The General Theory of Employment, Interest and Money. By John
Maynard Keynes. (Macmillan. 5s.)
Mr. Keynes's Attack on Economists
Ma. KEYNES'S new book presents the reviewer with an almost insoluble problem. It is avowedly a technical book, addressed, as Mr. Keynes tells us in the Preface, to his fellow- economists. Moreover, it is a very difficult technical book, involving much novel terminology,- a considerable use of mathematical symbols, and above all an elaborate abstract argument which is sustained as a connected whole through more than 332 of the 384 pages. It is a book in short, for specialists, not for the -general reader. None the less the general reader will wish to know much more about this book than he. was content to know about, say, Mr. Keynes's own Treatise on Probability. For here is the most famous of living-economists claiming to have demolished a large part of the.classical theory of economics, which he has himself taught for most of his life ; and this classical theory, as he is careful to insist, is no esoteric affair but " dominates the economic, thought, both practical and theoretical, of the governing and academic classes of this generation, as it has for a hundred years past." What, then, the general reader will ask, is the gist of Mr. Keynes's argument and is he right or. is he wrong, or is it a matter on-which opinions may. legitimately differ ? What is the issue and on what does it turn ? To answer these questions, however crudely, in a review of tolerable length, is a difficult, and perhaps a hopeless, task.
Mr. Keynes accuses classical economic theory of proceeding on the assumption that the resources of production are, subject to certain qualifications, fully employed. It recognises, of course, that there may be a considerable amount of unem- ployment due to " various inexactnesses of adjustment," e.g., demand may shift from the products of one set of indus- tries to those of another, and the shifting of labour required as a consequence may be a slow and painful process. Moreover, certain modern economists, notably Professor Pigou, have argued that there may be an additional. element of unemploy- ment, if the level of wages is maintained at an unduly high level. Subject to the foregoing, classical economic theory asserts that economic forces will work so as to bring the demand for labourt into,_ equilibrium with its supply. Mr. Keynes denies this, and maintains that unemployment may exist on a large scale, over and above " frictional unemployment " and any " voluntary unemployment," as the result of a general deficiency of " effective demand." Not only may unemploy- ment occur for this reason ; it is in fact likely to occur, remedial policy apart, as the normal rule ; and its scale is likely to be larger the wealthier society becomes.
To elucidate the issue, we must turn to the mysteries of savings, investment, and the rate of interest. Mr. Keynes founds his argument on the " fundamental psychological law " that the wealthier a man becomes the larger is the proportion of his income which he will seek to save. As society becomes more prosperous accordingly, the members of it will spend a diminishing proportion of their incomes on current consumption. If investment increases correspondingly, no harm is done ; full employment may still be maintained. But, argues Mr. Keynes, there is no reason why investment should Increase correspondingly ; and, if it does not, unemployment will result, the productive powers of igheiety. will not be fully employed, and its aggregate income will be diminished.
What has the classical theory to say to this ? It admits, of course, that this may happen for a period, as the pheno- menon of a trade depression. But it asserts that such a state of affairs is not a " position of equilibrium," and that there are corrective forces, which, however slowly and clumsily they may work, would prevent its indefinite continuance. It argues that, on the assumptions made, the supply of capital would exceed the demand for it in the capital market, that this would lead a fall in the rate of interest, and that a lower rate of interest would check saving and stimulate investment until equilibrium were restored. Mr. Keynes does not dispute that a lower rate of interest would stimulate investment, and that it might check saving. On the contrary, he is emphatic that a reduction in the rate of interest is, in principle, the right and essential remedy. But he denies absolutely that natural economic forces would do anything whatever to bring about a fall in the rate of interest. He denies indeed that there would be any tendency for the supply of capital to exceed the demand. What would happen in the circumstances supposed is that employment would be deficient, so that aggregate incomes would decline, and the capacity to save would be diminished. It is anathema now. to Mr. Keynes to suggest that savings may exceed investment. That he insists is impos- sible, if the terms are correctly employed and the point seems . to have for him a more than terminological importance. The rate of interest has become for him an " independent variable."
- It is not determined, as orthodox theory argues, by rela- tions between the demand for and the supply of capital, but by quite different influences, namely the quantity of money " in conjunction with liquidity preference," i.e., the extent to which people choose to keep their resources in cash or some other liquid form.
Mr. Keynes has much to say about the important part that may be played by variations in " liquidity preference." as, for instance, by the spreading in an atmosphere of distrust of a disposition to hoard idle bank-balances ; and his analysis of this matter forms in my opinion a valuable section of his book. But the possibility of such variations represents essentially a qualification of his main argument, the practical moral to which they point being the uncongenial one of the importance of maintaining " confidence." Subject to -possible changes in this factor, it is Mr. Keynes's view that the rate of interest is determined by the quantity. of money made available by the Central Bank, and not in the least by whether we are a thrifty or an extravagant people. If we are unduly thrifty we shall have heavy unemployment as a normal state of affairs ; if we are sufficiently extravagant, we may maintain " full employment " ; but it will make no difference in either case to the rate of interest. This is the real crux of the controversy ; and it is here, in my judgement, that Mr. Keynes fails to make out his ease.
I should formulate as follows the answer of the classical school. They Would agree that over a short-period monetary conditions exercise an important influence on the rate of interest and a dominating influence upon short-term rates. They wouldpoint out that depression and heaVY unemploy-
Meat will serve (subject " liquidity " complications) to bring about conditions of abundant bank-money, so that the natural corrective forces, though they- may work far less smoothly than used to be supposed, arc none the less really there. On the other hand,' they would insist, the influence of changes in the quantity of money on the rate of interest is purely transitional. Other things (including the state of " liquidity preference ") being equal, an increase in the quantity of money, operating through the medium of lower interest-rates, will set in motion a tendency towards higher commodity prices, this will involve an increased use of money, and when prices have reached a level appropriate to the increased quantity of money, the complicating influence, so to speak, of money will lie removed, and the more funda- mental factorS of the supply of capital, arising from the capacity and propensity to save, and the demand for capital, arising from the opportunities for investment, will resume their sway as the determinants of the rate of interest. There is nothing that Mr. Keynes has to say in his chapters on prices and wages which seems to me in any way destructive of this explanation ; and though it may seem to the general reader in sonic respects remote from reality, this is due to the great short-term importance of those complications about changes in " liquidity preference " which qualify Mr. Keynes's' main assertions as much as those of the classical school.
Much of what Mr. Keynes has written in this book is a real and much-needed contribution to short-term economic analysis. But, as I have indicated, the practical implications of what he has to contribute in this field are of a conservative nature . which is distasteful to him ; and I suspect that it is largely a conflict between his desires and his intellectual appre- hensions in the short-term sphere that has led him to under- take so fierce an offensive against classical long-term. theory. It is true,- in - my judgement, that the long-term morals of the economic troubles of recent years are different (and decidedly less conservative) from the short-term ones. But it is unnecessary, in--order to establish. them, to discard the classical theory of economics for a brand-new system of
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