AN ANALYSIS OF THE ＧＥＮＥＲＡＬ ＴＨＥＯＲＹ PROOFING PROCESS ― From “The Pre-First Proof Typescript” [Summer 1934] to the General Theory ―

 April 2007

                                                         

  

AN ANALYSIS OF THE ＧＥＮＥＲＡＬ 

ＴＨＥＯＲＹ　PROOFING PROCESS

― From “The Pre-First Proof Typescript” [Summer 1934] to the General Theory ―

Toshiaki Hirai*

I. Introduction

The main purpose of this paper is to examine and to show, objectively and exactly, how Keynes carried out the proofing process of the General Theory, and is to detect its main features. The period covers the summer in 1934 to February 1936.

  The key points in this paper are as follows:

 There exists no paper which has examined the latter half of Keynes’s developmental process from the Treatise to the General Theory in spite of the fact that many studies on the Keynesian Revolution from a point of history of economic thought have been so far made. The reason is that almost all the studies have been concentrated on the period up to 1933-34, maintaining that the Keynesian Revolution or the General Theory has been, in substance, completed in 1933 (albeit this is right), and that little effort has been spent for clarifying the eighteen months leading up to the General Theory.

 What concerns us in this paper are: what are the major changes in this proofing process?; How and why did Keynes make changes, after having made a drastic change from the Treatise to the road to the General Theory up by 1933?

 In order to answer these questions, we need to investigate the following.

1)           To endeavor to describe accurately, based on the material concerned, how Keynes made changes.

2)           To consider the implication and significance which these changes brought about to Keynes’s theory.

The first task is descriptive and explanatory, while the second one is theoretical in nature. Through the second task, we may shed some light on the nature and characteristics of the General Theory. (It may not be, for example, a complete book in terms of theory.)

During the period concerned, Keynes handed in his manuscript piecemeal, rewriting incessantly. Retracing this process might reveal the significant changes in the final stage. Keynes sent the galley proofs to his colleagues for their comments. The correspondence concerned will highlight the differences between them in theory.

Keynes had constructed many of the major components of the General Theory (including the theory of liquidity preference, the marginal efficiency of capital, the fundamental psychological law, and the multiplier) before the time of “The General Theory”. However, in terms of style it is in “The General Theory” that we first find material that was actually incorporated into the General Theory. For example, Ch. 12, “The State of Long-Term Expectation (or Confidence)”, of “The General Theory” was very much the prototype for Ch.12, “The State of Long-Term Expectation”, of the General Theory. Similarly, Ch.10, “The Propensity to Spend”, of “The General Theory” is the precursor of Ch.8, “The Propensity to Consume: I. The Objective Factors”, and Ch.9, “The Propensity to Consume: II. The Subjective Factors”, of the General Theory.

  As mentioned in Section 5 of Ch.6, Keynes remarked in his letter to Kitoh of 22 June 1934 that “it will be some months more before I am ready for printing”. This should be compared with the fact that he had completed almost all the text outlined in the table of contents of “The General Theory” by March 1934, went to the United States in May and came home in June, as we saw in Section 1 of Ch.10. To illuminate the succeeding phases of the proofing process in chronological order, which are to lead up to the publication of the General Theory — that is the purpose of this paper.

During the eighteen months or so from summer 1934 to February 1936, Keynes submitted the manuscript to his publisher in installments, and revised the galley proofs several times. In fact, he continued to modify the expression of his ideas all through this period right up to publication.

  A reconstruction of the proofing process illuminates the gestation of the General Theory. There are two main reasons for this. First, Keynes adopted the somewhat unusual procedure of handing in his manuscript piecemeal rather than in one go, rewriting constantly as he went along. Retracing this process gives us considerable insight into the significant changes he introduced along the way. In this context it should be remembered that although the consumption theory, the investment theory, and the theory of liquidity preference had all virtually reached their final forms by spring 1934, the theory of effective demand and the definitions of some fundamental concepts - such as user cost - had yet to be finalised. Second, Keynes sent the corrected galley proofs to several close colleagues for their reactions. The correspondence this generated highlights the differences between Keynes's theory and the theories of these colleagues very clearly, as well as the features they had in common. The picture is somewhat complicated, however, because the debates concerning points of disagreement Keynes had with Robertson and Hawtrey had begun prior to the Treatise and continued into the period of the General Theory, with no clear line of demarcation between the discussions of the one book and those of the other.

In this paper we will examine the developmental process of the General Theory dividing it into two phases. One is the period from the Pre-First Proof Typescript (summer 1934) up to Galley1(III) (to be explained below. June-July 1935). The other is the period after that up until the publication of the General Theory.

Concerning the first period it is worth noting the following points in advance. First, the First Galley, which will be explained below, is the most telling of the galleys for our purpose. There are two reasons for this: (i) the galley is written in line with the Galley Table of Contents (to be called “TOC” below), which leads us to suppose that the First Galley laid the foundations for succeeding galleys; (ii) by examining the appendix to Volume 14 of JMK, entitled “Variorum of Drafts of the General Theory”(JMK. 14, pp. 351-512; hereafter referred to as the “Variorum”), we can confirm that in the Second and Third Galleys (to be explained below) Keynes for the most part made only formal revisions, though there were a few exceptions to this. It will therefore be convenient for us to deal with these when we come to discuss the First Galley.

  Second, we need to compare and contrast the developments in this particular set of galleys not only with Keynes’s economic-theoretical development prior to their production, but also with the theory presented in the corresponding parts of the General Theory. For the first set of comparisons we focus on the new ideas each set of galleys contains. For the second set of comparisons, in addition to the new ideas found in each set of galleys, we will also examine more formal aspects of the text, such as the degree of completion, as this will assist us in clarifying in concrete terms the degree to which Keynes changed and did not change his theory in the process.

  In Section II we will examine “The Pre-first Proof Typescript”, and in Sections III-VIII we will go on to examine “Galley 1”, “Galley 2” and “Galley 3” (to be explained below).

Concerning the period after that up until the publication of the General Theory, through an explanation of this period, Section X “The Great Revision” and Section XI “The 1935 Michaelmas Lectures” are responsible for it. Section XII is our conclusion.

II. “The Pre-First Proof Typescript”

A typescript named “The Pre-First Proof Typescript” (hereafter “Typescript”) was written in the summer of 1934. It can be divided into two parts.

  The first part consists of Ch.4, “The Choice of Units”, Ch.5, “Expectation as Determining Output and Employment”¹, and Ch.9, “The Marginal Efficiency of Capital”. They are identical to Chs.4, 5, and 11 of GT, respectively, in both form and title.

  The second is Ch.6, “The Meaning of Income”. It differs considerably in form from the corresponding part of GT. After some changes in Galley1(I), small formal changes ensued until Galley3, and in “The Great Revision” it was revised in form.

  That summer Kahn helped Keynes. In early SeptemberKeynes wrote to Daniel Macmillan, his publisher: “I am now fairly well on with my forthcoming [book] … My provisional title is The General Theory of Employment, Interest and Money.”²

  Here we will examine the Typescript. The employment function and the definitions of some fundamental concepts merit particular attention.

1. The Employment Function

  The following quotation, which deals with the employment function, represents the origin of GT, Ch.4 (IV), although different in substance:

We can substitute for the supply function what we shall call the employment function. The employment function for a given firm (and similarly for a given industry or for industry as a whole) is given by N = F (D_w), where D_w is the sale proceeds in terms of wage units, the expectation of which will induce a level of employment N. Similarly we can write (D_w/N) = Q(N), which relates the money proceeds per wage unit to the quantity of employment, so that if N men produce an output O, (D_w/O) = Q(O) is the ordinary supply curve (JMK.14, p. 387).

  Keynes’s intention might have been as follows. The employment function N = F(D_w) can be reformulated as

D_w= f(N)         (1)

  By dividing equation (1) by N, we obtain the equation:

 D_w/N = f(N)/N = Q(N)  (2)

  Let us express the production function as

O = g(N)           (3)

  Then, from equations (2) and (3) the following equation can be obtained:

  　　　　　D_w/O = N・Q(N)/O = g^-1(O)・Q (g^-1(O))/O = Q′(O)³   (4)

  Keynes calls this the “ordinary supply curve”. Here he seems to be considering the inverse of the employment function.

  On the one hand, the employment function is a supply concept, for it is considered to be a substitute for the “supply function”. On the other, it is of the same type as the employment function in “The Summer Manuscript”. Therefore, N = F(D_w) may also be considered an equilibrium concept.

 So much can be verified with two considerations.

 Firstly, Keynes frequently changed the employment function formulation: (i) in “The General Theory” as D_w = F(N); (ii) in “The Summer Manuscript”, “The Typescript” and Galley1(I) as its inverse function; (iii) in Galleys2 and 3 as D_w = F(N); (iv) in the GT as its inverse function.

Secondly, the role which the aggregate supply function plays in the GT was assumed by the employment function, denoted by either D_w or D, until the GT, in which D is replaced by Z (aggregate supply price), while D now denotes effective demand. This likewise indicates that both the employment function and the aggregate supply function have the attributes of an equilibrium concept as well as those of a supply concept. Thus, there is some apparent difficulty in deriving the “ordinary supply curve” from the employment function.

Compared with this difficulty, the derivation of “the ordinary supply curve” is of little importance. Suffice it to point out that:

(i)  unlike the other galleys, Galley1(I) does not use the production function;

 (ii)  from Galley1(I) up to the GT the “ordinary supply curve” describes a relation between the level of employment and the price level, so that it is not a supply curve in the ordinary sense.

2. Some Fundamental Concepts

  Keynes discusses fundamental concepts such as income, investment, saving, and effective demand in Chapter 6.

 The chapter, taking over Ch.8, “Investment and Saving”, of “The General Theory” and “The Summer Manuscript”, forms the basis for fundamental concepts in the period from “The Pre-First Proof Typescript” to Galley3.

  In Galley1(I) Keynes inserts Ch.7, “The Definitions of Quasi-Rent, Saving and Investment”. The material is utilized somewhat dispersively in GT, Ch.6, “The Definition of Income, Saving and Investment”. We will therefore defer discussion of fundamental concepts until Section IX, simply observing here that Ch.6 of “The Pre-First Proof Typescript” is more relevant to Ch.6 of the GT than the galleys from Galley1(I) to Galley3.

III. Galleys 1, 2 and 3

After “The Pre-First Proof Typescript” came a set of galleys, which we will call Galley 1, 2 and 3 (see Table 11-1).

                                                       

(i)                                  Three galleys have the same table of contents, which we will call the TOC⁴.

(ii)                              Galley2 is a revised version of Galley1 while Galley3 revises Galley2. In each galley, only part of the material specified in the TOC was written. Moreover, Galley2 rewrites only parts of Galley1, while Galley3 rewrites only parts of Galley2. Consequently, some sections of the text remained at either Galley1 or 2 stage until what we will call “The Changeover” (September 1935).

(iii)                          The text of Galley1 was, of course, written first, but it appeared in various periods: (i) early December – mid January 1935 (Galley1(I)); (ii) March - May 1935 (Galley1(II)); (iii) June - July 1935 (Galley1(III)), so parts of Galley1 postdate Galley2.

(iv)    Gally1(I) laid the foundations for succeeding galleys;

  (v)    On the evidence of the appendix to JMK.14 (pp. 351-512; hereafter “The Variorum”) we see that in Galleys2 and 3 Keynes made only formal revisions.

(vi)   Although Galley1 of GT, Ch.17, “The Psychological and Social Incentives to Liquidity”, and Ch.19, “The Essential Properties of Interest and Money” have not survived, we have confirmation that they existed in Robertson’s letter to Keynes (3 February 1935) ⁵etc.

We will compare these sets of galleys with both the preceding developments and the General Theory.

IV. Galley1 (I) (Chapters 1-19)

On 7 September 1934 Keynes announced his publication programme to the Macmillan Co. and by 13 September 1934 he sent off the first three chapters (that is, Book I), the titles of which are the same as those of the corresponding chapters in the GT (although Ch.3, “The Principle of Effective Demand”, differs in substance). The galley of these chapters came out in October. Keynes delivered his Michaelmas lectures based on this galley together with the manuscript for Chapters 4-14.

That Keynes felt this manuscript needed revising is revealed in two letters to Kahn (18 and 27 September) ⁶:

Table 11-1  The Proofing Process

Ch. of TOC

Galley1( I) * [TOC]

Galley2 [TOC]

Galley 1(II) [TOC]

Galley3 [TOC]

Galley1(III) [TOC]

1

H (the end of January 1935)

2-3

R

(the end of January 1935)

H (June 1935)

4-6

7-14

H (the end of April 1935)

15-19

20-25

H**

26-28

(June - July 1935)

(Notes) 1.  R: the galleys sent to Robertson.

       　　　　　　　　　   H: the galleys sent to Harrod , Hawtrey, Kahn and J. Robinson.

                       2. The dates in parentheses indicate the period in which the galleys concerned came out.

                       3. ^*: the period between early December 1934 and mid-January 1935.

^**: the period from March 1935 on. Chs.21-24 with the date of 7-17 May 1935.

I … have found out one or two interesting novelties. … I’ve solved the riddle of how to define Income in some sort of a net sense…. The deduction from the gross sales proceeds of the output of a given equipment necessary to yield income is that part of the quasi-rent … necessary to induce the entrepreneur not to leave his equipment idle. … the sacrifice involved in using the equipment as compared with postponing its use ….

I am getting towards the end of the re-writing which you led me into and will show you the new way for dealing with net income in detail next term.

These progress reports relate to Ch.6, “The Meaning of Income”, which treats user cost, and Ch.7, “The Definitions of Quasi-Rent, Saving and Investment”, of the TOC.

  Keynes sent the publisher first Chs.4-11, and secondly Chs.12-19 (which respectively correspond to GT, Chs. 4-9 and Chs. 11-17). Their galleys probably appeared between early December 1934 and mid-January 1935. They mark the virtual birth of the General Theory. Keynes sent to Robertson⁷ Chs.1-19, which we will call “Galley1(I)”.

 

  Let us examine Galley1(I). It can be divided into two parts: Chs.10 and 11 for consumption, and Chs.14-19 for the rate of interest (The chapters to which we refer below, unless otherwise noted, are those in the TOC).

  A.  Consumption

  Ch.10, “The Propensity to Spend” covers the area of GT, Ch.8, Sections II and III.

 Section III, which discusses the fundamental psychological law, shows hardly any change from Galley1(I)⁸ onward.

However, Section II considerably differs from Galley1(I).

“The General Theory” had identified the objective factors as:

  (i)  the quantity of employment as determining the aggregate current rate of real income;

 (ii)  the rate of interest;

  (iii)  the state of long-term expectation.

 Galley1(I) deletes (i), keeping (ii) and (iii). It discusses (i) separately, using income rather than the quantity of employment⁹ (the GT added an argument justifying this substitution).¹⁰

 Item (ii) is kept in “The General Theory”, and is included in GT’s fourth objective factor, “changes in the rate of time-discounting”¹¹. Item (iii) is also kept in “The General Theory”, and is incorporated to some extent in GT’s third objective factor, “windfall changes in capital-values not allowed for in calculating net income”.

  Ch.11 corresponds to GT’s Ch.9, “The Propensity to Consume: II. The Subjective Factors”. “The General Theory” had regarded financial provision as a subjective factor, but neither Galley1(I) nor the GT followed this line.

 The argument concerning the influence of distribution on the propensity to consume is a restatement of that of “The General Theory”, namely that the employment function becomes a 45° straight line. The GT drops it and takes income distribution as given.

 Concerning “negative saving”, Galley1(I) adds negative saving by firms and “unemployment relief financed by borrowing” together with the purchase of annuities and death duties in “The General Theory”. The GT refers only to “unemployment relief financed by borrowing”.

 Besides these changes, Ch.11 is essentially the same as GT, Ch.9.

As far as Chs. 10 and 11 are concerned, there is no discernible difference between Galley 1(I) and Galley2, aside from minor changes in wording.

  B. The Rate of Interest

  Ch.14, “The General Theory of the Rate of Interest” is nearly identical to GT, Ch.13, in which the core of the theory of interest is articulated. In other words, Galley1(I) brings the liquidity preference theory to its final form. Only small revisions are made to Ch. 14 between Galley1(I) and Galley2.

 The same is true of Ch.18, “Sundry Observations on the Nature of Capital”, which corresponds to GT, Ch.16 (the same title) (Section II is traceable to “The Second Undated Manuscript” and “The Typescript”).

  Neither Ch.17, “The Psychological and Social Incentives to Liquidity”, nor Ch.19, “The Essential Properties of Interest and Money”¹² (corresponding respectively to GT, Ch.15, “The Psychological and Business Incentives to Liquidity”, and Ch.17 (the same title) ) are extant.

However, we have Keynes’s letter to Kahn (15 January 1935)¹³, and Robertson’s letter to Keynes (3 February)¹⁴ attesting to them.

The letter to Kahn indicates that Keynes rewrote 90 per cent of these chapters. Certainly Chs.17 and 19 of Galley2, are almost identical to GT, Chs.15 and 17.

  Ch.15, “The Classical Theory of the Rate of Interest”, and Ch.16, “Notes on the Rate of Interest in Marshall’s Principles of Economics, Ricardo’s Principles of Political Economy, and Elsewhere” correspond, respectively, to GT, Ch.14 (the same title), and its Appendix (the same title, replacing “Notes” with “Appendix”).

The differences between Galley1(I) and Galley2 are of very little account.

 In the Great Revision, however, both chapters were considerably rewritten, as is confirmed by:

(i) Keynes’s letter to Kahn (27 August)¹⁵, in which he is thinking of completely rewriting the chapters on the theory of interest;

 (ii) the fact that among the chapters on the theory of interest, Keynes rewrote these two chapters only.

  Keynes rewrote these two chapters under the impetus following on discussion with Harrod.¹⁶

  GT’s Ch.14 consists of 11 pages, of which 7 pages (pp. 177-183) were completely rewritten. Nevertheless, there is no difference of argument between Galley1(I) and the GT. In both versions he argues that the classical theory of interest assumes full employment, so that when income changes, the theory can no longer account for the actual rate of interest.¹⁷

  A similar relationship is discernible between GT’s Appendix to Ch.14 and Ch.16 of Galley1(I)¹⁸. Keynes completely rewrote four and a half (out of about seven and a half) pages of the appendix discussing Marshall = Pigou’s theory of interest (Section I). Yet when Ch.16 of Galley1(I) and the relevant passages in GT, Ch.14 are compared, no changes appear to have been made to the argument:

 The perplexity which I find in Marshall’s account … is fundamentally due … to the incursion of the concept ‘interest’, which belongs to a monetary economy, into a treatise which takes no account of money (GT, p. 189, and JMK.14, p. 484);

 Professor Pigou ... leads us (in his Economics of Welfare) to infer that the unit of waiting is the same as the unit of current investment and that the reward of waiting is quasi-rent, and practically never mentions interest, — which is as it should be (GT, p. 190, and JMK.14, p. 484).

The theme is common to GT’s Appendix to Chapter 14 and to Galley1(I)’s Ch.16, apart from two formal points of difference:

  (i)  Galley1(I) argues that Marshall does not clearly distinguish quasi-rent as a return on assets from interest as a return on money¹⁹, while the GT deletes it;

  (ii) Keynes’s criticism of Pigou’s theory of interest is more extensively developed in the GT, using Pigou(1927; 1933).²⁰

             

  Galley1(I) also has Chs.6-9 (Book II, “Definitions and Ideas”), and Chs.2-3 (Book I, “Introduction”), which will be examined in the next chapter.

V. Galley2

The revision of First Galley I, i.e., the Second Galley is particularly interesting from our point of view on account of the fact that Chapter 17, “The Psychological and Social Incentives to Liquidity”, and Chapter 19, “The Essential Properties of Interest and Money”, which correspond to GT’s Ch. 15 and 17 respectively, are both extant. Judging from the fact that the second galleys for Chapters 1-6 were ready on 29 January 1935, it would seem that some of Galley1(I) must have been revised and returned to the publisher by the end of 1934. The remaining part of Galley1(I) would then have been revised by the end of January 1935, as is confirmed by the letter Keynes wrote to Kahn on 15 January²¹, in which he says:

I have done two more chapters for you …. [T]hey cover the ground of the philosophical chapter, ninety per cent re-written … concerning the fundamental characteristics of interest … considerably remodelled.

 This would appear to relate to Chapter 18, “Philosophical Considerations on the Essential Properties of Capital, Interest and Money”, of “The General Theory”, suggesting that Keynes reworked this as Chapter 18, “Sundry Observations on the Nature of Capital”, and Chapter 19, “The Essential Properties of Interest and Money'” In response, the publisher returned the remainder of the Second Galley, i.e. Chapters 7-19, to Keynes towards the end of April 1935.

VI. Galley1(II) (Chapters 20-25)

  Galley1(II) consists of Chs.20-25 which exist only in the First Galley: these chapters appear in neither the Second nor Third Galleys. They correspond to Chapters 18, 20, 10, 19, 21, and 22 of the General Theory respectively.

Two pieces of evidence suggest that Keynes probably sent this off to the publisher after the end of March 1935. Firstly, he announced in his letter to Kahn of 26 March 1935 (JMK.13, p. 525):

 I have now finished a full-dress critique of the Prof. [Pigou] to go in as an appendix to the chapter on changes in money wages.

This would indicate that he had already finished writing “Appendix on Professor Pigou’s Theory of Unemployment ” to Chapter 23, “Changes in Money Wages”, which corresponds to “Appendix on Prof. Pigou’s Theory of Unemployment” to Chapter 19, “Changes in Money Wages”, of the General Theory.

Secondly, this manuscript was sent off for comment to several other economists in June 1935. From these we deduce that Keynes received the galley in May 1935.

Galley1(II) represents the final version of the parts of the General Theory to which it corresponds.

Ch.22, “The Marginal Propensity to Consume and the Multiplier”, becomes GT, Ch.10 (same title); Ch.20, “The Equilibrium of the Economic System”, becomes Ch.18, “The General Theory of Employment Re-stated”; Ch.21, “The Employment Function”, becomes Ch.20 (same title); Ch.23, “Changes in Money-Wages”, becomes Ch.19 (same title); and Ch.24, “The Theory of Prices” becomes Ch.21 (same title). Ch.25, “Notes on the Trade Cycle”, does not survive.

  The original idea of Ch.22 is traceable to the First Undated Manuscript, and that of Ch.21 to “The General Theory” and “The Summer Manuscript”.

As will be explained in the next chapter, Ch.3, “The Principle of Effective Demand”, of Galley1(I) defined the employment function as D’= F(N) (D’ denotes “the supply price” in the sense of an expectation of sale proceeds), N the volume of employment). However, Ch.21 of First Galley1(II) defines it as N = F(D)²² (where D denotes effective demand).

Then, in the Great Revision, Keynes sets about clearing up the confusion by calling the employment function of Galley1(I) the “aggregate supply function”, and that of Galley1(II) the employment function.²³ He also brings in the concept of the “aggregate demand function” for the first time, and re-defines effective demand as exclusive of “user cost”.

From this development we can infer that the employment function, N = F(D_w), of the GT is a function of the equilibrium value, D_w (effective demand in terms of wage units). This can be verified by examining the theoretical structure of the GT directly, which we do in Ch.13.

  Ch.23 of Galley1(II) is traceable to:

(i) Keynes’s attack on Pigou (1933) in September 1933, and the controversy with Robertson²⁴;

(ii) his first lecture of the 1933 Michaelmas Term;

(iii) a letter to Kahn (26 March 1935) to the effect that he has finished writing an appendix for Pigou’s book.²⁵

  Aside from these Chs. 21-23, we find no precursors to Galley1(II).

  We see no difference in content between Galley1(II) and the corresponding parts of the GT. The only exception²⁶ is Section II of Ch.20, which summarizes the argument in the preceding chapters. It was considerably rewritten, probably, in the Great Revision.

VII. Galley3

Galley3 (June) comprises Chs.2-6, which correspond to GT, Chs.2-5 and part of Chapter 6.

In early June Keynes sent to Harrod, Hawtrey, Kahn, and Joan Robinson:

(i) Ch.1 of Galley2;

  (ii) Chs.7-19 of Galley2, which correspond to GT, some of Ch.6, Ch.7, Section I-IV of Ch.8, Chs.9-14, Appendix to Ch.14, and Chs.15-17;

(iii) Galley1(II) (Chs.20-25).

 To sum up, what they received was Chs.1-25 of the TOC, corresponding to GT, Chs.1-22.

According to Keynes’s letter to Macmillan (31 July)²⁷:

(i)  he sent the final pages of Galley3 to the printer;

   (ii)  he expected the book to appear in November.

VIII. Galley1(III) (Chapters 26-28)

      Galley1(III) contains three chapters of the TOC. Although the galley is not extant, the chapter titles are known to us;

(i) Ch.26, “Notes on Mercantilism and the Usury Laws”;

 (ii) Ch.27, “Notes on the History of the Notion of ‘Effective Demand’ ”, and

(iii)Ch.28, “Is an Individualist Economy Capable of Providing Full Employment?” ²⁸.

Chs.26 and 27 together would correspond to GT, Ch.23, “Notes on Mercantilism, the Usury Laws, Stamped Money and Theories of Under-Consumption”²⁹ while Ch.28 to Ch.24, “Concluding Notes on the Social Philosophy towards Which the General Theory Might Lead”.

Keynes’s letter to J. Robinson (3 September) indicates that they were sent to her, and were still written along the TOC:

I now have … the last three chapters …. The last two chapters are completely unrevised. Roy [Harrod] strongly objects to chapter 26 as a tendentious attempt to glorify imbeciles. ... I have been occupied for several weeks in somewhat re-writing Book I and completely re-writing Book II. In the case of Book II practically not a word of the version you have read has been left standing. … I have somewhat modified my definition of user cost (JMK.13, pp. 650-651).

  On the evidence of this letter together with the galleys he sent to some fellow-economists in June 1935 and his letter to Daniel Macmillan (11 September)³⁰, Keynes’s work on these chapters and their appearance in galley form would have taken place between June and July.

Together with Ch.25 these constitute Book VI, “Short Notes on Some Applications of the General Theory”.

As far as the tables of contents are concerned, these can be traced back to the following:

 (i) Ch.17, “Historical Notes”, of the First Manuscript (1933);

 (ii) Ch.20, “Notes on the Trade Cycle”, Ch.21, “Notes on the History of Cognate Ideas”, of the Third Manuscript (1933);

 (iii) Ch.25, “Notes on Mercantilism, the Balance of Trade and Foreign Investment”, Ch.26, “Is an Individualist Economy Capable of Providing Full Employment?”, and Chapter 27, “Notes on the History of Similar Ideas”, of “The General Theory”.

  

That Keynes must have produced these chapters in June or July 1935 is confirmed by the letters to his mother (9 August) ³¹ and to Harrod (17 August)³². At this point there are three observations to be made.

  First, in his letter to Harrod, Keynes writes:

Chapter 26 is too long …. In chapter 27 the emphasis hasn’t worked out as I intended ….

Possibly Keynes transferred the substance of Ch.26 to the sections of GT, Ch.23: Sections I-IV (on Mercantilism); Section V (on the Usury Laws); Section VI (on the theory of Gesell); (together with the substance of Ch.27) Section VII (on theories of under-consumption).

  Second, we know the origins of some of the ideas in GT, Ch.23. The starting point should be “Historical Retrospect” (1932)³³, which could be connected with Ch.17, “Historical Notes”, of “The First Manuscript”, which is in favour of:

(i) Mercantilist and Protectionist policies as increasing foreign investment by improving the balance of trade;

 (ii) Anti-usury lawsand principles of cheap-money policies as increasing home investment by lowering the rate of interest;

 (iii) Expenditure as being a thing in itself “good for trade" by diminishing the excess of saving over investment.³⁴

“Historical Retrospect” is close to “The Monetary Theory of Production” in its basic tenor. Also, we have a note concerning Keynes’s 1932 spring lectures³⁵ which refers to “Mercantilism and Protection”. Keynes also discusses the seeds of his ideas in his 1932 Michaelmas lecture.

In GT, Ch.23, Section III Keynes quotes, from Hecksher (1935) several points drawn from various mercantilist authors as precedents for some of his ideas in GT, which are:

(i) scepticism about the policy of laissez-faire;

(ii) the theory of liquidity preference;

(iii) the need to distinguish between the rate of interest and the marginal efficiency of capital.  

Keynes’s extensive quotation of Hecksher’s text reflects its recent availability in English. Keynes had an interesting observation to make on Hecksher and his own position:

Prof. Heckscher is himself an adherent …of the classical theory and much less sympathetic to the mercantilist theories than I am. Thus there is no risk that his choice of quotations has been biased … (GT, p. 341, fn.1).

  In GT, Ch.23, VII Keynes discusses under-consumption theories. Although his line of argument on Malthus can be traced back to 1922, he did not refer to the relation between unemployment and effective demand until 1933.

Here Keynes also discusses in detail Mummery=Hobson (1898), which must date from July 1935, for, writing to Kahn (30 July), he states:

the book Hobson helped him [Mummery] to write, The Physiology of Industry, is a wonderful work. I am giving a full account of it … (JMK.13, p. 634).

.

  Third, from the letter to his mother (9 August) we are given to understand that Keynes commenced on Ch.28 in August 1935³⁶. Furthermore, according to the letter to Robinson (3 September)³⁷, the chapter had by that time been finished. We can infer that Ch.28 became the basis of GT, Ch.24.

IX. Interlude

  We have completed our examination of the latest-written of the chapters listed prior to “The Great Revision” in Table 11-1. Our examination so far, however, omitted consideration of Chs. 2, 3, and 6-9 of what we call the TOC. The main reason for this is that these chapters changed considerably after Galley1(III).

  We need to make sure the following situation: (i) As of June-July Keynes had Ch.1 of Galley(2), Chs.2-6 of Galley(3), Ch.7-19 of Galley(2), Chs.20-25 of Galley1(II) and Chs.26-28 of Galley1(III) with him as the latest version (all the chapters belong to the TOC); (ii) there exists no galley after Galley1(III); (iii) we have several sources of information on how Keynes changed in the period between August 1936 and February 1936 (the publication of the General Theory).

  Therefore, we are forced to reconstruct Keynes’s developmental process in the last phase by using item (iii) which comprises letters and comparing “the latest version” and the General Theory. 

  What characterises August-October is the fact that Keynes altered Chs.3 and 6-9 considerably (Ch.2 is an exception) and the TOC into GT’s table of contents, which, of course, accompanied great rearrangement. We will call this activity “The Great Revision”. Section X deals with “The Great Revision”. Here we will bring the developmental process from “The General Theory” to the General Theory into view.

  Concerning October-December, the material concerned is the Michaelmas lectures, which will be examined in Section XI.

X. “The Great Revision”

Keynes continued to revise the galley even after Galley1(III), as attested by the following evidence.

In his letter to Harrod (17 August 1935) he wrote: “Here are the last two chapters of my book. ... But chapter 26 is too long, .... In chapter 27 the emphasis hasn’t worked out” (JMK. 13, p. 542. The TOC has 28 chapters, while the General Theory 24).

From Keynes’s letter to Robinson (3 September 1935) we learn that he had spent several weeks rewriting Book I (Chs.1-3) and Book II (Chs.4-9). And in his letter to Hawtrey (4 September 1935)³⁸ he announces: “I have ... completed my re-writing of the first three books, namely chapters 1-11” (JMK. 13, p. 576. The TOC ends Book III with Ch.11 while the General Theory Ch.10). In his letter to Harrod (10 September 1935), we read: “I shall be here from September 22 … up to the end of the month. ... by then I shall have finished re-writing the chapters dealing with rate of interest” (JMK.13, p. 559). This might be Chs.15 and 16. This bears fruit in GT’s Ch.14, “The Classical Theory of the Rate of Interest”.

We also know, from Hawtrey’s detailed comments, and Keynes’s response (1 October), that Keynes had also embarked on rewriting Chs.15 and 16 of Book IV (Chs. 12-19).

On 10 October Keynes sent a letter to Robertson saying: “I am now practically finished, and am sending my galleys to the printers to be paged” (JMK.13, pp.523-524). This means that Keynes had drawn up the table of contents of the GT.

We will call these activities “The Great Revision”. In this activity Keynes carried out his rewriting (among others, Chs. 2-3, 6-10, 15 and 16) along the TOC, but his activity soon accompanied the decomposition and realignment of the chapters concerned, which means that the product of “The Great Revision” is virtually the text of the GT.

Due to the paucity of our sources, however, we know neither when precisely Keynes compiled the table of contents of the General Theory. He revised the chapters concerned so greatly that he might have felt the need to rearrange them and draw up a new table of contents.

It might have been in September/October that Keynes rearranged the whole galley in line with the table of contents of the General Theory. What remains as a fact is that Hawtrey, in his letter to Keynes dated 19 December 1935, made comments on the proofs which is based on the table of contents of the General Theory, for we find such a passage as “Own―rates of interest. A renewed study of chapter 17 leads me ...” (JMK.13, p. 625. GT’s Ch.17 deals with own-rates of interest while it is Ch.19 of the TOC that does). Judging from this, we may reasonably suppose that the galley based on the table of contents of the GT reached Keynes in November.

It should be noted that Chapters 6-10 of the TOC undergo substantial further change to reach the form of the General Theory, and that there the arrangement again changes as a result of Ch.22 of the TOC being shifted to become GT’s Ch.10.

Let us now examine Chs.6-9 of Book II, “Definitions and Ideas”, and Chs.2-3 of Book I, “Introduction”.

 

1.  Chapters 6-9

  Book II of the TOC consists of Chs.4-9, of which Chs.4 and 5 were finalized in “The Typescript”.

  A. Chapters 6 and 7 ― Some Fundamental Concepts

 

a. Revisions to the Formal Structure

  There are two points worth noting about the revisions - in terms of formal structure - to Ch.6, “The Meaning of Income”, and Ch.7, “The Definitions of Quasi-Rent, Saving and Investment”.

  First, the two chapters are at the completion stage, not only in terms of contents but also at the level of style, as far as the text in TOC is concerned. Ch.6³⁹, the revised version of Ch.6, “The Definition of Income”, of the Pre-First Proof Typescript, is slightly revised yet further in Galley2 and Galley3, and Ch.7⁴⁰ is slightly revised in Galley2.

  Second, rewriting these chapters became Keynes’s main preoccupation in August. As a result they combined to become GT, Ch.6, “The Definition of Income, Saving and Investment”, with its “Appendix on User Cost”.

  Ch.6, consisting of five sections, was revised from Galley3 to the GT as follows:

  (i) part of Section I (JMK.14, pp. 401-402) becomes the corresponding passage (pp. 52-53) in GT, Ch.6, Section I, “Income”;

  (ii) part of Section II (JMK.14, pp. 401-402) becomes the corresponding passage (pp. 67-68) in GT, Appendix to Ch.6, Section I;

 (iii) Section III remains unchanged in terms of style, but is restructured to form GT, Appendix to Ch.6, Sections II, III and IV;

 (iv) Sections IV and V do not appear in GT. Section IV dealt with the calculation of income in extreme cases, such as that of “a product prepared long beforehand [which] necessarily yields up its fruits now and is incapable of being stored up for a later date” (JMK.14, p. 413), and “that part of the wastage of any piece of equipment which occurs by the mere passage of time and irrespective of whether it is used or not” (JMK.14, p. 414). Section V stressed the need to define income, saving and investment consistently.

  Ch.7, consisting of three sections is revised from Galley2 to GT as follows:

 (a) Section I, which deals with quasi-rent, is dropped in GT;

(b) some of the arguments in Sections II and III dealing with fundamental concepts in relation to long- and short-period expectation as well as the actual result and also in relation to user cost, correspond to GT, pp. 60-64, which are almost identical with GT, Ch.6, Section II, “Saving and Investment”;

 (c) GT, Ch.6, Section I, “Income” (pp. 54-60), in which user cost and supplementary cost are discussed, was largely rewritten at this time.

  With respect to the GT the above changes can be summarized as follows:

(i) Keynes wrote GT, Ch.6 taking up the contents of Sections II and III of Ch.7 of Galley2 and those of Sections I and II of Ch.6 of Galley3 and reworking them considerably;

 (ii) Keynes wrote GT, appendix to Ch.6, following the contents of Section III of Ch.6 of Galley3.

  b. Theoretical and Conceptual Revisions

  Ch.6 (Galley3) and Ch.7 (Galley2) contain the core discussion, in terms of TOC, of the definitions of fundamental concepts such as income, investment and saving. These chapters are closely related to GT, Ch.6, which contains the core of the argument concerning fundamental concepts.

 Let us see how Keynes changed the definitions of such fundamental concepts in order to arrive at the final form. This task can be opportunely addressed by comparing the Pre-First Proof Typescript with the manuscripts written before and after it, as well as comparing Galley1(I) with GT, Ch.6.

  (i) The Typescript and the Immediately Preceding and Successive Manuscripts

  The definitions of fundamental concepts adopted in the GT can be traced back to those in “The General Theory”. Let us look at how Keynes changed the definitions as he proceeded from “The General Theory”, through the Pre-First Proof Typescript, to Galley3.

  The most important characteristics these manuscripts have in common are:

 (i) income is defined as the realized value of, and effective demand as the expected value of the sale proceeds;

 (ii) income differs from effective demand, even if the difference between the realized value and the expected value of the sale proceeds is disregarded.

  “The General Theory” ─ We have already seen the formulations in Chapter 10, I.

 Income (Y) is defined as larger than effective demand (D) by the amount of windfall profit (F), while effective demand is defined as the sum total of the quasi-rent (Q. meaning normal profit) and the prime cost (E).

These formulations are peculiar to “The General Theory”; in particular, the definition of windfall profit (excess profit) makes no further appearance subsequently.

  The relation between investment I, saving S, and consumption C is also peculiar⁴¹ to “The General Theory”. Effective demand is composed of consumption and investment. Income is equal to consumption and saving. By using the definition of windfall profit we can obtain:

  　　　　　　　　　　　　F = S - I                     (6)

  As from “The Parameters of a Monetary Economy” Keynes stood by the notion of investment-saving equilibrium. Equation (6), however, appears as a consequence of his argument, though he does not state it explicitly in “The General Theory”.

Keynes stresses that investment and saving should be construed as “gross” concepts. Gross investment is defined as inclusive of new investment, replacements, and repairs, while gross saving is defined as inclusive of sinking funds.⁴²

  “The Summer Manuscript” — In Chapter 10, II, we have already seen the formulations (the notation follows “The General Theory”, except where indicated):

  The most significant differences between the Summer Manuscript and “The General Theory” in the definitions are that in the Summer Manuscript:

(i) windfall profit disappears;

(ii) user cost, U_s, is considered to be the difference between effective demand and income;

(iii) income equals the sum of consumption and investment.

 

Keynes defines the difference between effective demand (D) and the prime cost (E) as the return to the entrepreneurs, Q_s1. The income of the entrepreneurs Q_s2, defined as the difference between Q_s1 and U_s corresponds to quasi-rent in “The General Theory”.

  In the Summer Manuscript the fundamental concepts are defined in nearly the same way as in Galley1(I). In both cases Keynes treats those concepts that include user cost as “gross” concepts, and stresses that effective demand can be defined as a gross concept. It is hard to tell exactly how Keynes defines user cost. However, given the reference Keynes makes here to “the user cost of the initial stock of capital goods” (JMK.13, p. 472), and, moreover, given the fact that he explicitly adopts user cost in the definition of investment although it makes no appearance in “The General Theory”, we can safely say that this is a new concept.⁴³

  “The Pre-First Proof Typescript” — Keynes deals with the definitions of fundamental concepts in Ch.6, “The Definition of Income”. The title does not appear in the table of contents of “The General Theory”. This chapter corresponds to Ch.6, “The Meaning of Income”, in the TOCs from Galley1(I) to Galley3. That is, after some revision, this chapter becomes Ch.6 of Galley1(I)⁴⁴. Unfortunately the parts in the Pre-First Proof Typescript which correspond to Ch.7, “The Definitions of Quasi-Rent, Saving and Investment” of Galley1(I), in which the interrelation between the concepts concerned are discussed, are not extant. However, on the basis of material reproduced in JMK.14 (pp.398-418) we may express the interrelation as conceived in that Typescript, as follows⁴⁵:

　　　　　　　　　　　　　 Y   = A - U_p            (17)

　　　　　　　　　　　　　 U_p = S_p- E             (18)

　　　　　　　　　　　　　 Q_p1 = A - E               (19)

　　　　　　　　　　　　　 Q_p2 = Q_p1 - U_p           (20)

where A is gross sales proceeds, U_puser cost, S_pthe supply price, E the prime cost, Q_p1 quasi-rent, and Q_p2 net quasi-rent. Subscript p indicates the Pre-First Proof Typescript. (Note: In the Typescript the argument is not couched in symbols. For the sake of convenience we use them.)

  As in Galley1(I), we might assume that the firm is completely integrated. It should also be noted that “the cost spent on the maintenance and improvement of the initial capital equipment”, B, which is important in the Galley1(I) (see (β) below), is yet to appear.

  Since the definitions of fundamental concepts in the Summer Manuscript are for the most part closely carried over to Galley1(I), and since the Typescript was written in between, we can safely say that the definitions in the Typescript for the most part closely reflect the Summer Manuscript. (One exception is equation (18), which defines user cost. This makes no appearance in the Summer Manuscript.) In that case, equation (17) becomes the same as equation (7), provided the definition of user cost is the same in the Typescript and Galley1(I). Then, gross sales proceeds, A, becomes equal to effective demand, D, and the equivalence Q_p1= Q_s1is obtained from equations (19) and (10). Moreover, Q_p2 = Q_s2is obtained from equations (20) and (11).

  In the Typescript, the term “user cost” is defined as “the loss in the prospective value of a plant due to using it as compared with not using it”⁴⁶, so we can conclude that the definition of user cost is established in the Typescript. The supply price, S_p, is defined as “the lowest price which the owner of the equipment will accept for its output rather than lay it up”.⁴⁷ By transforming equation (18) into the following, we find that the supply price is, by definition, the sum total of the user cost and the prime cost:

  　　　　　　　　　　　 S_p=  U_p+ E                   (21)

  (ii)  Galley1(I) and GT

  For Keynes’s definitions of fundamental concepts we need to attend to how the concept of “user cost” is defined.

  In Ch.6, there is no difference in content between Galley1(I) and Galley3. In Ch.7, the same is true with respect to Galley1(I) and Galley2. We will examine Ch.6 of Galley3 and Ch.7 of Galley2 below. It should cause no confusion even if we term them collectively as Galley1(I).

  Let us begin with the differences in fundamental assumptions between Galley1(I) and GT:

  (i) in Galley1(I) firms are fully integrated, but not in GT⁴⁸;

(ii) in Galley1(I), but not in GT, Keynes uses “B” to denote the cost of the maintenance and improvement of the initial capital equipment. As we shall see, this is a vital point which determines the differences in the definitions of some fundamental concepts.

 With respect to (i), GT denotes a certain sum paid on purchasing finished output from other entrepreneurs by A₁. In Galley1(I), therefore, A₁= 0 (for the sake of comparison we will assume that A₁= 0 below).

  The notation in GT is as follows:

A   : the sale proceeds of finished output either to consumers or to other entrepreneurs. Assuming A₁= 0, A equals the value of consumption.

G   : the actual value of capital equipment at the end of the period. In Galley1(I) this is denoted by C.

G’  : the greatest value of capital equipment at the end of the period which would have been maintained had it not been used for production. In Galley1(I) this is denoted by C’.

 B’   : the cost which must be incurred to maintain the value of capital equipment at G’.

 

  User Cost — This is the opportunity cost of capital equipment which current production requires. We will denote the user cost in Galley1(I) by U₁ and that in GT with U₂. Thus:

  　　　　　　　　　　U₁ = (C’- B’) - (C - B)       (22)

  　　　　　　　　　　U₂ = (G’- B’) - (G - A₁)      (23)

where B denotes the cost of the maintenance and improvement of the initial capital equipment.

  With A₁= 0, equation (22) becomes:

  　　　　　　　　　　U_１ = (G’- B’) - (G - B)       (24)

  Equation (23) becomes:

  　  　　　　　　　　U₂ = (G’- B’) - G             (25)

  The difference lies in B. The expenditure on capital equipment installed in the current period accounts for most of B, so that G - B is the value of capital equipment which contributed to current production at the end of the period. We now know that U₁is the opportunity cost of the capital equipment which contributed to the current production. On the other hand, U₂is defined in such a way that the expenditure on capital equipment installed in the current period is deducted from it. Therefore, it is inappropriate for the definition of user cost. (The definition of user cost in Galley1(I) seems to be more appropriate than that in GT).

 From equations (24) and (25) we obtain:

  　　　　　　　　　　　　　U₂ = U₁ - B             　(26)

  If U₁ is a more appropriate conception of user cost than U₂, then Keynes makes an extra deduction of B from U₁.

  Income ― Income as conceived in Galley1(I), which is denoted by Y₁, is defined by:

  　　　　　　　　　　　　　Y₁ = A + B - U₁             (27)

  Income as conceived in GT is defined by equation (7). If we denote it with Y₂, then:

  　　　　　　　　　　　　　Y₂ = A - U₂                (28)

  By making use of equation (26), we obtain:

  　　　　　　　　　　　　Y₁ - Y₂ = B - U₁ + U₂ = 0

  Thus Y₁ equals Y₂.

  Consumption, Investment and Saving — Consumption is equal to A in the system with A₁ = 0. Saving is defined as the excess of income over consumption in both the integrated and non-integrated cases. The definitions of consumption and income are the same in both cases, so that the definition of saving is also the same.

  In the definition of investment, however, there is some difference between the two. Let us denote the conception of investment in Galley1(I) I with I₁, and that in GT with I₂. Then we have:

  　　　　　　　　　　　　I₁ = Y - A + U₁ 　　　        (29)

　　　　　　　　　　　　　I₂ = Y - A      　　　        (30)

  From these we obtain:

  　　　　　　　　　　　　I₁ = I₂ + U₁                  (31)

  Thus I₁is larger than I₂by U₁. By making use of equation (27), equation (29) becomes:

  　　　　　　　　　　　　I₁ = B                        (32)

  That is, the cost of maintenance and improvement of the initial capital equipment equals investment Galley1(I). Keynes refers to the difference between I₁ and U₁ as “net investment”. Let us denote this with I_1n．Then:

  　　　　　　　　　　　　　I_1n= I₁ - U₁               (33)

  From equations (24), (32) and (33) we obtain:

  　　　  　　　　　　　I_1n= G - (G’-  B’)           (34)

  This is the definition of investment in GT (see GT, p. 55). On the one hand, in Galley1(I) “gross” (“net”) concepts are defined as inclusive (exclusive) of user cost, U₁, while on the other hand, in GT, “gross” (“net”) concepts are defined as inclusive (exclusive) of the supplementary cost, V (which is defined as the “depreciation of the equipment which is involuntary but not unexpected” (GT, p. 56)). Thus net investment, I_1n, in Galley1(I) corresponds to gross investment in GT, while net investment in GT can be expressed as I_1n - V.

  The Factors of Production — In Galley1(I) the prime cost, which we denote with E₁, is composed of the amount spent on finished goods (the main constituent of which is labour-cost⁴⁹), and B (the main constituent of which is the labor-cost required for production of investment goods within firms).⁵⁰Thus the prime cost equals the amount of money which the fully integrated firm pays for both the investment goods which are produced and retained within the firm and the finished output. It does not contain U₁ and equals the factor cost, F, of GT:

  　　　　　　　　　　　　　　　E₁ = F                  (35)

  In GT, prime cost, which we will denote with E₂, is defined as the sum of the factor cost and the user cost⁵¹:

                 

  　　　　　　　　　　　　　　E₂ = F + U₂               (36)

  The profit of entrepreneurs, as understood in Galley1(I), which we will denote as P₁, equals the income of entrepreneurs as understood in GT, which we will denote as P₂. This can be shown as follows. P₁and P₂ are respectively defined by:

  　　　　　　　　　　　P₁ = A + B - U₁ - E₁            (37)

　　　　　　　　　　　　P₂ = A - E₂                  (38)

  From these we obtain:

  　　　　　　P₁ - P₂ = B - U₁ - E₁ + E₂　　            (39)

  If we make use of the equation B - U₁= - U₂ (derived from equation (26)), as well as equations (35) and (36), then equation (39) gives us:

  　　　　　　P₁ - P₂= - U₂ - F +  (F + U₂) = 0        (40)

  The concept of “quasi-rent” in Galley1(I) is dropped in GT. In Galley1(I) Keynes distinguishes three kinds of time elements in variables: the actual value, short-period expectation and long-period expectation. He uses (’) to indicate the short-period expectation, (’’) the long-period expectation.

 In the case of quasi-rent, its actual value is called “profit”, while its long-period expectation is termed “prospective yields”. The term “quasi-rent” is retained for its short-period expectation, and is formulated as:

  　　　　　　　　　　　　Q = P’+ U₁’                (41)

where Q denotes “quasi-rent”.

  Effective Demand — The definition of “effective demand” in GT differs from that in Galley1(I), though the definition of “income” is the same. In Galley1(I) effective demand includes user cost, U₁, but in GT it does not include user cost, U₂. If we denote effective demand in Galley1(I) with D₁and that in GT with D₂, then we have:

  　　　　　　　　　　　　D₁ = Y’+ U₁’               (42)

　　　　　　　　　　　　　D₂ = Y’                    (43)

where Y denotes income. (’) indicates short-period expectation.

  In Galley1(I) Keynes explains the concept of effective demand as follows:

... in contradistinction to income, effective demand is reckoned gross of user cost, so that D = Y’+ U’. It is essential to reckon effective demand gross, since it is the gross value of output which absorbs spending power (JMK.14, p. 422).

  In GT effective demand is defined as the “aggregate income which the entrepreneurs expect to receive, inclusive of the incomes which they will hand on to the other factors of production” (GT, p. 55).

  From equations (42) and (43) we obtain:

  　　　　　　　　　　　　D₁ = D₂ + U₁’              (44)

  In Galley1(I) Keynes argues that effective demand is important because it contains user cost, and distinguishes the concepts inclusive of user cost (such as quasi-rent and gross investment) from those exclusive of it (such as income, profit and saving). In GT he defines effective demand, investment, income, profit and saving as exclusive of user cost, and does not use quasi-rent. This suggests that the role of user cost recedes somewhat in GT.

  B. Chapters 8 and 9

  Ch.8, “The Meaning of Saving”, of Galley1(I) corresponds to GT, Ch.7, “The Meaning of Saving and Investment, Further Considered”. Ch.9, “The Meaning of Investment”, of Galley1(I) corresponds to GT, Ch.8, “The Propensity to Consume: I. The Objective Factors”. Overall, there is less change in the proofing here than in the case of Chs.6 and 7.

 a. Chapter 8

 This chapter is extant in Galley1(I) form and in Galley2 form. Each version consists of three sections. Section II of Galley1(I) version, which criticizes Hayek’s theory of forced saving, derives directly from Section VI of Ch.8, “Investment and Saving”, of the Summer Manuscript. In Galley2 Keynes adds to this only a supplementary explanation to the effect that net investment necessarily equals saving, and that the theory of forced saving is an inappropriate application of Bentham’s theory to the state of underemployment. In Galley2 Keynes rewrites his account of how a change in the quantity of money brings about a change in saving through a change in distribution⁵², but the content of the theory is unaltered.

  In terms of formal arrangement, the transformation from Ch.8 of Galley2 to GT, Chapter 7, which has five sections, is considerable. In GT Keynes adds Section I (which states that the difference in terminology lies in the difference in the definitions of investment and income) and Section II (in which he defines investment, and criticizes Hawtrey’s definition of investment as exclusive of liquid capital, as well as the Austrian School’s idea of capital formation and capital consumption).

  GT, Ch.7, III of Chapter 7 corresponds to parts of Section I of Ch.8 of the Second Galley⁵³. There is no difference in content between the two. GT, Ch.7, IV is virtually the same as Section II of Galley2. On the other hand, GT, Ch.7, V was compiled out of several parts of Ch.8 of Galley2 (JMK.14, pp. 428-429, pp. 432-433 and 434-436), plus some new passages (GT, pp. 82-83) which discuss the relation between the granting of bank credit and the theory of investment-saving equilibrium.

  b. Chapter 9

 In Ch.9, “The Meaning of Investment”, Keynes argues that “financial provision”, by functioning as saving, decreases net investment and causes stagnation. This argument is already complete in both contents and even form in Section IV of Ch.8, “Investment and Saving”, of “The General Theory”.

  Ch.9 survives in Galley1(I) and Galley2. The only difference lies in the point that in Galley2 Keynes adds Kuznets’ data of gross capital formation in the U.S.A. This is an addition to discussion of Clark’s study in the U.K. in Galley1(I). Ch.9 of Galley2 is incorporated into GT, Ch.8, IV.

  2. The Introductory Chapters

  The three chapters of Book I, “Introduction”, are: Ch.1, “The General Theory”, Ch.2, “The Postulates of the Classical Economics”, and Ch.3, “The Principle of Effective Demand”. (They are reproduced in JMK.14, pp. 351-352, 352-369, and 359-379 respectively.) Ch.1 is almost identical to GT, Ch.1.

  A.  Chapter 2

  Ch.2 exists in the galleys from Galley1(I) to Galley3. Apart from a few slight changes of expression, there is no difference between them. In the Great Revision, moreover, there is no change in substance, although there are some stylistic changes.

  GT, Ch.2 has seven sections. In Sections I and II, Keynes adds “a decrease in the marginal disutility of labour” to the list of the means of increasing employment available to classical economics (GT, p. 7). Apart from this, we see some minor revisions of style and wording.

 In Section III Keynes states that the struggle over money-wages does not determine the level of real wages. The section is the same in content as the corresponding part (JMK.14, pp. 363-365) of Galley1(I), albeit with some stylistic changes.

Section IV, which deals with involuntary unemployment, is the same in content as the corresponding parts (JMK.14, pp. 366-369) of Galley1(I) although, again, there are some stylistic changes. The only real difference is that in Galley1(I) Keynes discusses involuntary unemployment from the point of view of the supply side of labour only, while in GT he also discusses it from the point of view of the demand side for labour. The argument in Section V of GT, which discusses the implications of accepting the first postulate and rejecting the second, was formerly included in Section IV of Galley1(I).

 The argument in Section VI, in which Keynes states that Say’s Law underlies the entire classical theory, formerly “appeared in an abbreviated form” (JMK.14, p. 368) as Section I of Chapter 3 Galley1(I). In GT Keynes adds a quotation from Mill to illustrate the classical economists’ belief in Say’s Law.

Section VII refers to three assumptions, namely:

  (a) the real wage equals the marginal disutility of the existing employment;

 (b) there exists no involuntary unemployment; and

 (c) Say’s Law, on which the classical theory depends, was newly written for GT. It is absent from Galley1(I).

  B.  Chapter 3 ― Employment Function

  The galleys from Galley1(I) to Galley3 for Chapter 3 are extant, and share an important passage (JMK.14, pp. 370-371), which can be formulated as follows (this formulation is the same as that in the second of his 1934 Michaelmas lectures):

 

  　　　　　　　　　　　　D   = f (N)           (45)

　　　　　　　            D’ = F (N)            (46)

　　　　　　　　　　　　　D   = D’            (47)

where D denotes effective demand, f (・) the state of effective demand, D’ the supply price, and F (・) the employment function.

  The level of employment is determined by these equations. This formulation is basically the same as in the GT, except for the terminology. In the GT equation (45) is called the “aggregate demand function”, equation (46) the “aggregate supply function”, D the “aggregate demand price”, D’ the “aggregate supply price”, and the value of D at the level of employment determined by equation (47) “effective demand”.

  Let us compare this formulation with the formulations in “The General Theory”, the Summer Manuscript, and the Typescript. As we have seen, the employment function in the three manuscripts was used not only as a supply concept but also as an equilibrium concept. This duality is absent from Ch.3 (JMK.14, pp. 369-378) of the galleys from Galley1(I) up to and including Galley3, in which the function D = f(N) is treated as representing the demand side, and the function of D’ = F(N) as representing the supply side. However, in the GT the duality reappears, and characterizes its theoretical structure.

  In the galleys from Galley1(I) to Galley3, Keynes argues that income as a realized value differs from effective demand as an expected value by the amount of user cost. As we saw above, effective demand is vital in determining the level of employment because it includes user cost. Moreover, user cost is important for the definitions of concepts such as investment, saving and profit. In equations (45) to (47), D and D’ include user cost.

  When we say that equations (45) to (47) are the formulation used in GT it is with the proviso that in GT the definitions of effective demand, investment, income, profit and saving have been changed in such a way that user cost is not included. In GT Keynes explains the reason for this change as follows: “since user cost is obviously dependent both on the degree of integration of industry and on the extent to which entrepreneurs buy from one another, there can be no definition of the aggregate sums paid by purchasers, inclusive of user cost, which is independent of these factors” (GT, p. 24, fn.2).

XI. The 1935 Michaelmas Lectures

  After “The Great Revision” how did Keynes proceed to work on producing the General Theory? Did he make no further changes, or did he, rather, make certain substantial changes? We must now address these questions. The lecture notes taken by Lorie Tarshis in the Michaelmas Term of 1935 (14 October - 2 December) are the only material for this.⁵⁴

  The lectures were not delivered exactly in accordance with the final text of the General Theory, which indicates that Keynes rewrote the galleys during and even after the lectures.

  In the Michaelmas lectures of 1935 the theory of employment is formulated in terms of the aggregate supply and the aggregate demand functions (The time span here is confined to the short period in which capital equipment and the technology of production are given).

  　　　　　　　　　　　　　　　Z =Ψ(N)       (1)

　　　　　　　　　　　　　　　　D = f(N)       (2)

  　　　　　　　　　　　   　　Ψ(N) = f(N)     (3)

  Equation (1) is the aggregate supply function. This relates the volume of employment to the sale proceeds, the expectations of which induce entrepreneurs to employ the corresponding volume of employment (Z is the cost of production of the volume of output of N men).

 Equation (2) is the aggregate demand function. This relates the aggregate demand entrepreneurs expect to encounter for their output to the number of men they employ.

 The volume of employment is determined at the intersection between the two functions.

The aggregate demand, D, is composed of the demand for consumption, D₁, and that for investment, D₂. When employment increases, both aggregate real income and aggregate consumption increase, but the latter does not increase as greatly as the former. This is expressed by the function D_１ = X(N). Demand for investment is expressed by the function I = D₂ = F(N). It follows that Ψ(N) - X(N) = I, so that N depends on Ψ, X and D₂.

  The theory of investment here has two characteristics:

(1) The discussion of the marginal efficiency of capital here is not so close to the treatment in the General Theory as was the discussion of it in the lectures of 1934.

(2) With regard to the theory of liquidity preference, in the sixth lecture (18 November) the precautionary motive is dependent on the rate of interest, while in the seventh (25 November) it is made to depend on income.

  Besides these, the following points also deserve mention:

(1) The objective factors make their first appearance so far as the lectures are concerned. However, the list here differs somewhat from that in the General Theory. The salient differences are that in the General Theory changes in the wage-unit are added and changes in the rate of interest are replaced by changes in the rate of time-discounting.

(2) The qualified items which are listed in the calculation of the multiplier are not always the same as those in the General Theory.

(3) The discussion of “the relation between a change in the money wage and effective demand” differs from that in GT’s Chapter 19 in terms of the order and number of items listed.

(4) As the means of curing unemployment in the case where the two classical postulates hold good, “improvement in organization” is added, though “improvement in foresight” is not still mentioned.

(5) The definitions of various concepts, including user cost, attain the final forms found in the General Theory.

(6) Keynes invokes a number of problems for the Quantity Theory of Money which remain insoluble even if many conditions necessary to make the theory hold good are added. The problems mentioned are virtually the same as those discussed in the General Theory.

In his letter to Macmillan (9 January 1936) Keynes writes: “I now have the exact size of the book for the leaflet, namely, xii plus 403”.⁵⁵

After 19 January or thereabouts, the General Theory was out of his hands. It was published on 4 February.

   Two tables are given here. One is Table 12-2 which shows how each chapter of the General Theory was developed. The other is Talbe 12-3 from which we can get the whole view of Keynes’s Michaelmas lectures in 1932-35.

XII. Conclusion

In this paper we set ourselves two main objectives: (i) to show how Keynes carried out the proofing process, and (ii) to separate out its main features.

Concerning (i) the following points emerge from our analysis:

  (1) Galley1(I) represents the most considerable revision work carried out on the topics covered in the TOC. Galley2 and Galley3 represent stylistic revisions of Galley1(I).

  (2) Galley1(I) is composed of Chapters 1-19.⁵⁶ The chapters except for Chs. 4, 5, 12 and 13 were completed in Galley1(I) both in contents and at the stylistic level, as far as the TOC is concerned.

(3) The largest change after Galley1(III) occurred in “The Great Revision”. The definitions of some fundamental concepts changed due to both the change in the definition of “user cost” and a change in its treatment.

(4) In the Michaelmas lectures (18 November) the precautionary motive is dependent on the rate of interest.

In the case of (ii) our main concern was: What kind of significance do changes or struggles detected in the latter half stage hold for our understanding of Keynes’s theory? 

Here there are two major changes to point out, one concerning the “employment function”, the other having to do with fundamental concepts.

(1) Employment function

In “The General Theory”, the Summer Manuscript and the Pre-first Proof Typescript, the employment function was used as both a supply concept and an equilibrium one. This duality disappears in Galley1(I) up to and including Galley3. However, in the GT it reappears, and overshadows its theoretical structure.

(2) Some Fundamental Concepts

We can summarize the relation between the definitions of fundamental concepts in Galley1(I) and in the GT as follows:

 (i) The difference in effective demand, investment and prime cost in definition depends on whether they include user cost (Galley1(I)) or not (the GT);

(ii) the definitions of income, profit and saving are the same;

(iii) the equation U₂ = U₁ - B is vital to the relation.

 

1) Cf. JMK.14, p.351. As precursors of Chapter 5, in fact, there survive three versions written a little before the Typescript.

  2) In Lord Keynes’s Letters to Daniel Macmillan, British Library.

  3) The original is Q (O). Cf. JMK.14, p.387.

4) JMK.13, pp. 525-526.

5) JMK.13, pp. 496-506.

6) JMK.13, pp. 484-485.

7) Robertson did not receive the chapter corresponding to GT, Ch.10, “The Marginal Propensity to Consume and the Multiplier”. The correspondence on the galleys continued until March 1935. Robertson (3 February 1935) remarked “I’ve found it extremely hard to see the wood for the trees”, and (10 February) wrote that “a large part of your theoretical structure is … mumbo-jumbo!” The only chapters to that Robertson agreed were Chs.14 and 17, for Robertson regarded the liquidity preference theory as an alternative version to the loanable fund doctrine. See Moggridge (1992, p. 567).

  8) See JMK.14, pp. 446-447.

  9) See JMK.14, pp. 446-447.

  10) See GT, p.90.

  11) See JMK.14, pp. 448-449 and GT, pp. 93-94.

 12) On Ch.19 we have comments by Robertson and Hawtrey (JMK.13, 508-511, 574-576, respectively).

  13) JMK.13, p. 525.

  14) JMK.13, pp. 496-506.

 15) JMK.13, p. 634.

  16) The discussion between Keynes and Harrod about the galley continued from July to October 1935 (JMK.13, pp. 527-565). The serious issue was over the classical interest theory. Keynes deemed the classical theory (the loanable fund theory)  incoherent, taking the rate of interest to be determined by the equilibrium of investment and saving, given income. Instead he insists upon the liquidity preference theory. Harrod recognized some value in the classical theory. He agreed completely with the constructive part of Keynes’s theory, but opposed his criticism of the classical theory (Harrod held his stance thereafter, as is to be seen in Harrod (1969, pp. 173-174)). From Keynes’s point of view, Harrod still remained partly in the world of classical economics. See especially JMK. 13, pp. 530-552. For the relationship between Harrod and Keynes, see also Kregel’s paper in Harcourt ed. (1985). Blaug (1985, p. 637) questions Keynes’s treatment of the classical theory where he refers only to Marshall-Pigou’s theory, which deals solely with the so-called “direct mechanism”.

  Milgate (Eatwell and Milgate eds., 1983, Chapter 5) maintains that “In adopting Harrod’s reconciliation Keynes sacrificed his [critical] argument [developed in Chapter 15 of Galley1(I)] on the altar of the immediate success of the [constructive] theory. This has had the unfortunate consequence …” (p. 89).

  17) Pigou (1941, Ch.7) criticizes Keynes’s critique of Marshall’s interest theory, arguing that Keynes fails to recognize that Marshall advances a long-term theory in which the level of employment is given.

  18) JMK.14, pp.479-487. 

19) Cf. JMK.14, pp. 482-484.

  20) Cf. GT, pp. 189-190.

21) JMK.13, p. 525.

  22) This finds confirmation in the fact that the formulation of the employment function in both Ch.21 of Galley1(II) and Ch.20 of “The General Theory” is one and the same (In fact, D_was deflated by the wage unit is used).

  23) Here we assume that in The Great Revision Keynes came to adopt the same functions as in GT. This can be confirmed by the fact that Keynes used “the aggregate supply function” and “the aggregate demand function” in the second lecture for the 1935 Michaelmas term. Patinkin (1976, Note 14 to Chapter 8) erroneously states that the aggregate “supply function” is found only in GT.

  24) See JMK.13, pp. 309-326.

  25) See JMK.13, p. 525. Pigou (1933) thinks that a cut in money wages contributes to increasing the level of employment. Pigou (1941), who on the whole accepts the system of the General Theory, stresses two conditions for the classical view: (i) money wages must be flexible; and (ii) a cut in money wages must contribute to increasing the level of employment (see pp. 91-92). For studies which deal with Keynesian theories on the presupposition that money wages are inflexible, see Iwai (1981, pp.128-129) and Yoshikawa (1984, pp. 87-88).

  26) See JMK.14, p. 504.

27) In Lord Keynes’s Letters to Daniel Macmillan, British Library.

28) Chs. 26, 27, and 28 will correspond respectively to Ch.25, “Notes on Mercantilism, the Balance of Trade and Foreign Investment”, Ch.27, “Notes on the History of Similar Ideas”, and Ch.26 (the same title) in the table of contents of “The General Theory”.

29) Clarke (1998, pp. 122-124) mentions Keynes’s inclusion of Hobson’s theory in GT.

30) This letter, together with some other letters by Keynes to which we refer a little later, shows that Keynes was making his last revision.

31) JMK.13, p. 653.

32) JMK.13, p. 542.

33) JMK.13, pp.406-407.

34) JMK.13, p. 407.

  35) JMK. 29, p. 48.

  36) JMK.13, p. 653

37) JMK.13, pp. 650-651.

  38) JMK. 13, pp. 576-577.

  39) JMK.14, pp. 398-418.

  40) JMK.14, pp. 418-425.

  41) Cf. JMK.13, p. 442 and 436.

  42) Cf. JMK.13, p. 435.

  43) A possible origin is to be seen in the remarks in JMK.13, p. 431, (iii).

  44) See JMK. 14, pp. 398-418.

  45) Based on the remarks in JMK.14, p. 400 (fn.2) and 412 (fn.2).

  46) Cf. JMK.14, p. 400 (fn.2).

  47) Cf. JMK.14, p. 400 (fn.2).

48) Cf. GT, p. 55.

  49) Because we assume a fully integrated firm.

  50) Cf. JMK.14, p. 404.

  51) Cf. GT, p. 53.

  52) See JMK.14, p. 430.

  53) JMK.14, pp. 425-427.

  54) For a chronological analysis of the 1935 Michaelmas lectures, see Hirai(2003, pp.537-549).

55) Contained in Lord Keynes’s Letters to Daniel Macmillan.

  56) Robertson’s letter to Keynes (3 February 1935) and Keynes’s response (JMK.13, pp. 496-520) are useful for an understanding of Galley1(I), in which the principle of effective demand and the liquidity preference theory are debated. Robertson’s  criticism of the principle of effective demand (and the multiplier theory) can be seen in Robertson (1940, Chapter IX), his criticism of the liquidity preference theory in Robertson (1940, Chapter I).

 Also see a controversy between Harrod and Robertson. Roberston remarked in his letter to Harrod (27 September 1934) that “if your line of reasoning is right, it makes nonsense of everything which I have been trying to say for the last eight years”. Harrod answered (3 October 1935) that “My only ray of sunshine is Maynard’s book. … I agree with him (as against you) that his book …is pathbreaking”. See Young (1989, pp. 75-82).

  Keynes’s discussion with Hawtrey is noteworthy as well. The sources before the GT are contained in JMK.13 (pp. 567-633) and those after it in JMK.14 (pp. 2-55). The most important document is Hawtrey’s comment to Keynes (JMK.13, pp. 567-576). In his letter to Hawtrey of 4 September (JMK.13, pp. 576-577), Keynes states that he is revising the galley (reference is to the Great Revision), taking Hawtrey’s comment into consideration. From examination of the Variorum we can confirm that Keynes at this time revised as follows: (i) the quasi-rent was deleted (Ch.7 of TOC is the main place in which Keynes makes revision); (ii) the concept of the marginal efficiency of capital was applied to working capital. However, the debate between the two remained fierce after the publication of the GT. See Keynes’s letter to Hawtrey (24 March 1936. JMK.14, pp.14-18).

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* Faculty of Economics, Sophia University, Tokyo. E-mail: hirai-t@sophia.ac.jp This paper originates in Hirai (1997-1999, Chs.13 and 14). The earlier version was read at the International Conference on the Cambridge School, Hitotsubashi Univ., 20-23 March 2006. I am grateful for invaluable comments, among others, by Profs. Maria Cristina Marcuzzo (Univ. of Rome <La Sapienza>), Roger Backhouse (Univ. of Birmingham), Mauro Boianovsky (Univ. of Brasilia), and Dr Eleonora Sanfilippo (Univ. of Rome <La Sapienza>).