definition of the marginal efficiency of
capital in these lectures is the same as that in the General Theory: it
is defined as the rate of discount which makes the present value of the series
of prospective yields of an investment equal to the supply price. It falls as
investment increases, because the supply price of capital will rise while the
prospective quasi-rents decrease. The volume of investment is determined at the
point at which the marginal efficiency of capital becomes equal to the rate of
interest.
This theory differs from that in the seventh
lecture for 1933 in that in the latter the demand price of capital assets as a
stock was compared with its cost of production, whereas in the former the
marginal efficiency of capital calculated for the investment goods as a flow,
is compared with its cost of production. Further, the theory differs in that
the idea held on to since the Treatise, that the price determined in the stock
market rules the price in the flow market, is abandoned. It should be borne in
mind, however, that (as we already know) in the Second Undated Manuscript the level of investment was considered
to be determined at the point at which the marginal efficiency of capital
becomes equal to the rate of interest, although the definition of the marginal
efficiency of capital there was different, and that in 'The General Theory' the
investment theory was developed in the same way as in the General Theory.
Keynes proceeds to develop an
argument similar to that seen in Sections II and III of Chapter 11 of the General
Theory. Does the marginal efficiency of capital relate to increase in
physical output or in value? Is it a ratio or an absolute quantity? Does it
relate to Q１ (the return after one
year) only, or to Q１, Q２, ... , Qｎ? In these connections, Keynes discusses the theories of Marshall and
Fisher critically. He goes on to discuss the volatility of fluctuations in the
marginal efficiency of capital (the substance of this discussion is to be followed up in Chapter 12 of
the General Theory). He concludes that the volatility is due to the volatility of
fluctuations in the prospective yields of capital goods. Forecasts of future changes
in the type and quality of capital assets, in demand, and in money-wages,
together with the degree of the confidence with which such forecasts are made,
determine the state of long-term expectation.
At this point Keynes draws
attention to an historical shift in the nature of investment activities. In the
past, investments were based not so much on the dispassionate calculation of
expected profits as on the willingness of bold people to run risks. Once made,
an investment was usually fixed not only for society but also for the
individuals concerned. In modern society however, Keynes argues, the
development of stock exchanges and the separation of management from ownership
has allowed people to escape from bondage to their investments, at least individually.
What mainly determines the values of investments now are the average
opinion-expectations of those who deal in the stock exchange, rather than the
genuine return-expectations of entrepreneurs. The stock exchange revalues
investments all the time, and in doing this affects the present level of
investment: the marginal efficiency of capital comes to be determined by the
average opinion-expectations of those who deal in the stock exchange. Such
people generally know rather little about investment in real capital: the
primary concern of professional speculators is to be a moment ahead of the
market in anticipating changes in the market valuation of shares. In
consequence, investment, which ought to be made on the basis of the genuine
forecasting of returns on real investment, is liable to become prey to the
speculative forecasting of stock exchange psychology.
This is Keynes's insight. Pure capitalism
finds great difficulty in getting investment to be made on the basis of
forecasts of genuine long-period consequences. This is why he advocates that
the management of long-period investments be controlled by the state.
In the seventh lecture (3 December), the theory of
interest is developed. After arguing that the traditional theory does not
separate the marginal efficiency of capital from the rate of interest, Keynes
criticises the traditional theory of the rate of interest based on the supply
and demand of capital. (The argument here is related to Chapter 14 of the General Theory.)
After reiterating his own theory of the rate
of interest, which can be traced back at least to the fourth lecture of 1932,
Keynes explains, according to his theoretical model, the chain of causation
brought about by an increase in the money supply, and argues that the velocity
of circulation is only a statistical by-product, and has no causal importance
in itself.
Lastly, Keynes asks what the factors upon
which liquidity preference depends might be. He confesses this theme to be
'fuzzling as yet' (Rymes [Salant], p. O-28). His provisional answer is as follows:
(1) The convenience for immediate transactions. 'The demand for M[oney] here is likely [to be] inelastic [vis-a-vis the rate of
interest]' (Rymes [Bryce], p. C-49).
(2) Uncertainty as to the future of the rate of interest.
(3) The existence of different opinions in the market as to the future rate
of interest.
Item (1) might be considered as a formulation of the transactions motive; items (2) and (3) of the
store-of-wealth motive. The former motive is inelastistic with respect to the
rate of interest, while the latter is due to the uncertainty as to the future
rate of interest. It should be noted that it was not until the sixth lecture of
1935 that Keynes was to classify the motives for liquidity preference in exactly
the way we find in the General Theory. So far as classification is
concerned, the eighth lecture of 1933 is perhaps closer to the General
Theory. However, in that here the speculative motive is made dependent not
on the rate of interest but on the state of bearishness, the seventh lecture of
1934 is perhaps closer to the General Theory than the eighth lecture of
1933.
Table 12-3 summarises the contents of the
lectures in the Michaelmas term of 1934.
The consumption function is
defined as D１ = f１(N１) (N１ is the number of men employed in the consumption goods sector which is
needed to meet the consumption resulting from real income). Furthermore, we
have the equation N１ =φ(N) (where 0 < ΔN１/ ΔN < 1). The investment
function is represented as D２ = f２(N２). This states that N２ (the number employed in the investment goods sector) will be increased up
to the point at which the marginal efficiency of capital becomes equal to the
rate of interest.
To sum up, the system can be
expressed as follows:
F (N) = f１(N１) + f２(N２) (1)
N１ =φ(N) (2)
Keynes then argues that given f２(N２), N and N１ are determined (though in this case N = N１ + N２ is not necessarily satisfied). The level of employment thus determined is not guaranteed to be full
employment.
Keynes expresses the above ideas very
succinctly as follows:
when the propensity to invest will absorb the output of N２ men, eq[uilibriu]m requires that agg[regate] employment should be N where N is such that, with [the] existing psych[ological] prop[ensity] to consume, this vol[ume] of employment will
lead to an am[ount] of cons[umption] that will absorb the labour [of] (N - N２) men (Rymes [Bryce], p. C-10).
given [the] propensity funct[ions] there is only one level of employment will be consistent.... There is a
level of I which leads to full employment but no reason why it should always
exist.... That is, [the] marginal efficiency of capital, the rate of interest, and the
propensity to consume will give us all (Rymes [Tarshis], p. K-5).
The argument is almost identical in content
to that of Chapter 3, 'The Principle of Effective Demand', of the General
Theory.
The point on which the 1934 lectures
certainly do differ from the lectures of 1933 is that any argument in terms of
the TM supply function has completely disappeared (moreover, the concept
of quasi-rents, Q, is dealt with as a 'realised' concept).
Besides this, we can mention the following as
new features in the 1934 lectures:
(1) The argument
presented in Chapters 4 - 6 of the General Theory, which can be traced
back to the lectures of 1933, approaches completion in the lectures of 1934.
Among other things, the concept of 'user cost', which is the same in content as
the user cost of the General Theory, here makes its first appearance,
playing a central role in dealing with the relations among various other
concepts.
(2) Quasi-rents are defined in relation to realised profits.
(3) The 'subjective' factors influencing the propensity to consume make
their first appearance.
(4) The 'marginal efficiency of capital' makes its first appearance, and
the theory of investment is constructed in flow terms.
(5) The speculative motive is made clearly dependent upon the rate of
interest
(in the lectures of 1933, the income, business, and precautionary motives
were made dependent upon the rate of interest, while the speculative motive was
made dependent upon the state of bearishness).
B. Chronological Analysis
As we noted, the lectures for 1934 were
entitled 'The General Theory of Unemployment'. Keynes labeled Marshall,
Edgeworth, Pigou, among others, the 'classicists'. According to Keynes, the
classicists were concerned with the distribution of a given volume of resources
between various uses, and with the available amount of resources, but not with
the volume actually employed in relation to the amount of resources available.
It is a theory of what determines the latter ('The General Theory of Unemployment') that Keynes was trying to develop.
The structure of the first
lecture (15 October) is essentially the same as that of the first lecture of the previous
year - that is, the classical theory of employment is first introduced, then criticisms
of its weaknesses are developed. According to Keynes, the classical theory of
employment is based on the two classical postulates. The first postulate gives
us the demand schedule for employment, while the second gives us the supply
schedule. The level of employment is determined at the intersection of the two.
Keynes develops a two-pronged
attack on this theory. The first line of criticism simply appeals to everyday
and historical experience. At any given wage, people rarely have as much work
as they would like to have. Even if prices rise (that is, real wages decrease), the amount of labour offered will not usually decrease. The experience
of the USA in 1932, Keynes points out, was that unemployment did not decrease
in spite of the fact that labour accepted reductions in money wages.
The second line of argument is more
theoretical. The classical school believes that real wages are determined by
the money-wage bargains which workers make with their employers. Moreover, it
considers that cuts in money wages bring about corresponding falls in real
wages, while the level of prices is determined in accordance with its theory of
money. Keynes criticises the classical theory for the dichotomy it embraces
between the theory of value and distribution on the one hand and the theory of
money on the other.
The theory of money is separate from the theory of value and
distribution, so that the inter-relation is ignored. The volume of money is
considered to be independent of the level of real wages, and the price-level of
the wage-level (Rymes [Hopkin], pp. H-4 - H-5. See also Rymes [Thring], p. O-3 for the same expression).
Keynes argues that there is no
force which directly makes real wages equal to the marginal disutility of
employment or causes changes in money wages to bring about changes in real
wages. He thinks that it is the classicists' theory of the rate of interest
that lies at the bottom of these misunderstandings. The wage struggle is a
struggle over relative wages; generally workers do not demand changes in money
wages. Keynes argues that the second classical postulate assumes full
employment, and precludes the possibility of involuntary unemployment from the
start.
In the second lecture (29 October), Keynes begins by
declaring acceptance of the first classical postulate, with rejection of the
second. He then argues that the classical theory assumes Say's Law, which holds
that the total of the costs of production is spent on the output. He also
criticises the classical idea that society's savings necessarily enrich it.
The order of the lectures for
1934 differs considerably from that of the previous lecture courses, in that
Keynes develops the theory of how national income (or the level of
employment) is determined in these early lectures, while previously he had
presented it only towards the end. In the second 1934 lecture Keynes calls the
theory of national income 'The Theory of Effective Demand' (we have already
discussed this in (A) above). Keynes presents Say's Law as indicating that D = D′ holds good for any value of N, which means that full employment is
attained. He states that Say's Law is closely related to the classical theory
of the rate of interest, the quantity theory of money, the laissez―faire philosophy and
sound finance credo. Malthus, Marx, Gesell, and Major Douglas are mentioned as
opponents of Say's Law, while mainstream economists such as Marshall, Edgeworth
and Pigou are mentioned as those who accept it almost without reservation.
At this point, let us compare
the presentation in these lectures with the 'The General Theory' and 'The
Summer Manuscript'. In 'The General Theory' effective demand was defined as
'the present value of the expected sales proceeds' while income was defined as
the 'actual sales proceeds', and the difference between the two as 'the
entrepreneur's windfall profit or loss'. Here we see the remnants of Keynes's
adherence, since the Treatise, to a certain conception of profit. Further, in
The Summer Manuscript, the difference between effective demand and income was
defined as 'user cost'. In the lectures for 1934, Keynes appears to maintain
the distinction between effective demand and income he had used in the Summer
Manuscript, and therefore also the definition of user cost as the difference
between the two (as stated above, the definition of user cost is in substance the same as
that in the General Theory). As we will discuss in Chapters 13 and 14, Keynes was to maintain this
stance up to the 'Third Galley' (June 1935. See Table 13-1).
In both 'The General Theory' and
the Summer Manuscript, an employment theory was put forward by means of the
'employment function', the definition of which is in substance the same as that
in the General Theory, though in 'The General Theory' it is expressed as
its inverse function, and has the 'duality' problem. In this lecture, the
theory of employment is discussed by means of two functions - the 'effective
demand function' and the 'employment (or supply) function', which correspond to the 'aggregate demand function' and the
'aggregate supply function', respectively, of the General Theory. In
that sense Keynes moves closer to the General Theory in this lecture.
In the third (5 November) and fourth (12 November) lectures Keynes
endeavours to clarify various concepts. These discussions are the origins of
Chapters 4 - 6 of the General Theory. Keynes begins the lecture by advancing
an argument almost identical to the one we find in the General Theory (the 'three
perplexities' - the choice of units, the part played by expectations, and the
definition of income; p. 37). The only difference is that here Keynes mentions the marginal
efficiency of capital as a fourth perplexity. In the third lecture, units and
expectations are taken up, while in the fourth lecture income is taken up
together with the user cost (the marginal efficiency of capital is dealt with in the sixth lecture).
The argument concerning units is almost the
same as that in the General Theory. The term 'wage unit' here makes its
first appearance as far as the lectures are concerned, though it had already
appeared in 'The General Theory'. Keynes then discusses certain equations
related to the employment function. This discussion might well have provided
the origins of the equations we find in Section IV of Chapter 4 of the General
Theory.
Keynes next turns to the topic
of expectations - both short-term and long-term. Short-term expectations are
the kind of forecast which producers make covering the time between the
initiation of production and the sales of the finished goods. Long-term
expectations are the kind of forecast which producers make for the returns over
the expected lifetime of the capital goods purchased. Keynes argues that 'it is
on these expect[ations] that employment depends...whether they prove [to be] right or wrong do[es] not influence
current employment.' Realised results matter only 'insofar as they modify
subsequent [actions or expectations]' (Rymes [Bryce], p. C-17). Finally Keynes mentions the concept of 'long-period employment' which
is defined as the state which would emerge if a state of expectation were to
continue long enough to work itself through to employment (the state where the
economy is in 'long-period equilibrium'). However, this can only be conceived of in theory: in reality new
expectations are always being superimposed on old ones before the influences of
the latter have had time to work themselves through.
In the fourth lecture, Keynes discusses the
concept of income (this is the origin of Section I of Chapter 6 of the General Theory). The key concept
here is 'user cost' which makes its first appearance as far as the lectures are
concerned, though as we saw the term had first appeared in the Summer
Manuscript. User cost is the sacrifice made as a result of using a piece of
equipment as against not using it - that is, the loss in the value of capital
as a result of using it to produce current output, as compared with what its
value would have been had it not been so used.
Keynes formulates user cost as
follows:
U = (C′- B′) - (C - B)
C′: The value the capital equipment would have had at the end of the
period, if it had not been used;
B′: The amount one would have spent on maintenance and improvement if the
capital equipment had not been used;
C
: The value the capital equipment has at the end of the period if it has
been used;
B : the
amount one has spent on maintenance and improvement when the capital equipment
has been used.
Denoting the value of newly finished goods by
A, income Y is defined by the equation
A + B - U = Y
Income Y is equal to prime costs E plus
profits P:
Y = E + P
Keynes goes on to argue that the supply price
equals marginal prime cost plus marginal user cost, and, from this standpoint,
criticises the traditional theory which maintains that the supply price equals
marginal prime cost only (the same criticism appears in Section I of the appendix to Chapter 6 of
the General Theory). Keynes presents another way of defining user cost: as the present
value of the opportunity cost of postponing replacement by not refraining from
use, less carrying costs associated with the capital involved.
Keynes next explains the fluctuations in the
relationship between the user cost and the supply price, referring to the trade
cycle, and criticises Pigou's Theory of Unemployment on the grounds that it
neglects the fact that the price of any good includes the part represented by
the marginal user cost.
Let us examine the relation between the
concept of user cost adopted here and that adopted in the General Theory.
The latter conception is defined by the equation:
U = (G′ - B′) - (G - A１)
Here G′is the same as C′and G is the same as
C. B′is as before. In a
fully integrated system, A１, the amount of finished goods which entrepreneurs buy from other
entrepreneurs, is zero. In the General Theory, B is not taken into
consideration, so that it too is zero. Thus it turns out that the user cost in
the lectures and that in the General Theory are virtually one and the
same. In the General Theory income is defined as A - U. Supposing B is
zero, this comes to the same as was proposed in the lectures. Thus we can
conclude that the arguments concerning user cost in the 1934 lectures and in
the General Theory are, in substance, the same.
In the fifth lecture (19 November)２８ Keynes mainly discusses quasi-rent and the saving-investment relation.
The argument concerning quasi-rent shadows that of the fifth lecture of 1933 (though it differs
somewhat, due to the appearance of user cost). Thus, Keynes takes up three kinds of quasi-rent: (1) the quasi-rent as
the return an investment actually earns (this is equal to (realised) profit Q plus user cost U, and also equal to A + B - E); (2) the quasi-rent to which
short-period expectations of profit pertain (this is composed of net quasi-rent P′and U′; and (3) the quasi-rent to
which long-period expectations of profit pertain (this is represented
as P″ + U″ and is equal to prospective yield Q″).
According to this
classification, there are three kinds of entrepreneurs' income - P, P′and P″. Keynes says that he
used P″ in the Treatise and
P′in the fifth lecture
of 1933, while he uses P here. He then develops a number of equations, among
which the following is worth noting:
D = P′+ U′+ E = Q + E
Here the relation P′+ U′= P + U is made use
of - that is, an assumption that short-period expectations are realised is
made. Effective demand, D, is considered to be equal to realised quasi-rent
plus prime costs. The following equation is also put forward:
D = Y′+ U′
Keynes next proceeds to discuss
saving and investment. The argument developed here might be said to be the
origins of Section II, 'Saving and Investment', of Chapter 6 of the General
Theory . Saving, S, is defined as follows.
S = Y - C
In this connection Keynes criticises
Robertson's concept of income, the concept of 'forced saving', and also the
concept of income in the Treatise (the same criticism is developed in more detail in Sections III and IV of
Chapter 7 of the General Theory).
Gross investment is equal to A + B - C (= Y + U - C), and net investment
is equal to I - U, so that net investment is equal to saving. Keynes argues
that what matters for effective demand (D) is gross investment:
D = I′+ C′
where I′is expected gross investment, C′expected consumption.
Therefore, actual gross investment is equal
to savings plus user cost.
I = S + U
What the above definitions
differ most markedly in from those of the General Theory is the
definition of investment. In the General Theory, gross investment is
defined as A１ - U, net investment as A１ - U - V. The difference between the two is not so much user cost as
supplementary cost.
Keynes goes on to a discussion which seems to
be the origins of Section I of Chapter 8, and Chapter 9 of the General
Theory. He states that C differs little from actual consumption. Referring
to the general psychological law (the propensity to spend), he states that the fundamental law of employment is that employment
cannot increase unless there is either an increased propensity to invest and/or
an increased propensity to consume.
As to the propensity to consume,
Keynes argues here that it depends on the motives for saving. The motives
mentioned are almost exactly the same as the 'subjective' factors in the General
Theory. We already know that in 'The General Theory' Keynes developed an
argument virtually identical to that developed in Section I of Chapter 9 of the
General Theory. As far as subjective factors are concerned, therefore,
this would indicate that Keynes advances the same argument in the lecture.
Keynes did not mention the objective factors influencing consumption in the
1934 lectures. He was to refer to them for the first time, as far as the
lectures are concerned, only in the fourth lecture of 1935. As we know,
however, he had already referred to the 'objective factors' in 'The General
Theory', although the items mentioned there differ considerably from those in
both the fourth lecture of 1935 and the General Theory.
Lastly, after critically discussing the
classical understandings of saving and the rate of interest, Keynes argues that
the principal variable that determines the volume of saving is the volume of
real income, which, in turn, depends on the amount of investment. That is,
investment is the dominant factor, and determines the volume of saving.
In the sixth lecture (26 November), an investment
theory is developed which uses the marginal efficiency of capital for the first
time, as far as the lectures are concerned. This was the fourth perplexity
mentioned in the third lecture. We already know that the term 'marginal
efficiency of capital' made its first appearance as the title of 'Excursus II'
in the table of contents of 'The General Theory of Employment' (the Third Manuscript;
see Table 10-1), and then appeared again in the 'Second Undated Manuscript' in the
first half of 1934, although the definition there differs from that in the General
Theory.
The definition of the marginal efficiency of
capital in these lectures is the same as that in the General Theory: it
is defined as the rate of discount which makes the present value of the series
of prospective yields of an investment equal to the supply price. It falls as
investment increases, because the supply price of capital will rise while the
prospective quasi-rents decrease. The volume of investment is determined at the
point at which the marginal efficiency of capital becomes equal to the rate of
interest.
This theory differs from that in
the seventh lecture for 1933 in that in the latter the demand price of capital
assets as a stock was compared with its cost of production, whereas in the
former the marginal efficiency of capital calculated for the investment goods
as a flow, is compared with its cost of production. Further, the theory differs
in that the idea held on to since the Treatise, that the price determined in
the stock market rules the price in the flow market, is abandoned. It should be
borne in mind, however, that (as we already know) in the Second Undated Manuscript the level of investment was considered
to be determined at the point at which the marginal efficiency of capital
becomes equal to the rate of interest, although the definition of the marginal
efficiency of capital there was different, and that in 'The General Theory' the
investment theory was developed in the same way as in the General Theory.
Keynes proceeds to develop an
argument similar to that seen in Sections II and III of Chapter 11 of the General
Theory. Does the marginal efficiency of capital relate to increase in
physical output or in value? Is it a ratio or an absolute quantity? Does it
relate to Q１ (the return after one
year) only, or to Q１, Q２, ... , Qｎ? In these connections, Keynes discusses the theories of Marshall and
Fisher critically. He goes on to discuss the volatility of fluctuations in the
marginal efficiency of capital (the substance of this discussion is to be followed up in Chapter 12 of
the General Theory). He concludes that the volatility is due to the volatility of
fluctuations in the prospective yields of capital goods. Forecasts of future
changes in the type and quality of capital assets, in demand, and in
money-wages, together with the degree of the confidence with which such
forecasts are made, determine the state of long-term expectation.
At this point Keynes draws
attention to an historical shift in the nature of investment activities. In the
past, investments were based not so much on the dispassionate calculation of
expected profits as on the willingness of bold people to run risks. Once made,
an investment was usually fixed not only for society but also for the
individuals concerned. In modern society however, Keynes argues, the
development of stock exchanges and the separation of management from ownership
has allowed people to escape from bondage to their investments, at least
individually. What mainly determines the values of investments now are the
average opinion-expectations of those who deal in the stock exchange, rather
than the genuine return-expectations of entrepreneurs. The stock exchange
revalues investments all the time, and in doing this affects the present level
of investment: the marginal efficiency of capital comes to be determined by the
average opinion-expectations of those who deal in the stock exchange. Such
people generally know rather little about investment in real capital: the
primary concern of professional speculators is to be a moment ahead of the
market in anticipating changes in the market valuation of shares. In
consequence, investment, which ought to be made on the basis of the genuine
forecasting of returns on real investment, is liable to become prey to the
speculative forecasting of stock exchange psychology.
This is Keynes's insight. Pure capitalism
finds great difficulty in getting investment to be made on the basis of
forecasts of genuine long-period consequences. This is why he advocates that
the management of long-period investments be controlled by the state.
In the seventh lecture (3 December), the theory of
interest is developed. After arguing that the traditional theory does not
separate the marginal efficiency of capital from the rate of interest, Keynes
criticises the traditional theory of the rate of interest based on the supply
and demand of capital. (The argument here is related to Chapter 14 of the General Theory.)
After reiterating his own theory of the rate
of interest, which can be traced back at least to the fourth lecture of 1932,
Keynes explains, according to his theoretical model, the chain of causation
brought about by an increase in the money supply, and argues that the velocity
of circulation is only a statistical by-product, and has no causal importance
in itself.
Lastly, Keynes asks what the
factors upon which liquidity preference depends might be. He confesses this
theme to be 'fuzzling as yet' (Rymes [Salant], p. O-28). His provisional answer is as follows:
(1) The convenience for immediate transactions. 'The demand for M[oney] here is likely [to be] inelastic [vis-a-vis the rate of
interest]' (Rymes [Bryce], p. C-49).
(2) Uncertainty as to the future of the rate of interest.
(3) The existence of different opinions in the market as to the future rate
of interest.
Item (1) might be considered
as a formulation of the transactions motive; items (2) and (3) of the
store-of-wealth motive. The former motive is inelastistic with respect to the
rate of interest, while the latter is due to the uncertainty as to the future
rate of interest. It should be noted that it was not until the sixth lecture of
1935 that Keynes was to classify the motives for liquidity preference in
exactly the way we find in the General Theory. So far as classification
is concerned, the eighth lecture of 1933 is perhaps closer to the General
Theory. However, in that here the speculative motive is made dependent not
on the rate of interest but on the state of bearishness, the seventh lecture of
1934 is perhaps closer to the General Theory than the eighth lecture of
1933.
Table 12-3 summarises the contents of the
lectures in the Michaelmas term of 1934.
Table12-3 Michaelmas Term of 1934
|
No.
|
|
| |
Contents
|
| ||
 1st 15
Oct.
|
・A presentation of the classical theory of employment and criticism thereof (two pronged
|
| |
attack).
|
| ||
|
・Criticism of the dichotomy of value and distribution/money of classical economics.
|
| ||
2nd
29
Oct.
|
・Acceptance of the first postulate and rejection of the second postulate.
・A presentation of `The Theory of Effective Demand'in which the level of employment is determined at the point where the effective demand function intersects the employment function (or supply function).
・Criticism of Say's Law and support for Malthus, Marx and Major Douglas who argue against it.
| ||
3rd
5
Nov.
|
・Four perplexities - a choice of units, the part played by expectations, a definition of income, and the marginal efficiency of capital. ・A choice of units - wage unit.
・Short-term and long-term expectations.
・Long-period employment.
| ||
4th
12
Nov.
|
・A definition of income; income = prime costs + profits
| ||
・A formulation of user cost.
|
| ||
|
・Supply price equals marginal prime costs plus marginal user cost.
・An explanation of the fluctuations in the relationship between the
|
| ||
user cost and the supply price.
|
| ||
|
・Criticism of Pigou's Theory of Unemployment for its neglect of user cost.
|
| ||
5th
19
Nov.
|
・Quasi-rent - three kinds of quasi-rents and adoption of quasi-rent defined as the return
| ||
actually earned from an investment.
|
| ||
|
・Effective demand = realised quasi-rent + prime costs
|
| ||
・Saving defined as income minus consumption.
|
| ||
|
・Criticism of Robertson's concept of income, the concept of forced saving, and the concept of income in the Treatise.
・`Gross' as defined in terms of user cost.
・The general psychological law and the propensity to consume.
・Subjective factors.
・Criticism of the classical theories of the rate of interest and saving.
|
| ||
6th
26
Nov.
|
・The marginal efficiency of capital.
・The theory of investment - investment is determined at the point at which the marginal efficiency of capital equals the rate of interest. ・The volatility of fluctuations in the marginal efficiency of capital - a problem arising from the development of the stock exchange. ・Investment becomes vulnerable to speculative activities.
・The necessity for the management of long-period investments by the state.
| ||
7th
3
Dec.
|
・Criticism of the traditional theory of the rate of interest.
・An explanation, along the lines of his theoretical model, of the chain of causation brought about by an increase in the money supply.
・Liquidity preference - transaction motive depends upon current transactions, while the
| ||
store-of-wealth motive depends upon uncertainty as to the future of the rate of
|
| ||
|
interest.
|
| ||
Notes
1) See JMK.14, pp. 464-470. The chapter concerned is referred to as
'The Pre-First Proof Index Version' (see JMK.14, p. 351) by Moggridge. Sections III to VIII of Chapter 12, 'The State of
Long-Term Expectation', of the General Theory retain the original form
of the Pre-First Proof Index Version, except for a few paragraphs, while
Sections I and II of the same chapter appear in the form of a summary in the
Pre-First Proof Index Version.
2) Patinkin (1976) emphasises the
importance of 'The General Theory', for there Keynes put forward the theory of
effective demand. Moreover, Patinkin (1976) concludes, judging from the 1933 Michaelmas Lectures, that Keynes
formulated the theory of effective demand in the first half of 1933. See
Patinkin (1976, pp. 88-94 頁; 1977, 24頁). Patinkin does not
notice the ambiguities in the concept of 'effective demand' and the
inconsistency of the employment theory.
3) A similar problem occurs in the Second Manuscript. There the relation
between the acceptance of the first postulate and the argument by means of both
aggregate expenditure and aggregate costs is unclear. Cf. JMK.29, pp.
68-69, 72, and 90-91.
4) At this time Keynes stresses the difference between effective demand
and income. Thereafter, however, he came to feel it 'to be of secondary
importance, emphasis on it obscuring the real argument' (JMK.14, p. 181). This is Keynes's own recollection, appearing in a draft for his
lectures of 1937.
5) Cf. Patinkin (1976), p. 86.
6) Patinkin (1976, 89 頁) clearly states that
this is the aggregate supply function in the General Theory and a
production function.
7) This is also apparent in the footnote in which Keynes tries to explain
why the employment function might be a straight line with a slope of 45°(JMK.13, p. 446). He says that there is 'a tendency for average real prime cost to
increase at about the same rate as output, as supply equipment is gradually
brought into use'. This indicates the first postulate of classical economics (W/P =ΔO/ΔN [where W denotes the
money wage, P price, O the volume of output, N the volume of employment, ΔX an increment in X]) . Patinkin infers from this statement, Bryce's notes, and other
sources, that the employment function passes through the origin and has a slope
of 45°, and that it is in
fact the aggregate supply function of the General Theory (Patinkin, 1976, pp.
77-78, 87-88, 7 and Note 14 to Chapter 8). The first classical postulate is not used in his demonstration.
8) This shows that the three features of the General Theory
appeared in 'The General Theory' for the first time: (i) the four kinds of
aggregate supply function; (ii) the aggregate supply function as a whole as an equilibrium concept; and
(iii) 'Keynes's
incompleteness' in the sense that because he assumes a fixed distribution of
the amount of effective demand between the different industries, his
metholodological standpoint which stresses 'the heterogeneity of goods' and
expectations is not persistently maintained. For a more detailed explanation,
see Section 2(B) of Chapter 15 of the present book. See also GT, p. 286.
9) In fact, there no distinction is made between equations (4) and (5).
10) Cf. Section 2 of Chapter 4 of A Reconstruction.
11) Keynes considers
that the level of employment thus determined remains 'within a modest range of
fluctuation' and does not 'proceed to extreme lengths'. Cf. JMK.13, p.
446. Here we have the idea of 'underemployment equilibrium', to recur in the General
Theory.
12) See GT, p. 280.
13) Cf. Keynes' letter to Kahn of 13 April 1934 (JMK.13, pp. 422-423), and Keynes (1939).
14) The term 'maximise' which occurs at JMK.29, p. 89, means to
maximise excess profit. It has no direct relation to the first postulate of
classical economics. (This is inconsistent with the main theoretical system of the Second and
Third Manuscripts, where excess profit is considered to become zero in
equilibrium.)
15) See, for example, JMK.13, p. 436 and p. 427.
16) For more detail, see Section 4 of Chapter 11 of A Reconstruction.
17) Patinkin (1976, 91-92 頁) seems to point out the same inconsistency from a different angle.
18) However, this is not unquestionable, because around this period Keynes
clearly tries to separate the functions of profit. It would perhaps be more
accurate to say that he shows no interest in the pseudo-TM supply function,
rather than that the manuscript is devoid of anything corresponding to equation
(8).
19) In a letter to Harrod dated 27 August 1935, Keynes states that the
discovery of the definition of marginal efficiency of capital was absolutely
vital in the development of his thought. See JMK.13, p. 549. Historically
speaking, Keynes's marginal efficiency of capital follows Fisher's 'rate of
return over cost' in The Theory of Interest (Fisher, 1930), a key concept in Fisher's 'principle of investment opportunities'. See
GT, pp. 140-141. Fisher said that his theory of the rate of return over
cost could be traced back to John Rae in The Statement of Some New Principles
on the Subject of Political Economy Exposing the Fallacies of the System of
Free Trade and of Some Other Doctrines Maintained in the 'Wealth of Nations' of
1834.
20) In Section 3 (B) of Chapter 7 of the
present book, we referred to the 'duality' problem in the theory of the
determination of the price level of investment goods in the Treatise. The
investment theory of the General Theory is also inconsistent. Or rather,
there are two investment theories, the inconsistency between which Keynes
overlooks. For more on this, see A Reconstruction, pp. 195-200.
21) The idea is found at JMK.13, p. 450.
22) Keynes's examination
of some fundamental concepts can be traced back to the Second Manuscript of
1933 (see JMK.29, pp. 68-69).
23) On this occasion, Keynes read the paper entitled 'The Theory of
Effective Demand' (JMK.13, pp. 457-468) to the American
Political Economy Club. The main themes of this paper were an analysis of the
American economy and some suggestions on economic policy. Keynes argued that an
increase in public spending through deficit financing was indispensable for the
restoration of the economy, and put forward the multiplier theory in relation
to the policy of public spending. Keynes wrote open letters to President
Roosevelt in the New York Times of 31 December 1933 and 11 June 1934 (JMK.21, pp. 289-304; 322-329, respectively). Lippmann wrote a letter to Keynes to the effect that the former
letter, Lippmann, had a great effect on the U.S. Treasury's policy of lowering
the long-term rate of interest. The latter, in which Keynes emphasised for the
government to make emergency spending, was encouraged by Lippmann. See Hession (1984), pp. 275-276. On the
relation between Keynes and Lippmann, see Wright (1973), p. 78.
For a comparison between this paper and 'An
Economic Analysis of Unemployment' which was read as the Harris Foundation
lecture in America in June 1931, see Note 23 to Chapter 6 of the present book.
24) Immediately after
this, the equation C + I = E + Q = Y = C + S appears. In view of the argument
developed up to this point, this equation should have been C + I + U = E + Q =
Y + U = C + S + U.
25) Cf. GT, p. 282.
26) The situation
remains the same in the case of Yｗ + Uｗ = Iｗ +Cｗ + U ｗ. This is obtained by dividing through the equation by the wage unit, w.
27) As can be seen at JMK.13, pp. 104-108, Keynes himself, together
with Robertson, developed the theory of forced saving in 1928. On this, see
Presley (1978), pp. 79-80, and also Section 3 of Chapter 6, Note 58 to Chapter 7, and
Note 17 to Chapter 8, of the present book.
28) At this time Keynes gave a public broadcast entitled 'Poverty in
Plenty: Is the Economic System Self-Adjusting?' (JMK.13, pp. 485-492), in which he
stresses 'a fatal flaw in that part of the orthodox reasoning [economics] which deals with the
theory of what determines the level of effective demand and the volume of
aggregate employment; the flaw being largely due to the failure of the classical
doctrine to develop a satisfactory theory of the rate of interest' (p. 489) and emphasises the
importance of increasing investment through the fall in the rate of interest
rather than that of increasing consumption through the drastic social changes
like an equalisation of income).
29) Patinkin (1976, Chapter 8, Note 2) estimates that it means the period from the Ricardo-Malthus controversy
in 1820 up to J.S. Mill's Principles of Political Economy (1848).
