The great discontinuity in Keynes’s economic thought

This is an extract from a note I have written to an economist in the United States whose work I have only just come upon. I am beginning to become aware of the various attempts by a number of economic schools to abandon modern neo-classical theory which, in my view anyway, mostly means trying to rediscover what the classical economists already knew. Perhaps there is more to it but so far I cannot see what. The interest in this letter, however, is in the nature of the Keynesian Revolution. I have no in-depth knowledge of Keynes’s Treatise on Money although am reasonably familiar with it. But it was published in 1930 while my interest begins in 1932 with Keynes’s discovery of demand deficiency as the explanation of recession and involuntary unemployment.

The paper I am commenting on treats Keynes’s ideas as if there had not been the great disruption at the end of 1932 when Keynes came upon Malthus’s 1820 letters to Ricardo. It was these that instantly converted him into a Keynesian theorist which he had not previously been, even though he had always sought to increase public spending to reduce unemployment during recessions. That virtually all of his contemporaries understood how thin Keynes’s arguments are is now just of historical interest and of interest to hardly anyone at all. Only by going back to those moments of transition, and by understanding what economic theory was like before 1936, is there any hope for again turning economic theory into something useful for analysing economic events. This then is what I wrote:

I would have written back straight away but Tuesdays is my heavy duty teaching day and I also didn’t want to clutter your inbox until I had read your brilliant article on Keynes. You cannot imagine how similarly we see the world and what a treat it is for me to read something like what you wrote. I will, of course, include this paper in my Anti-Keynesian Reader, but I must also beg your indulgence if I explain to you the 1932-1933 shift in Keynes’s thinking which is my speciality. I have also ordered your macroeconomics text which I am looking forward to since it came after your paper and must therefore incorporate the same ideas.

You have also made me even more aware than I was before that I have not been keeping up with the literature as well as I should. I found the scholarship of your article exhilarating and finished it at one go. I just sat down and read it and was only sorry that after thirty pages it turned out to be so short. My own excuse for not being aware of the most recent literature is that I spent the years from 1980-2004 as the Economist for the Australian Chamber of Commerce and Industry. I therefore think that my economic interests were driven by an eclectic interest in arguments that could be used to explain economic issues from the perspective on an entrepreneur. It is why the classical economists so appealed to me since that was their aim. From the marginal revolution on, I find almost nothing of much value in framing issues, specially since post the marginal revolution economics went micro and into equilibrium analysis, both of which are utterly contrary to what I could see right before my eyes being the need to make sense of an economy in which every business decision is fraught with the uncertainty of spending tonnes of money before the outcome of each of those decisions could be known. And while I may have been feeding on the classics, nothing I ever wrote looked archaic to those to whom our submissions went. Classical economics makes perfect sense and is much more logical and insightful than the kinds of economic theory we find today.

But what started me on the trajectory I travelled was a minor issue in the National Wage Case of 1980. I was brought on to write the economic submission to our industrial relations court on behalf of employers. It was explained to me that every argument in a court of law must be controverted so I had to go through the union submission, identify each argument they had made and then explain why it was wrong. Believe me, this was the easiest task I have ever been given, but one of them was easiest of all. This was the argument that wages had to be raised as a means to stimulate demand. So I just pointed out that you could not stimulate an economy by making employers pay an extra $100 a week so that employees could then spend that extra $100 in their shops. And then, in 1982, I was reading John Stuart Mill’s Principles, for no other reason than because I was interested in what he might have to say, and came across his Four Propositions on Capital which literally, on the spot, ended my days as a Keynesian. (And now, 32 years later, I am about to finally have an article published on these four propositions.) From there, I continued reading more of Mill and found a passage in which he pointed out how ridiculous it was that people thought an economy could be driven forward by demand. And the example he gave of how ridiculous this argument is was of someone who might steal from the till of the business they are working in, go out the back door and come back in the front and spend the money, and that the more this was done, the faster the business would grow. This was so exactly my own argument that it completely dumbfounded me. And yet, it was probably not until another couple of years later that I worked out that the notions that Mill was discussing are the actual meaning of “Say’s Law”. It has been coming to terms with Say’s Law and what it meant and all of its implications that has been the pole star for all of my economic writing ever since. And so, my Free Market Economics, which is me trying to do in my own fashion right now what Mill had done in 1848.

I have tried to explain over and again that Say’s Law is the Rosetta Stone for understanding The General Theory, and is also the foundational principle for understanding how an economy works. For the second, you can read my text when it gets to you. But the first is what you have written your article about which has been in so many ways a revelation to me. My speciality is the Keynesian Revolution and know less than perhaps I ought to about The Treatise and Keynes’s original monetary theories. You have perfectly situated Keynes’s arguments for me and his original conception which fits into everything I already know and understand. It is a tour de force, and I have tried to read everything I can on the critics of Keynes. But this is what I can add to what you have written. I have, of course, published things on this but to say that it has been ignored is something of an understatement. It so badly fits the narrative others wish to promote, and truly undermines Keynes as an original thinker and an honest purveyor of ideas, that it just cannot be allowed into the canon. Perhaps, however, you will see my point.

Keynes was doing exactly what you write all the way up to the end of 1932. He was going to write a book about the Monetary Theory of Production, almost certainly along the lines you set out. Unfortunately, it was just then that he came across Malthus’s long-lost letters to Ricardo which had just been discovered by his best friend, Piero Sraffa. In updating his “Essay on Malthus” for inclusion in his Essays in Biography, he read through those letters and discovered demand deficiency, the issue of the general glut debate of the 1820s. He therefore stopped writing about the monetary theory of production and began to write about Say’s Law. And rather than requiring a form of disequilibrium analysis, he is forced by what he wishes to argue, to adopt the most rigid form of equilibrium analysis. This may seem a conundrum to others who work forward from Keynes’s previous writings, but working backwards from The General Theory as I do, it seems perfectly clear to me what he had done.

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