THE YEARS OF HIGH THEORY
INVENTION AND TRADITION IN ECONOMIC THOUGHT 1926-1939
TO THE ‘QJE’ FROM CHAPTER 12 OF
THE ‘GENERAL THEORY’:
KEYNES’S ULTIMATE MEANING
Writers on Keynes’s theory of investment incentive give all their attention to the concepts of the marginal efficiency of capital and the interaction of a quantity so named with the interest-rate on loans of money. To do so is to study the formal configuration of the engine without asking about its thermal source of power. The marginal efficiency of capital is nothing but a formal sum waiting for the insertion of numerical values in place of its algebraic symbols. The essential problem of why at any time the investment flow has the size it has is contained in the question what is the source of these numerical values, by what psychic alchemy is the list of incongruous ingredients chosen and fused into an answer to the unanswerable. Keynes’s whole theory of unemployment is ultimately the simple statement that rational expectation being unattainable, we substitute for it first one and then another kind of irrational expectation: and the shift from one arbitrary basis to another gives us from time to time a moment of truth, when our artificial confidence is for the time being dissolved, and we, as business men are afraid to invest, and so fail to provide enough demand to match our society’s desire to produce. Keynes in the General Theory attempted a rational theory of a field of conduct which by the nature of its terms could be only semi-rational. But sober economists gravely upholding a faith in the calculability of human affairs could not bring themselves to acknowledge that this could be his purpose. They sought to interpret the General Theory as just one more manual of political arithmetic. In so far as it failed this test, they found it wrong, or obscure, or perverse. The same fate had overtaken his Treatise on Probability.
The General Theory of Employment, Interest and Money has for this reason two entirely different natures or modes of being. It
is for the most part a description of how society in its economic parts and functions fits together. This account, however heterodox its content, was in purpose quite orthodox. It was a piece of balance-sheet work, a piece of accountancy, an establishment of the detailed coherence of society’s economic anatomy and physiology. It tells us what is composed of what; what adds up to what; what values are dependent on or to be compared with what. But at the heart of this system, which was itself only superficially strange, lay something totally different. Chapter 11 shows us the arithmetic of the marginal efficiency of capital and its relation with interest-rates, a matter for actuaries and slide-rules. Chapter 12 reveals the hollowness of all this. The material for the slide-rules is absent, or arbitrary. Investment is an irrational activity, or a non-rational one. Surmise and assumption about what is happening or about to happen are themselves the source of these happenings, men make history in seeking to apprehend it. This is the message of the General Theory, and that is the only part of it which Keynes troubled to reproduce when in the Quarterly,Journal of Economics for February 1937 he brushed aside the painstaking detail of his critics’ incomprehension and attempted a final penetration of their minds:
If the simple basic ideas can become familiar and acceptable, time and experience and the collaboration of a number of minds will discover the best way of expressing them. I would, therefore, prefer to occupy such further space, as the Editor of this Journal can allow me, in trying to re-express some of these ideas, than in detailed controversy which might prove barren.
[Ricardo. Marshall, Edgeworth, Pigou and more recent writers],were dealing with a system in which the amount of the factors employed was given and the other relevant facts were known more or less for certain. This does not mean that they were dealing with a system in which change was ruled out, or even one in which the disappointment of expectation was ruled out. But at any given time facts and expectations were assumed to be given in a definite and calculable form; and risks, of which, though admitted, not much notice was taken, were supposed to be capable of an exact actuarial computation. The calculus of probability, though mention of it was kept in the background, was supposed to be capable of reducing uncertainty to the same calculable status as that of certainty itself.
Actually. however, we have, as a rule, only the vaguest idea of any
but the most direct consequences of our acts. Now the whole object of the accumulation of wealth is to produce results, or potential results, at a comparatively distant, and sometimes at an indefinitely distant, date. Thus the fact that our knowledge of the future is vague and uncertain renders wealth a peculiarly unsuitable subject for the methods of the classical economic theory.
By ‘uncertain’ knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is merely probable. The game of roulette is not subject, in this sense, to uncertainty. Or, again, the expectation of life is only slightly uncertain. The sense in which I am using the term is that in which the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention are uncertain. About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know. Nevertheless, the necessity for action and for decision compels us as practical men to overlook this awkward fact and to behave exactly as we should if we had behind us a good Benthamite calculation of a series of prospective advantages and disadvantages, each multiplied by its appropriate probability, waiting to be summed.
How do we manage in such circumstances to behave in a manner which saves our faces as rational economic men? We have devised for the purpose a variety of techniques of which much the most important are the three following:
(i) We assume that the present is a much more serviceable guide to future than a candid examination of past exnerience would show to have been hitherto. In other words we largely ignore the respect of future changes about the actual character of which we know nothing.
(2) We assume that the existing state of opinion as expressed in prices and the character of existing output is based on a correct summing up of future prospects, so that we can accept it as such unless and until something new and relevant comes into the picture.
(3) Knowing that our own individual judgement is worthless, we endeavour to fall back on the judgement of the rest of the world, which is perhaps better informed. That is, we endeavour to conform with the behaviour of the majority or the average. The psychology of’ individuals each of whom is endeavouring to copy the others to what we may strictly term a conventional judgement.
Now a practical theory of the future based on these three principles has certain marked characteristics. In particular, being based on so flimsy a foundation, it is subject to sudden and violent changes. The practice of calmness and immobility, of certainty and security, suddenly breaks down. New fears and hopes will, without warning,
take charge of human conduct. The forces of disillusion may suddenly impose a new conventional basis of valuation. All these pretty, polite techniques, made for a well-panelled board room and a nicely regulated market, are liable to collapse. At all times the vague panic fears and equally vague and unreasoned hopes are not really lulled and lie but a little way below the surface.
The climax of contemptuous impatience to which this passage rises may have made some readers understand that Keynes was concerned only superficially with details of mechanism and institutions, but really with the nature of things. They could not have been expected to draw that message from chapter 12 of the book itself; where the scattered bones of the thesis which we have quoted lie waiting for life to be breathed into them. Chapter 12 is a curiously unsatisfying chapter. It loses sight of what in the end Keynes saw as its profoundly important meaning, and spends many pages discussing the possible advantages of abolishing the joint-stock company or at any rate of greatly reducing the marketability of its shares. A chapter called ‘The State of Long Term Expectation’ turns out to assert that there is virtually no such thing. This is confusing for the first-time reader. In the General Theory of Employment, Interest and Money Keynes was still exploring. In ‘The General Theory of Employment’ he had arrived.
The deliberate self-deception of business, in supposing its investment decisions to be founded on knowledge and to be rationally justifiable; the insecurity of its faith in its own judgements, which the awareness of this self-deception engenders; the paralysis of decision and enterprise which can result when the structure of pretended knowledge is violently overthrown by events; this central core of the General Theory is to be found in chapter 12. but expressed with a relative diffuseness and buried in an exposition of the nature of Stock Exchange speculation and its consequences for the inducement to invest in newly ordered and yet-to-be-constructed equipment. This latter aspect is doubtless important. Low Stock Exchange prices of ordinary shares in existing concerns may be a symptom rather than an original source of despondency about the profitability of contemplated enterprise; but it is also a signal, widely and conspicuously spreading the suggestion that such despondency is general amongst business men, and thus giving it a specious
plausibility. Nonetheless, Keynes may be thought, in his book itself, to have given this Stock Exchange influence excessive weight; it seems to unbalance the emphasis of chapter 12, which can in consequence appear at a first reading as a strange intruder into the main current of thought.
It is not only business men, but economists themselves, who ardently subscribe to the rationality, the objectivity, the scientific well-conductedness of business reasoning. Economic theory is the theory of an orderly and reasonable world, a world of a concerted interchange of knowledge, a world where actions are pre-reconciled by the great market computer and a world where what we intend is what will happen. Such a conception of economic society had a measure of plausibility in the modern Antonine age, the second Victorian generation and its Edwardian sequel, where, after 1870, western Europe seemed to have turned its steps towards the liberal vision of free internal and international competition, of political liberty and of peace. General equilibrium is a state of general agreed consistency and public availability of knowledge of the economic situation, as it is being shaped by the actions of individuals and itself bears upon each individual’s choice of his own action. General equilibrium consists in and depends upon the coherence and universal diffusion of relevant knowledge by means of a system of prices publicly determined and announced. If the ends which are being pursued by the participants in such an equilibrium consist in altering the existing measurable economic configuration of society; if these ends consist, that is to say in what is nowadays comprehensively known as ‘growth’: this makes no difference to the ultimate conception itself of the equilibrium as a mutual conformity of simultaneously prevailing plans. Economics is about order.
But unemployment is the consequence and reflection of disorder. A theory of unemployment is, necessarily, inescapably, a theory of disorder. The disorder in question is the basic disorder of uncertain expectation, the essential disorder of the real, as contrasted with the conventionally pretended, human condition. It is the disorder of adventurous decision, of ‘enterprise’. The world in which enterprise is necessary and possible is a world of uncertainty. The notion of enterprise, so central in Marshall, the realist, had no proper or legitimate place in the
conception of a general equilibrium, the equivalent of a general agreement on what is to be done and on the meaning of what is being done.