Introduction – Money, Investment and Consumption

For experience seems to show that people are divided between the old ones whom nothing will shift and are merely annoyed [sic., amazed, (sent letter of August 30, 1936, CW, XIV, p. 85)] by my attempts to underline the points of transition so vital in my own progress, and the young ones who have not been properly brought up and believe nothing in particular. … I have no companions, it seems, in my own generation, either of my earliest teachers or of earliest pupils … (Keynes to Harrod, draft letter of August 27, 1936, cited by Clarke 1988, p. 259)

Judging by any standard in economics, John Maynard Keynes was truly an exceptional, innovative scholar, who made a significant contribution to economics. His was a contribution not in the ordinary sense of adding a little here or transforming things a little there within the established corpus, contributions which luckily will be simply a footnote in the annals of knowledge. It was rather a contribution like those of Adam Smith, Ricardo, and Marx, which have in essence shaken the corpus, a contribution that will last. Whatever the merits of Keynes’s work, it transformed thinking in economics. Throughout his career as an economist, Keynes was above the crowd in his abilities to theorise, to shape the intellectual agenda, and even more astonishing, to be able to participate in a unique way in government decision-making in public affairs. One could reiterate that to be a good economist, one must be a good philosopher, historian, mathematician … Keynes had all the attributes of the ideal economist.

In fact Keynes managed to contribute in multiple fields and to attract attention from beyond the economics profession. By the very harsh critics, who did not like or agree with his ideas, he was depicted as a charlatan, but of course over the years he has also had many promoters. The literature on Keynes is enormous. There are biographies, e.g., those of Roy Harrod, Robert Skidelsky, Don Moggridge and Gilles Dostaler, among others, which give accounts of a fascinating man. Numerous books and articles by economic historians, e.g., Sue Howson, Roger Middleton, and Peter Clarke, reveal the importance of Keynes’s involvement in public affairs and his participation in the shaping of public policy, whether British or international. Rod O’Donnell, Terrence Hutchinson, Anna Carabelli, and Brad Bateman have brought to light influences that drove Keynes’s philosophical thinking.

It is on Keynes’s economic theory that this book is focused, and specifically as it was developed in the A Treatise on Money and The General Theory. Although other aspects of his works are admittedly integral to the man’s thinking, it is not the intention here to study all facets of Keynes’s various contributions. Nonetheless, as background for the present study, the variety of works on Keynes, too numerous to mention, are extremely important to understanding the development of Keynes’s theory. Such works are a sine qua non to putting Keynes’s technical theoretical treatment of economics into perspective. For this reason, the authors just named and many more are to be found in the final select bibliography.

By and large, while the biographers, economic historians, and historians of philosophy have done their job in analysing Keynes within their own areas of interest, economists and particularly historians of thought, save for a few exceptions, have failed miserably in assessing Keynes’s complete theory. Despite the enormous literature and the institutionalization of Keynes, his generalised General Theory has yet to see the light. The so-called Keynesian Revolution was more a controversy over bits and pieces of Keynes’s ideas than a product of their comprehensive whole. Keynes’s work was recognized from the beginning as expressing an unusually challenging terminology and a new methodological approach, which in themselves posed enormous difficulty in comprehension. Not knowing how to evaluate Keynes’s distinctiveness, the first reactions of the orthodoxy were to attempt to figure out his fit within the mould 1.

By readjusting his terminology, twisting his premises back to the ordinary understanding, and trivializing the novelty of his theory, very early on Keynes was made Keynesian. The outcome was established by consensus, and Keynes’s desired revolution was stifled. In a publication by an outstanding Keynes’s scholar, timed coincidentally quite closely with this book, Luigi Pasinetti has touched on a similar observation: “The great majority of those theories that we now call ‘Keynesian’ have in fact little to do with the theoretical ‘revolution’ that Keynes had in mind in the 1930s” (2007, p. xiv). In looking back, the failure to recognize Keynes’s theoretical contributions on their merits stemmed first from the harsh criticism of the antagonistic reviewers, and second from the protagonists who were so defensive that they made matters worse. What started as personal attacks by Hayek and Robertson on Keynes’s scholarship gave any subsequent commentator an almost obligatory caricature of his attributes and then the “license” to remedy the perceived deficiencies….

The exercise of assessing the merits of Keynes’s own work – from his own text and on its own terms — has evaporated. While the target discussion of this book is narrowed down especially to Hayek and Hicks, a general point is worth stating: the first generation of economists, whether critics or proponents, did not do enough for the next to help steer the discipline into the intricacy of Keynes’s theory. It is simply incredible that the persona of Keynes in economics as a whole is exemplified by the myth that Keynes was confused, sloppy, wrote badly, etc. Since it has become such a part of common parlance, the tacit conclusion is that any good understanding of Keynes must come from second-hand interpretation, such as Hicks’s very powerful IS-LM. The literature on Keynes continues thus to perpetuate a consensus contaminated with a warped perception of Keynes’s theory.

The purpose of this book is to return to the initial controversies that led to the misconceptions about Keynes’s theory, in short, to address the myth. It will be shown that Keynes had a command of the language unsurpassed by his critics and commentators. He read carefully among the Mercantilists, the Classics and the neoClassics. Despite the colossal amount of work and the multitude of duties he imposed on himself, Keynes was lucid, coherent, and almost obsessive about defining and clarifying terms and concepts in his written work, particularly as concerned the core of his theory, developed in the Treatise, the various drafts of The General Theory, and in The General Theory itself. It will be shown that Keynes developed a coherent and complete theory, which ran from the Treatise through The General Theory. It is asserted even further that Keynes’s theory is applicable not only to the situation of the slump but capable of explaining any phase of the trade cycle.

Keynes made two major breakthroughs in economics: one in the theory of value, the other in monetary theory. Along with the myth that commentators and critics developed about Keynes’s semantics, there was also their wondering where his theory fit within the moulds of economics. His theory of value did not depend on labour as did the Classics’s nor on utility as does neoClassical theory. It had to be recognized that his concept of value is a hybrid, based on average cost and market fluctuations embedded in the discrepancies between savings and investment, and that his price-level is an index embodying both a monetary component, usually associated with income, and a component related to liquidity shifts. It is with this price-level index that Keynes showed the way out of the Quantity Theory of Money.

Keynes’s commentators and critics were set to wondering what the source of Keynes’s inspiration had been. Misunderstanding the thrust of Keynes’s own references, Hayek and Hicks both forced Wicksell upon him as his prime source. In the eyes then of others as well (e.g., Klein, Patinkin, and Leijonhufvud), Wicksell became the “official” inspiring author for Keynes. It will be shown in this book that there is very little evidence that this is the case and that in fact the results of the theories of Wicksell and Keynes are actually quite opposing. While for Wicksell, the ultimate goal of his theoretical endeavour was to show that price stability is required for containing income inequality, for Keynes, price changes, through the various inflationary and deflationary pressures, are necessary for sustaining employment and redistributing income.

1 In The Keynesian Revolution (1966), Klein, on the opening page, asserts boldly “Keynes was always a classical economist.”