The Critics of Keynesian Economics

VI

ÉTIENNE MANTOUX, son of the distinguished French Historian, Paul Mantoux, was born in Paris in 1913. After graduating from the University of Paris and the École des Science Politiques, he was attracted to economic studies and went to the London School of Economics (1935-36) on a research scholarship. His only book was The Carthaginian Peace—or The Economic Consequences of Mr. Keynes (1946), by far the fullest and ablest attack on the contentions of Keynes’s The Economic Consequences of the Peace. But Étienne Mantoux did not live to see its publication. As his father wrote in a touching foreword: “The author of the following pages was killed on active service near a Bavarian village in the Danube Valley, on 29 April, 1945—hardly more than a week before the bells rang for victory and peace. What was meant to be his first message to the public, opening discussions he was eagerly expecting, now comes to us from beyond the grave.” Yet Étienne Mantoux’s first message (though a brief one) had, fortunately, come years earlier, in the following essay from the Revue d’Économie Politique of November-December, 1937, published by Editions Sirey, 22, rue Soufflot, Paris 5e, France. Written when its author was only twenty-four, it reveals, no less than The Carthaginian Peace, what a brilliant mind was lost to economics by his premature death.

This is the essay’s first publication in English. The translation is by Philip Cortney and Henry Hazlitt.

MR. KEYNES’ “GENERAL THEORY”1

ÉTIENNE MANTOUX

When he published The General Theory of Employment, Interest and Money2 last year at the sensational price of 5 shillings, J. M. Keynes perhaps meant to express a wish for the broadest and earliest possible dissemination of his new ideas. At all events, the book reads more like an invitation to open discussion, an encouragement to debate, than like a definitive affirmation. And yet, as Keynes himself tells us in the Preface, the book is addressed to his fellow economists, rather than to the general public. The most arduous problems are examined there, and the most exacting specialists will find matter to exercise their powers of abstraction—often, perhaps, of divination—more even than in the Treatise. Where is the lucid style, the vigorous clarity, of Keynes of The Economic Consequences of the Peace and Monetary Reform? The problems he then so powerfully helped to illuminate seem quite transcended in his present preoccupations. The result is a degree of obscurity without precedent in his past work—though not, to be sure, in the annals of economic thought; the complaints one might make upon this head were to be heard long ago, when the same problems were already being argued, and when the very authors now attacked by Keynes were already under fire. “Omne ignotum pro magnifico,” cried Samuel Bailey, in 1825, “is not without example among us, and an author’s reputation for the profundity of his ideas often gains by a small admixture of the unintelligible!” 3 And yet I should not be surprised to learn that this latest book, so great is its author’s reputation, so engrossing the issues of which it treats, did bring him a return he had not hoped for. However that may be, the General Theory, once published, has been the staple diet of discussion—frequently animated—in the economics seminars of the English universities. Several books have already been more or less directly inspired by it.4 Few men, indeed, enjoy comparable intellectual prestige in their generation. In 1919, he appeared to an exhausted Europe, still blinded by violent passions, as the clear-eyed and courageous champion of fair play and common sense. But it is not by the play of cold reason that Keynes has gained renown; the warlike humor of the polemicist, the powerful gift of imagery in analysis or repartee, and the literary charm about everything he writes, though they may have troubled the needful serenity of the scientist, have nonetheless contributed to the fascination felt by most young British economists and students, which has made him the leader of a School—albeit as yet undefined.

For with his fascination Keynes combines another of the serpent’s attributes—his disconcerting ability to molt at more or less frequent intervals, leaving his former conceptions behind him like so many old integuments from which the reader, somewhat disconcerted, must proceed to extricate his own thinking, having previously been at no little trouble to get it in.5 In fact, one of Keynes’ rarer virtues is to be often right in difficult situations, and another, rarer still, is never to hesitate in public retraction when convinced or persuaded of error. Thus when Alvin Hansen, for example, made an important correction in the first of his fundamental equations, Keynes assented freely.6 On the other hand, his dispute with F. A. von Hayek did not so quickly reach an agreeable conclusion.7 It is even to be regretted that in this new work, the difficulties raised by the clash between Keynes’ views and those of the “Austrian,” or “neo-Austrian,” school, are not dealt with except by occasionally devious allusions.8

Still, the Treatise itself was a way station, and quite plainly a transitional work. The General Theory is now offered to us as the outcome of “a long struggle of escape .. . from habitual modes of thought and expression” (Preface, p. viii). Why “general” theory? Because, in Keynes’ opinion, the conclusions of the classical school apply only to a special case, and depend on an implicit hypothesis that is seldom satisfied. “General,” then, is here opposed to “classical”; we are to witness a revolution. At least so one would gather from some of the more enthusiastic reviews, which go so far as to make Keynes (much to his disgust, no doubt) the direct successor of Karl Marx.9 “My undertaking is one that has had no equal, that none will ever equal. I would change the basis of society, shift the axis of civilization. . . .” 10 Is it facetious to place Proudhon’s ironic boast beside Keynes’ ambitious sureness? Yet their two proposals are not so very unlike; for it is by decline of the rate of interest to zero that the latter would see our economic ills remedied. Curious that the most sharp-tongued economist of our time should come back, by this unexpected route, to the thought of the famous inventor of “crédit gratuit.”

What is the idea? In the Treatise, as Keynes tells us, his monetary theory attempted to deal with output in general; but his fundamental equations reflected only a momentary situation, for a given total output. It remained to determine the effects of changes in the total volume of output. Here attention shifts, and takes a step backward, as it were; for Keynes’ analysis is addressed to variations in employment. The classical writers had not only taken the quantity of products to be distributed as given; they had based their perfectly logical and consistent theory of prices and distribution on the tacit hypothesis of a state of equilibrium in which all the factors of production were being employed. The expression “full employment” lends itself unreadily to translation, and its use in the contemporary English literature of economics is universal. Through the persistence of worklessness—a sore subject with British economists, and an outrage to their theoretical position—the happy state of affairs implied by this term “full employment” has become the aim and the ideal of all political economy:

What is the criterion of improvement of the economic situation? [asks The Economist;11] the classical economists would have replied unhesitatingly, “Increase of the average real income!” . . . It was not until the first decade of this century that a full volume of employment gained equal status with the rise of real income as a criterion of economic efficacy. Since the war, we may have gone too far in this direction. There is today among statesmen and economists a tendency to concentrate attention on reducing the ranks of the unemployed at the expense not only of the real income of the employed, but also of the average income of the population as a whole.

Now that is just the point. It is true that the classical economists paid too little attention to the forces determining the level of employment; but today the pendulum seems to have swung in the opposite direction. If increase of real income and consumption of that income are the ends of all economic activity, then control of employment (of capital as well as of men) is of course only a means. Yet one would have to conclude, with Keynes, that economic theory has got ahead of itself, and that before we can say how much consumable wealth will be produced and distributed, we must try to learn why workers cannot all find steady occupation in a growing society. So we must turn back. How humiliating! How gratifying to those who ridicule the inability of economic science to solve pressing problems and the continual lack of agreement among its foremost exponents! The issue raised was, from the beginnings of the science, a subject of embittered dispute. It was this that embroiled Ricardo and Say with Malthus, Sismondi and many others:

This theorem, that to purchase produce is not to employ labor; that the demand for labor is constituted by the wages which precede the production, and not by the demand which may exist for the commodities resulting from the production . . . is, to common apprehension, a paradox; and even among political economists of reputation, I can hardly point to any, except Mr. Ricardo, and M. Say, who have kept it constantly and steadily in view. Almost all others occasionally express themselves as if a person who buys commodities, the produce of labor . . . created a demand for [labor] as really . . . as if he had bought the labor itself directly, by the payment of wages. It is no wonder [Mill adds ruefully] that political economy advances slowly, when such a question as this still remains open at its very threshold.12

Has the science made any progress since? Keynes’s book, which reopens the whole subject, might lead us to doubt it. And in what degree can we now speak of science?

When after all sorts of arrangements and preparations, new difficulties are encountered just as one believes himself in sight of the goal—when, to reach it, one is often obliged to retrace one’s steps and take a different road—or when agreement cannot be had among those working in the field concerning the manner in which the common end should be pursued—then one may be sure that inquiry has yet to enter upon the path of science, and is merely groping.13

If economic thought is indeed still at such a point as to require remolding from the bottom up in order to arrive at a judgment of phenomena in the world of today that will give us a basis for positive action, Keynes will have done us a real service. But if his new theory is after all not so revolutionary as he claims—more, if it is only an analytical rationalization of a policy dear to him, and one we have long known to be so—was it necessary not only to sow discord among economists, but to cast ridicule upon that portion of our hard-gained and laboriously disseminated knowledge, which the public so willingly blames for mistakes whose consequences it suffers? Keynes is here without indulgence for his predecessors, in particular for his teacher, Marshall, to whom, as he himself acknowledges in a masterly biography, he owes the best of his theoretical training. And he admits that his own book is utterly at variance with what he had once learned and then taught for years afterwards.

What, then, is the essential novelty of the General Theory?

What might catch public attention first of all is of course the new identity between investment and saving. The Treatise rested wholly on a distinction between the two, through a very special definition of income that excluded profit, or at least “abnormal” profit (General Theory, p. 61). But Keynes has by no means given up explaining economic fluctuations by anomalies of the mechanism of saving.14 This particular phenomenon has always intrigued him. It will be recalled how he placed it in his striking portrait, drawn in 1919, of nineteenth century Europe:

The capitalist classes were allowed to call the best part of the cake theirs and were theoretically free to consume it, on the tacit underlying condition that they consumed very little of it in practice. . . . There grew round the non-consumption of the cake all those instincts of puritanism which in other ages has withdrawn itself from the world and has neglected the arts of production as well as those of enjoyment. And so the cake increased; but to what end was not clearly contemplated.15

The tone became more ironical in Monetary Reform (1923):

To save and to invest became at once the duty and the delight of a large class. . . . The morals, the politics, the literature, and the religion of the age joined in a grand conspiracy for the promotion of saving. God and Mammon were reconciled. Peace on earth to men of good means. A rich man could, after all, enter into the Kingdom of Heaven—if only he saved . . .,16

But this playfulness conceals an imperfectly satisfied curiosity. “Were the Seven Wonders of the World built by Thrift?” he asked in the Treatise; “I deem it doubtful.”17 It became apparent that the total capital being accumulated was not equal to the aggregate amount of savings. The celebrated distinction between “saving” and “investment” might help clear up the mystery, provided it were stated in what the difference consisted. Keynes was aware in 1931 that if profit was included in income, the identity of saving and investment became obvious.18 Such an identity today, then, is only a consequence of a new terminology, and does not imply so great an overturn as might be imagined.

The mystery, however, does not seem to be explained very clearly in the General Theory; it appears to reside in the relationship of these concepts to time. At this point Keynes brings in the factor of expectations, and throughout his book it is in terms of forecasts that the new entities are defined. We shall have occasion to return to this major innovation shortly. But where it might have been most felicitously applied, Keynes leaves us still in doubt; savings (p. 63) are equal to the difference between income and consumption; and, by definition, income corresponds to the total value of output, which is to say to the sum of consumption and investment. It follows quite naturally that saving and investment are equal, if not identical. The manifest contradiction between this definition and that of the Treatise is explained when it is considered that any saving amounts to the acquisition of an asset, whether in liquid money or in actual goods; 19 conversely, the establishment of an investment through the banking system is necessarily attended on the other hand by an equivalent diminution of the share of income devoted to consumption.

But Keynes does not clearly tell us that this diminution is not instantaneous and that the mechanism of saving must be understood in terms of two successive “periods,” as would appear from D. H. Robertson’s terminology, which he nevertheless regards as an alternative to his own. Nor does he approve the use of the term “forced saving” (p. 79); but, as Robertson brought to his attention,20 he does recognize the fact of an imbalance between the total quantity of capital in existence at a given time and the corresponding quantity of “voluntary” savings; it may be, as he contends, that a standard rate of saving must first be defined in order to specify the quantity of investments deriving from another source. But the fact of the imbalance is not to be doubted, and continues moreover to underlie the General Theory.

If Keynes had resorted more explicitly in this part of his exposition to his original use of “expectations,” the difficulty would have been much less. On this particular problem, the suggestion made by Ohlin brings some enlightenment; though Keynes says (p. 77) that his mistake in the Treatise had been not to distinguish between anticipated and realized return, he does not yet make use of this distinction in his new terminology of savings. Ohlin, on the other hand, points out21 that if we consider the plans and forecasts of entrepreneurs, there is not necessarily, beforehand, identity between the sums of money which some decide to save and others to invest. But retrospectively, behindhand, the results realized generally differ from expectations because the quantity of capital invested cannot but correspond to the existing volume of savings. Whether the difference between expectation and results is called “forced savings” according to the current terminology, or, according to the quite recent one of R. G. Hawtrey,22 “passive investment,” it is still understood that the causes of general imbalance are to be found in the capital market. The monetary theory of saving remains the pivot of the demonstration, but the new identity hardly helps us to understand the complex phenomena that come in with money. However, Keynes feels that it gets closer to reality, and besides, the use of unaccustomed devices is to give us the answer to the riddle of unemployment.

*      *      *

What, then, is to be proved? Essentially this: That in a society where not all the productive forces are employed, the classical analysis is inapplicable; and since it is necessary precisely to know why unemployment exists—how there can be a state of equilibrium without “full employment”—we should inquire what forces determine this state of equilibrium. Over against the classical theory of balancing of the labor and capital markets by the interplay of supply and demand, Keynes sets the new variables of the general theory: the propensity to consume, the marginal efficiency of capital, and liquidity preference.

THE PROPENSITY TO CONSUME

It is correct to say that most “classical” analyses of the operation of production, and more especially of the capital market, rest on the hypothesis of absence of unemployment. And most of the time this hypothesis does remain implicit. In the course of more recent analysis, however, its necessity to rigorous argument has been so felt that it has often been expressed with all the clarity one could wish: “We shall assume,” writes Mr. Rist, “a society in which the forces of production are all employed.” 23 In such a case, the classical analysis was correct, upon condition, says Keynes, of appealing to two more hypotheses (p. 21): the classical theory of wages, and Say’s Law.

The traditional theory of wages required that the utility of the wage be equal to the marginal disutility of the labor performed; otherwise stated, a decline in the demand for labor should normally lead wage earners to accept a reduction in the level of their wages until their value coincides with the marginal productivity of labor. This rule is compatible with the existence of unemployment due to “friction” (seasonal variations, incomplete mobility of workers from job to job or from region to region) and of voluntary unemployment. But the classical theory cannot logically accept the possibility of “involuntary” unemployment, defined by Keynes as follows: “Men are involuntarily unemployed if, in the event of a small rise in the price of wage-goods [consumers goods: products bought with wages] relatively to the money-wage, both the aggregate supply of labour willing to work for the current money-wage and the aggregate demand for it at that wage would be greater than the existing volume of employment” (p. 15).

The distinction between money wage and real wage affords an exploration of the consequences of this definition. By the “classical” theory, a slight decline in real wages sufficed to increase the demand for labor; it assumed that the demand curves shift with all price movements. Now in actuality it is the money wage that the workers look to. French readers of Simiand will perhaps recognize this as a familiar theme. But does the experience of certain recent events encourage us to see the money wage as the only factor determining the movements of supply and demand? Of course, it is often urged, it is well known that in times of prosperity and rising prices, workers are stimulated by the high profits of enterprises to demand wage increases. But for some time now, it has not been only in time of prosperity that such movements occur! “Having regard to human nature and our institutions, it can only be a foolish person who would prefer a flexible wage policy to a flexible money policy . . .” (p. 268). It would seem that Keynes acknowledges the necessity of reducing real wages to diminish unemployment. If so, he is being perfectly classical,24 or if you will, traditional. But it is hard to tell whether he regards this policy as economically necessary, or whether, in order to render it more palatable to the public, he brings in considerations of fairness and practical politics while arriving at it indirectly through monetary manipulations. In any case, he will have to reckon with the practical experience of union negotiators; even if they have not read the General Theory, it would seem that the various postwar monetary upheavals, and certain incidents more recent still, have today enabled many a layman to grasp the distinction between money wages and real wages.

Are we moreover to assume that reduction of nominal wages is in no case an effective means of combatting unemployment? This is where those celebrated “expectations” came in. The volume of employment depends, at all events, on the sums that entrepreneurs have decided to invest in production. These in turn depend only indirectly on prices existing at the time; for it is the entrepreneurs’ expectations that determine the volume of sums to be invested; a decline in wages, opening up the prospect of a further decline, will not serve to increase the demand for labor (p. 263). It is upon probable consumption expenditures that the expectations are based. These future expenditures, or the “effective demand,” correspond to the point of intersection of the entrepreneurs’ over-all supply and demand functions (expressed in “anticipated” prices). Keynes gives the name of “propensity to consume” to the ratio of consumption expenditures to the total income of the community (the marginal propensity being (p. 115) the ratio of infinitesimal increments of the two variables). Now the volume of employment is controlled by that of investments. What part, then, is played by the propensity to consume?

This brings us to the multiplier theory, under which Keynes merely develops some reflections due to R. F. Kahn on the incremental effects of a capital investment.25 Obviously the movements of capital entailed by investing a certain sum devoted, say, to the execution of a given public works program, will not be confined to the original sum, and a certain amount of additional investments will result, after a varying interval of time, from that initial outlay. The sums invested will more or less rapidly permeate the structure of production, first leading to expenditures among enterprises, and later, when they reach the consumer through payment of wages or other income, causing a demand for consumption goods, which in turn will step up demand for intermediate goods, and so on.

Most analyses of this highly complex phenomenon assume, as we have seen, that all the factors of production are employed. In that case a new investment can only have the effect, in production as a whole, of transferring factors from one branch to another, most often from the consumption goods to the production goods market. It then becomes difficult to speak of net secondary effects of the initial investment, since their addition does not go to augment total output. Kahn’s multiplier measured the ratio of the immediate increment of employment, due to a given investment, to the total increment. Keynes here defines his investment multiplier as the ratio of the total increment of income brought about by a given increment of investments, to this original increment (Y income, I investment, multiplier ).

One might first point out that it is very hard to tell what moment to choose for evaluating the final result Y. The interval between the initial outlay and the time when the money invested reaches consumers is not only highly variable, but scarcely amenable to averaging without recourse to some concept like the “Austrian” theory’s “period of production”—apparently not very congenial to Keynes (p. 76). His “period of production” (p. 287), defined in terms of the time elapsed before increased demand for a given product expresses itself in a diminished elasticity of employment, looks very much like a petitio principii. But the effects of the multiplier, approximate as they are, are indubitable. Far more debatable is the function making the multiplier depend on the propensity to consume. The latter is equal, by definition, to , since income is divided between consumption expenditures and investment expenditures. Given the definition of the multiplier, the propensity to consume therefore becomes equal to , which amounts to saying that as the propensity to consume approaches unity, meaning if the community applies the totality of its income to consumption expenditures, the secondary effects of a primary investment would approach infinity. Remarkable! Back in 1933, Keynes thought the multiplier, in Great Britain, was slightly greater than 2.26 It is altogether reasonable to use a term such as the “multiplier” to express a fact patent to everyone; one may go on to regard the proportion of income devoted to consumption as an independent function; lastly, it is quite permissible to make a certain function, called the “multiplier,” depend by definition on a certain variable called the “propensity to consume.” It is another matter to turn this formal relationship into a causal relationship.27

The entire demonstration, it would seem, nevertheless rests on this function. The volume of employment depends on the over-all demand function, the propensity to consume, and the volume of investments. When the volume of employment increases, income increases also; but, “when aggregate real income is increased, aggregate consumption is increased, but not by so much as income” (p. 27; pp. 96, 116). The propensity to consume is less than unity. Savings accumulate more rapidly, too rapidly to allow entrepreneurs to base their expectations on an increase in effective demand.

So it is not surprising that “Say’s Law” should be altogether abandoned by Keynes. In his biographical essay on Malthus,28 he was apparently already struck by the latter’s ideas, expressed in his correspondence with Ricardo, on the respective effects of consumption and accumulation. Ricardo’s opinion appears clearly enough in a letter of September 16, 1814:

Effectual demand consists of two elements, the power and the will to purchase; but I think the will is very seldom wanting where the power exists, since desire of accumulation will occasion demand just as effectually as a desire to consume; it will only change the objects on which the demand will exercise itself.29

Malthus replied:

I must admit that I see no other cause for the diminution of profits which, you will acknowledge, follows accumulation, than in the fall of prices of the product compared to the costs of production, or in other words in the diminution of effective demand.

In 1821, the discussion was resumed, but Malthus and Ricardo stood upon their respective positions. Malthus wrote on July 16, 1821,

You will yourself agree that a temporary increase in savings at a time when profits are high enough to encourage it, may entail a division of income capable of banishing any motive for increasing production. If such a state of affairs is not to be called stagnation, I know not what to call it. The more so as this stagnation must inevitably leave the new generation without employment. . . .

He wrote again in his treatise,30

The opinion of M. Say which states that, un produit consommé ... est un débouché fermé, appears to me to be . . . directly opposed to just theory and . . . uniformly contradicted by experience. . . . What, I would ask, would become of the demand for commodities, if all consumption except bread and water were suspended for the next half-year? What an accumulation of commodities! Quels débouchés! What a prodigious market would this event occasion!

What would become of the commodities? Wrote J.-B. Say to Malthus,31

Well! Sir, they would sell for every bit as much. After all, what was thereby added to the sum of capital would buy beer, coats, shirts, shoes, furniture from the producer class, which the sums saved would put to work.

Sound reasoning, if we suppose, once more, that all the productive forces are employed; for the mechanism of saving has no other meaning than, in such a case, to allocate consumable wealth to the making of intermediate goods, to the expansion of capital, to be expressed in an increment of future real incomes, but necessarily at the expense of immediate income. The celebrated theory of the wage fund, which, properly interpreted, contains a basic truth, too often disregarded, says nothing else: the real income commanded by the community, which is to say the aggregate of its consumption goods, is limited by the existing amount of capital, and is capable of increment only within very narrow limits; hence the “real-income fund” can increase only in the long run, through an increase in capital, and consequently requires a prior increment of saving.

Now among the numerous critics of this theory, some appear, with Malthus, to have had an intimation of the ultimate role of demand and of the paradox inherent in the mechanism of the formation of capital—the weak point in Say’s reply; for new investments will not develop unless the state of demand for the goods to be produced warrants the expectation of selling them; if demand decreases and prices fall because of saving, the deflation in the consumer-goods industries is apt to be echoed at the higher levels. Ultimately, then, the real-income fund depends on consumer demand. Hermann, who opposed the classical economists by asserting that all demand for commodities is a demand for labor, implied that the elasticity of the fund was limited by that demand only. We find a kindred idea in Keynes, since his entire theory rests on the assumption of very great elasticity in the production of consumption goods.

For the classical analysis applies only to the special situation in which all the productive resources are employed, the case of “full employment,” and so long as there exists unused wealth, ready to be allocated to production, it becomes unnecessary to diminish present consumption in order to increase capital, or, if one prefers, to promote investments. It is certainly true that the theory of saving requires revision at this point. But the conception of “full employment” as here presented surely does not suffice to clarify the problem. That state is not achieved, for Keynes, until there is no more involuntary unemployment, defined as we have seen, or again, until aggregate employment ceases to increase despite an increase in the effective demand for its output (p. 26), in other words until aggregate employment becomes inelastic. To this definition is added a new theory of prices, in the form of a statement of the quantity theory of money (p. 304), for so long as aggregate output increases under the impetus of effective demand due to involvement of unused resources, an increase in monetary circulation will not necessarily raise prices.

So long as there is unemployment, employment will change in the same proportion as the quantity of money; and when there is full employment, prices will change in the same proportion as the quantity of money (p. 296).

But why seize upon the criterion of unemployment alone? If by “full employment” we mean emploi complet, the height of activity of all resources, men and capital alike, the definition of the term presents great difficulties. One would suppose that so long as the productive system is not operating at its maximum productivity, so long as all the resources employed are not yielding the technical output of which they are capable, the true state of “full employment” has not been reached. In that case, logic would require that the General Theory apply whenever the point of diminishing returns itself has not been reached. What difference is there, from the point of view of aggregate output, between a man involuntarily unemployed and a skilled worker whose abilities are ill utilized, a poorly maintained machine, a mistaken investment? Are we justified, in any of the latter three cases, in speaking of “full employment,” even if, following Keynes’ definition, there is no involuntary worklessness?

Now what Keynes has in mind is essentially the elimination of unemployment. As we have seen, this aim has today become the alpha and omega of economics and political economy in Great Britain: “Our present object is to discover what determines at any time the national income of a given economic system and (which is almost the same thing) the amount of its employment” (p. 247). But that is where the difficulty begins: Is it almost the same thing? A policy of combatting unemployment can always succeed, at least for a time, if one will at all costs put people to work, without regard to the productivity of the works undertaken. Can we flatter ourselves that we have then killed two birds with one stone, reducing unemployment and increasing national income at the same time? Far from being blind to the absurdity of the policy of unproductive public works, Keynes finds in it one more weapon to support his own theory:

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing (p. 129).

Between this reductio ad absurdum of the big-projects policy and the gold mining industry, Keynes sees a complete analogy; by virtue of the multiplier, an investment, though unproductive, must at last express itself in an increment of effective demand, hence of employment, hence of national income. So the policy of public works becomes, in the General Theory, the practical application of the ideas of Malthus, who in his Principles suggested unproductive expenditures to remedy the evils of the 1815-1820 crisis. “If only Malthus, instead of Ricardo, had been the parent stem from which nineteenth century economics proceeded, what a wiser and richer place the world would be today!” 32 But the ascendancy of Ricardo, “that able but mistaken mind,” said Jevons, was absolute.33 Ricardo wrote in a note on Malthus’ Principles:

If, of the two things necessary to demand, the will and the power to purchase, the will should prove wanting, and we should consequently suffer a general depression of trade, we could do no better than follow Mr. Malthus’ advice and have the government step in where the public is holding back. We must then petition the Crown to dismiss the economic ministers and appoint others able to provide more effectively for the best interests of the country by encouraging luxury and public spending.34

Ricardo thought he was being very ironical.

THE RATE OF INTEREST

At one end of the system, then, Keynes finds that inadequacy of effective demand is at the bottom of the imbalances which Say’s Law failed to explain. But the entrepreneur, in order to be able to produce, must not only rely on the future proceeds of his sales; he must also be able to borrow at reasonable rates. The General Theory gives us a new explanation of interest, and leads us to a policy perhaps less new, for one acquainted with Keynes, but quite considerably different from that of the Treatise.

The theory of interest, of all elements of economics, is certainly the one that, since its beginning, has suffered most vicissitudes. It is perhaps the best example of the nature of this science, of its scope, and of the chief difficulties it encounters, combining nearly all of them: notably those of distinguishing between lawfulness and necessity, between ethics and expository theory; that of looking behind monetary phenomena for actual consequences; those, lastly, associated with the “time factor.” Here again, Keynes would have us replace the “classical” theory with his “general theory”; but between the two, the theory of interest has a long history to look back upon. If we take the classical theory back to Hume, we shall already find the two main ideas that were to dominate the endeavors of later authors: first, the influence on the rate of interest of the quantity of money; and secondly, its relationships to the commercial rate of profit.

Hume showed clearly that money could accumulate in a country without affecting the rate of interest, and that the latter depended on three circumstances: demand by borrowers, supply of “wealth” by lenders, and the profit drawn from trade. Hume was already distinguishing between interest, the price asked and paid for a loan of money, and the commercial profit which enabled the borrower to pay that price, and he emphasized that the bond between them was a relationship of mutual dependence (“they mutually forward each other”).35 Later, however, the two terms were frequently confused. Still, the classical form of the quantity theory of money rested upon utter elimination of the role of the interest rate from the monetary mechanism of establishment of prices.

It is only with Wicksell36 that we find the first attempt at unification.37 Wicksell’s contribution, in fact, was twofold. First he separated the monetary rate of interest from the hypothetical “natural” rate that would have resulted from equilibrium of capital supply and demand in a barter economy, and he assumed that as a result of the presence of money alone, the effective market rate could fail to correspond to this ideal rate in actuality. Next he supposed that through the mechanism of credit, the rate of interest had an influence on prices; that a rise of the monetary rate above the “natural” level produced a fall, and a decline below that level a rise, in prices. But Wicksell went on to conclude that if the natural rate coincided with the monetary rate, stability of prices would follow. Davidson then pointed out that in a progressive economy where accumulation of wealth takes place normally, the equilibrium rate between capital supply and demand was necessarily greater than would correspond to a stable price level, in which case such stability could be obtained only by swelling monetary circulation.38 But Keynes, who acknowledged in the Treatise what his ideas owed to Wicksell, adopted the concept of a natural rate, the one placing investments and savings in equilibrium. From this theory he derived a banking policy intended to avoid excessively violent price fluctuations by manipulating the rate of discount.

Side-by-side with the “natural rate” theory of Wicksell and the neo-Wicksellians, that of the “real rate” suggested by Marshall and further developed by I. Fisher, served to explain how price movements, or rather anticipation of price movements, reacted upon the rate of interest, and why long-term interest rate rises coincided with periods of rising prices, and vice versa. Between these two theories, there was no room for any contradiction or paradox; but neither of them made interest an exclusively monetary phenomenon. It would seem that Keynes burdens the “general” theory of interest with this exclusiveness; whether in the circumstances determining its establishment or in its effects on the productive system, it is in fact money that now assumes the main role, not real factors.

Keynes distinguishes two rates: First, the marginal efficiency of capital (efficacité marginale du capital; in the previously cited article by Lerner, Revue internationale du travail, p. 481, the French translator adopts the convenient term rendementlimite “limit of yield”), which agrees fairly closely with Fisher’s “rate of return over cost” 39 (taux de rendement par rapport au coût), expresses the rate that would equate the present value of the annuities yielded by a given capital to its supply price, or, if one prefers, its replacement cost (p. 135). The rate of yield is consequently the limit of the price that entrepreneurs will pay, on the basis of expectations, to obtain the requisite capital for an undertaking. This is the demand price of capital, the price bid by the borrowers; not to be confused with the rate of interest, which is the price asked by lenders in exchange for a sum of liquid money. The former rate expresses no actual ratio of productivity, but only the effect of expectations, and will decrease when the aggregate volume of capital invested increases, both because the replacement cost in that case itself increases, and because the anticipated yield decreases. The schedule of marginal efficiency of capital thus gives us the demand curve, or demand schedule, of investments (p. 126). Thus the volume of investments will be adjusted to the point where the marginal efficiency of capital exactly corresponds with the level of the current rate of interest.

LIQUIDITY PREFERENCE

But this point of equilibrium tells us nothing, because the rate of interest is itself a datum in the system, not depending, according to the classical formula, on supply of and demand for savings, nor on psychological factors called in turn by the names of “abstinence,” “waiting,” “time preference,” “impatience,” but on a new function, “liquidity preference,” which serves to explain the role of money in the economic system (p. 168): the basic property of money is to be a means of liquid payment, so to lend one’s money involves at once an immediate disadvantage and a risk. It is to offset this loss of liquidity that lenders exact interest, varying with the strength of their preference for liquid effects. The supply curve of capital (which actually has the form of an ordinary demand curve) thus expresses the relation M = L(r), and the rate of interest decreases as the quantity of money increases. The propensity to hoard becomes a sufficient explanation of the rate of interest, which depends on “money supply and demand,” or again, serves to equilibrate “supply and demand for hoarding.” 40

The rate of interest thus becomes a purely monetary and at all events a purely conventional phenomenon (p. 203). For the operation of our economic system depends on individual decisions based on expectations, and insurance against the unforeseeable risks of the future, immediate or more remote, finds its simplest expression in the accumulation of a reserve of liquid money. Money acts, so long as its rate of circulation is not infinite, as a means of waiting, as a link between present and future. Knight41 had pointed out that interest was hardly conceivable except in a society where the future did not admit of firm predictions. Keynes, by introducing into his theory of interest the part played by expectations, quite felicitously connects the “pure,” or “real,” theory to the money theory: “The classical school have had quite a different theory of the rate of interest in Volume I dealing with the theory of value from what they have had in Volume II dealing with the theory of money” (pp. 182-183). “ ’Interest’ has really no business to turn up at all in Marshall’s Principles of Economics,—it belongs to another branch of the subject” (p. 189). In so doing, however, he definitely abandons the neo-Wicksellian line of thought. In the General Theory, there is no place for a natural rate, even though he grants (p. 242) that a “neutral” rate might be defined as that prevailing in a state of “full employment.”

Does the liquidity-preference function suffice to explain the phenomenon of interest? Keynes seems to think so. The liquidity-preference schedule shows us the rate of interest decreasing as the quantity of money increases. Here we have indeed come a long way from Hume and the classical theory. But, Keynes adds, “the most stable . . . element in our contemporary economy has been hitherto, and may prove to be in future, the minimum rate of interest acceptable to the generality of wealth-owners” (p. 309). Be that as it may, there have been very considerable fluctuations of the rate of interest since the beginning of the nineteenth century, especially the past forty years. Perhaps Keynes refers only to the lower limit, defined by Cassel in his Nature and Necessity of Interest, and still expressed in the celebrated Victorian saying, “John Bull can stand many things, but he cannot stand 2 per cent” (p. 309). However that may be, it is the rate of interest thus determined that sets a limit on the capacity of entrepreneurs to borrow. For the marginal efficiency of capital may be less than the rate of interest: in that case, investments are inadequate, and unemployment appears.

Furthermore, there is no mechanism able to bring about equilibrium, and this is where Keynes finds the classical theory particularly at fault. For there is no rate determined by the supply and demand for savings, or rather, that mechanism does not tell us at what level the rate will be set and in what degree it will diverge from the marginal efficiency of capital; in fact, the amounts offered on the market depend far less on movements of the rate of interest than on those of income. The sums invested, on the other hand (the demand for capital), depend narrowly on the rate of interest; so variations in this rate directly affect investments, hence employment, hence incomes. When the rate of interest rises, the sums invested decrease at once, and so at the same time incomes contract (p. 181). The sums saved out of these incomes decrease, or at least do not necessarily increase in response to a higher rate. We cannot know the new point of equilibrium and the locations of the supply and demand curves unless we know, on the basis of the new income, how liquidity preference and hence the rate of interest have changed. At all events, the latter has to be a datum:

Thus the traditional analysis is faulty because it has failed to isolate correctly the independent variables of the system. Saving and Investment are the determinates of the system, not the determinants. They are the twin results of the system’s determinants, namely, the propensity to consume, the schedule of the marginal efficiency of capital and the rate of interest (pp. 183-184).

“And, sure, a reverent eye must see
  A Purpose in Liquidity,”

sang Rupert Brooke’s fishes. The nature of this function is as yet vague. Yet liquidity preference helps us to clarify some of the most complex problems of the monetary mechanism. We know well enough that the entire banking structure rests, in the last analysis, on the need to be “liquid.” But since in a society where production takes any appreciable time, there can never be real liquidity, in the sense that liquidation of an asset means final payment, the last step placing it in the hands of the consumer, the full maturity of the real asset, it is obvious that no productive system can ever be wholly and simultaneously liquid. In most cases, however, people call liquidity the possibility of transferring an asset, of exchanging a claim collectible at a given term for another whose date of liquidation is nearer at hand.42 The existence of such institutions as stock exchanges has no other purpose than to render investments liquid for the individual that cannot be so for the community as a whole. “Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of ’liquid’ securities” (p. 155). Liquidity by transfer can have no effect on that of the system as a whole, and by definition, the larger the sums invested, the less liquid the system. When the members of the community, under the influence of a panic, try to “become liquid,” it soon becomes apparent that they are attempting the impossible. The most sinister aspects of great speculative upheavals are all to be accounted for by this phenomenon.

So the mechanism of economic life, at all events that of investment, is little more than a game, in which the success of each depends on his ability first to guess his neighbor’s expectations, and then to unload losses on him at the favorable moment. Thus decisions are taken at the third, fourth or fifth remove, and so on, for when we have managed to guess each other’s thoughts, we must turn to guessing “what average opinion expects the average opinion to be” (p. 156). One is reminded of Poe’s famous story of the little boy who won marbles by guessing what his opponents thought he was thinking. “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism” (p. 159). However, Keynes is not yet ready to eliminate capitalism entirely. Though some English socialists have received this new book with enthusiasm,43 and are trying to persuade Keynes that there is nothing left for him to do but to join them, the policy he envisages is still, as he himself says, “reasonably conservative.” Non-socialist though it may be, however, its consequences would nevertheless modify the existing social order quite profoundly.

*      *      *

In this sense, the general philosophy Keynes presents to us is not very greatly different from what we have long since come to expect from him. The economic difficulties in which the world is floundering irritate him because a little reflection, as it seems to him, should be enough to solve them. After the effort he has had to make, by his own admission, and then demand of his readers, to rediscover the secret of the workings of our economic system, one might think the difficulties were not so trifling. “The economic problem is not so difficult,” he wrote one day, remarking upon Wells’ interview with Stalin; “leave that to me, I’ll take care of it.” This sally is not so great an exaggeration of his attitude. An upheaval of our society from top to bottom has always seemed to him quite unnecessary. But today he considers that the extreme inequality of fortunes characteristic of the present capitalist system must be eliminated—an inequality that was justified, in the view of economists of the last century, by the part large incomes played in the accumulation of capital. Above all, we must maintain the propensity to consume. “ . . . the growth of wealth, so far from being dependent on the abstinence of the rich, . . . is more likely to be impeded by it” (p. 373). So one of the economic bases of inequality of fortunes, in his view, disappears.

But is this enough to make Keynes a socialist? Appropriation of the means of production by the state seems to him no more necessary than before. It is much more important to centralize the control and direction of investment in its hands. Just recently, Keynes suggested establishment of a Public Office of Investment to draw up programs ready to be put into effect at the first sign of crisis.44 The boom in England is giving him some cause for concern. But the last thing to do, if one would avoid it, would be to raise the rate of interest.

Interest policy, in fact, remains the heart of the system. Though he says (p. 164) that a purely monetary policy intended to affect the rate of interest seems to him inadequate today, that policy is still the necessary condition for a state of “full employment.” One does not quite see how Keynes proposes to diminish liquidity preference, since it is not a matter of “injecting” a little money, in time of crisis, to “prime the pump,” according to the familiar formula of reflation, and the General Theory is not basically an explanation of the business cycle. (Chapter 22, “Notes on the Trade Cycle,” contains only some passing comments, and attributes the phenomenon to variations in the marginal efficiency of capital, to successive waves of optimism and pessimism.) Keynes nevertheless looks to a future when the State will have pushed capital development to a saturation point such that the marginal efficiency is reduced to zero. This result might be brought about within a generation (p. 220).

Is it credible that the present wealth of the world warrants such optimism, and that Mill’s famous “stationary state,” the mere thought of which sent Paul Leroy-Beaulieu into raptures, can be so close? Keynes believes, though, that despite the disappearance—euthanasia—of the rentier (p. 375), the rate of interest will not fall absolutely to zero, and that enterprise may quite well persist, paying no more for the use of capital than its depreciation through wear and obsolescence, plus a margin required to cover risk and the exercise of skill and judgment (p. 221). In other words, profit properly so called would remain, but pure “interest” would be nil. Pending this state of bliss,45 monetary policy should attempt, by diminishing liquidity preference, to keep the rate of interest below the marginal efficiency of capital.

Is not this policy likely to beget inflation pure and simple, and present us once more with the excesses that have characterized all great crises, and that were indulged in con molto brio during the last? For Keynes, apparently, there can be no inflation so long as there is not full employment. “It is when an acceleration of demand cannot significantly increase the volume of employment, and expresses itself merely in rising prices, that we can speak of true inflation.” 46 England, with its 1,570,000 unemployed, is therefore approaching this limit today in his opinion, since prices (especially the cost of living) have been accelerating alarmingly for the past year (though much progress is still to be made in the “distressed areas” before true inflation need be feared). In that case one may wonder what is really meant by “full employment”! If Keynes considers that rising prices are a sufficient sign to serve as the criterion, many of the unwillingly unemployed may not agree with him. At any rate, this might put the famous “irreducible minimum” pretty high.

Keynes, then, is not blind to the dangers of a coming crisis. But the General Theory gives us no prescription against acceleration of the speculative boom. The persistence in London of rates never before reached, even at the low points in the latter years of the last century, is certainly an effect of the now inveterate belief in the enduring virtue of cheap money. If you ask a financier in the City today what will happen when the Bank of England rate goes up again, he will tell you without a smile (or nearly) that he sees no reason why it ever should. It will be curious to see what reaction that inevitable rise will produce, in the more or less early future, on the London market.47 Will it cause more of a shock, the more the public has become convinced that the 2 per cent level must not be abandoned except under very serious circumstances, and especially so if there is a conviction that a rise in the discount rate must precipitate a crisis? Or will British sang-froid, allied with the spirit of the third and fifth removes, serve to avoid a panic rendered more dangerous than ever by the persistence of that ideology?

For this ideology, of course, Keynes is not alone responsible. At all times there have been hymns in praise of lowering the rate of interest. But it has only been for a few years now that British opinion—which has humiliating and anguished memories of the “deflation” following the return to the gold standard in 1925, those grim years when industry stopped, exports languished, and unemployment continued in a time of world prosperity—has seen the gold standard and the so-called orthodox monetary policy as the root of all evil.

Recently, practical bankers in London have learnt much, and one can almost hope that in Great Britain the technique of bank rate will never be used again to protect the foreign balance in conditions in which it is likely to cause unemployment at home (p. 339).

Certainly events count for something in the molding of contemporary ideas, if only of Keynes’ own. But cannot Keynes, who has so much interest in the history of ideas, boast today of having failed not only to predict, but even to persuade? On March 7, 1931, an article appeared that ended, for generations perhaps, an era begun by Adam Smith in 1776. Keynes had always wondered whether he was really a liberal. But the general staff of that army, now without troops, counted him among the strongest adversaries of protectionist remedies. “If there is one thing Protection can not do, it is cure Unemployment.” 48 In 1931, his prestige turned the balance. And for many liberals, attached to free trade as the last symbol of their convictions, his conversion must have been a real tragedy. But then as always, Keynes acted in the best of faith. Today he has come round to an esoteric justification of the preconceptions of the man in the street, whose intuition, as he likes to say, is sounder than the classical economist’s. “Now that Gavroche and Mr. Homais have come straight to the last word in philosophy, and with so little trouble too,” wrote Renan, “a man has a hard time thinking.”

After all this manifestation of candor, Keynes may be yielding to the temptations of his genius for mystification. When, for example, he rediscovers the neglected merits of the mercantilists, or pays belated homage to Silvio Gesell, the inventor of stamped (shrinking) money, to J. A. Hobson and to Major Douglas, or quotes Mandeville and his Fable of the Bees interminably in support of the virtues of prodigality, he certainly hopes to scandalize his more orthodox and less alert colleagues. And in that sense, he still belongs, in the field of economics, to the antipuritan and anti-Victorian tradition so well represented in the field of letters by Wells and Shaw. But behind this foolery, do we not sense some discomfiture, after a long and painful effort of conscience in quest of truth forlorn—à la recherche de la vérité perdue?

1 This article is a sequel to that of Mr. J.-M. Jeanneney, “L’oeuvre scientifique de quelques économistes étrangers, VIII: John Maynard Keynes,” Revue d’économie Politique, March-April 1936, pp. 532ff.

2 The General Theory of Employment, Interest and Money, New York: Harcourt, Brace and Co., 1936, 403 p.

3 A Critical Dissertation on the Nature, Measures, and Causes of Value; chiefly in reference to the writings of Mr. Ricardo and his followers; p. xvii.

4 See particularly R. F. Harrod, The Trade Cycle, Oxford, 1936; J. E. Meade, An Introduction to Economic Analysis and Policy, Oxford, 1936; A. L. Rowse, Mr. Keynes and the Labour Movement, Macmillan, 1936; R. G. Hawtrey, Capital and Employment, Longmans Green, 1937; Joan Robinson, Essays in the Theory of Employment, Macmillan, 1937.

5 Keynes was already quite solicitous of the readers of his Treatise: “Those still greatly attached to the old point of view cannot see that they are being asked to put on a new pair of trousers, and insist that it is only an alteration of the one they have been wearing for years.” (Economica, November, 1931, p. 390.)

6 A. H. Hansen, “A Fundamental Error in Keynes’ Treatise on Money,” American Economic Review, September 1932.

7 F. A. Hayek, “Reflections on the Pure Theory of Money of Mr. Keynes,” Economica, August 1931 and February 1932; and Keynes’ reply, Economica, November 1931.

8 One can hardly interpret otherwise, for example, the passages devoted to excess of depreciation allowances and the financial prudence of enterprises in periods of rising prices. These excesses may have been sufficient to start the 1929 crisis (p. 100)! It would be interesting to know what Keynes thinks of the phenomenon of “Kapitalaufzehrung.”—On this point, (see recent report of economic section of the League of Nations, Prospérité et Dépression, by G. v. Haberler, p. 53), Keynes himself was recently alarmed by the danger of mistaken employment of the profits from the present boom; Times, January 12, 1937.—See also General Theory, pp. 76 and 329.

9 See particularly account by G. D. H. Cole, New Statesman, February 15, 1936: “The most important theoretical economic writing since Marx’s Capital, or, if only classical economics is to be considered as comparable, since Ricardo’s Principles.” Sir Josiah Stamp in 1930 greeted the Treatise as “the most penetrating and significant work since Ricardo.”

10 Le Peuple, February 19, 1849, “Démonstration du socialisme théorique et pratique, ou Révolution par le crédit.”

11 June 13, 1936.

12 Principles of Political Economy, book I, chapter V, section 9.

13 Kant, Critique of Pure Reason, preface to 2nd edition.

14 Mr. Rist wrote on this subject: “J. M. Keynes, having sought diligently in a theory of investments and savings for an adequate explanation of the price level, has just affirmed, in a ringing article, the importance he assigns to the recent increase in the output of gold.” (Revue d’ Économie Politique, September-October 1936, p. 1521.) Keynes has never denied the part played by gold in price movements, and the article to which Mr. Rist refers (“The supply of gold,” Economic Journal, September 1936, p. 412) does not appear to me, in this respect, so much of an innovation. Keynes merely discusses some probable effects of the present gold inflation. Monetary abundance due to accelerated production of gold, for the Keynes of the Treatise, would be only a special case of excess of investment over saving. According to the new terminology of the General Theory, it would have the same effects on the capital market, but by strengthening the liquidity of the banking system.

15 The Economic Consequences of the Peace, p. 20.

16 Monetary Reform, (American edition, 1924, pp. 9-10).

17 Treatise, vol. II, p. 150.

18 Economica, op. cit., November 1931.

19 Mr. A. P. Lerner (Revue internationale du travail, October 1936, p. 477) points out that the appearance of “hoarding” does not interfere with equality of the two terms according to the new definition. For according to him, though the individual can hoard, and though individual investments and saving can of course be different, there can be no net hoarding for society as a whole unless the total stock of money increases; otherwise, all individual hoarding implies de-hoarding elsewhere. This assertion can be understood only insofar as Mr. Lerner allows changes in the velocity of circulation to depend only on those in quantity of money held. It seems to me, however, that any slowing in velocity of circulation, any lengthening of the interval between two consecutive payments, amounts to hoarding, without necessarily bringing in an overall increase of the stock of money.

20 Some Notes on Mr. Keynes’ General Theory of Employment,” Quarterly Journal of Economics, vol. 51, 1936, p. 178.

21 “Some Notes on the Stockholm Theory of Savings and Investments,” Economic Journal, March 1937, pp. 64–65.

22 Capital and Employment, p. 176.

23 Essais sur quelques problèmes économiques et monétaires, p. 205.–See also, for an analytical justification of this hypothesis, F. A. Hayek, “The Paradox of Saving,” Economica, May 1931, p. 140.

24 J. Viner, “Mr. Keynes and the Causes of Unemployment,” Quarterly Journal of Economics, vol. 51, 1936–1937, p. 158.

25 “The Relation of Home Investment to Unemployment,” Economic Journal, June 1931. See also an excellent analysis of this complicated question in J. M. Clark, The Economics of Planning Public Works, pp. 80ff., and E. R. Walker, “Public Works as a Recovery Measure,” Economic Record, vol. 11, December 1935.

26 The Means to Prosperity, p. 11.—See also a recent article in the Times, March 11, 1937 (“Is it Inflation?”), where he puts the multiplier close to 3 in present circumstances.

27 See the penetrating criticism by G. v. Haberler, Zeitschrift für Nationalökonomie, vol. VII, no. 3, August 1936.

28 Essays in Biography, 1933, pp. 95ff.

29 Letters of Ricardo to Malthus, Bonar 1887, p. 43.

30 Principles of Political Economy, p. 363, quoted in General Theory, p. 362.

31 Letters to Malthus, Oeuvres diverses, Guillaumin, p. 470.

32 Essays in Biography, p. 144.

33 “Ricardo conquered England as completely as the Holy Inquisition conquered Spain” (p. 32). But Keynes is at least inaccurate when he later says that Effective Demand is not mentioned even once in Marshall’s works (see Principles, 8th ed., pp. 511 and 699). Keynes gives us, moreover, a rather strange picture of what he calls the “classical” school, embracing under this term, apart from Ricardo’s forerunners (in Marx’s sense), “the followers of Ricardo, . . . including (for example) J. S. Mill, Marshall, Edgeworth and Prof. Pigou” (p. 3). He tells us elsewhere that his “classical” critics will be in doubt “whether what I am saying is utterly false, or whether I am saying nothing new.” One might well be in doubt, for example, whether the new conception of “user cost” (p. 53 and appendix to chapter VI, p. 65) is much different from Marshall’s (op. cit., pp. 360 and 421). Again, it is certainly untrue to say that the idea of a difference between savings and investment only appeared in some post-war theories (Economic Journal, June 1937, p. 249). The distinction is very clearly made in Bagehot, Lombard Street, chapter VI.

34 See David Ricardo, Notes on Malthus, ed. Hollander and Gregory, 1928, p. 162. The introduction contains an excellent summary of the argument.

35 Essays, ed. Routledge, p. 221.

36 Geldzins und Gütterpreise, Jena 1898. Recently translated into English by R. F. Kahn: Interest and Prices, Macmillan, 1936.

37 See Rist, “Théories relatives à l’or, au taux de l’escompte et aux prix,” Revue d’Economie Politique, September-October 1935.

38 See Hayek, Monetary Theory and the Trade Cycle, pp. 113-114.

39 Théorie de l’intérét, French ed., p. 155; General Theory, p. 140.

40 Economic Journal, June 1937, pp. 241 and 250.

41 Risk, Uncertainty and Profit, pp. 168 and 321.

42 H. G. Moulton, Journal of Political Economy, vol. XXVI, 1918.

43 A. L. Rowse, op. cit.

44 London Times, January 14, 1937, “How to Avoid a Slump.”

45 J. E. Meade (op. cit., p. 277), for convenience of exposition, adopts the term “state of bliss” to designate the time when the stock of capital has reached the point where its marginal return is zero. In that condition the real income of the community is a maximum and the real satisfaction of economic wants as great as possible.

46 London Times, March 11, 1937.

47 Written in 1937. In 1957 the Bank of England discount rate was raised to 7 per cent.—Ed.

48 Nation and Athenaeum, November 4, 1923, quoted by Keynes himself, General Theory, p. 334.