Philosophical Foundations of Keynesians

0:00I'd like today to discuss two areas in which I think Keynes' views on philosophy influenced his economic thought. These concern his theory of knowledge and his views on ethics and politics. Now, Keynes' views on theory of knowledge are expressed principally in a book of his that came out in 1921, which was his fellowship dissertation at King's College, Cambridge, called A Treatise on Probability. From the title of the book, one might not suspect that this is about the theory of knowledge, But unusually for a statement by Keynes, this is only slightly misleading as the treatise on probability is for a great part about technical issues of probability, but also is a much broader philosophical account of what the nature of knowledge consists of.

1:10Now, Keynes divided knowledge into two different categories, direct and indirect. Direct knowledge were things that we, such as things we see directly or can perceive directly such as I'm now looking at certain objects or certain shapes and I can't doubt that I'm actually seeing something, this is something that's known directly and as we'll We'll see later, Keynes thought there were other, there were truths about ethics that were also directly seeable, but most knowledge in his view fell into the indirect category, and it's here that issues of probability come to the fore, because he thought practically all knowledge, since it's indirect, involves probability, again not in the mathematical sense, but just in the sense that we know things not directly but just by inference or by evidence. In his view, there were logical principles that enable us to go from certain evidence to certain probable judgments.

2:21Just like in the famous syllogism, all men are mortal, Socrates the man, therefore Socrates is mortal, it follows logically given the premises are true, the conclusion is true. King's thought that given certain premises, it was logically true that such and such an event was probable given certain evidence. The only catch in this was he thought it was practically impossible to establish anything as knowable that way even though most of our knowledge rested on just this kind of indirect inference. When he, as an example of his skepticism about knowledge, he, and here he for one a few times resembles Austrian economists, he was very doubtful about the value of econometrics or measurement in economics and the collection of statistics, Although he himself had done some work in economic statistics in his work on Indian currency reform in 1909, he doubted that this was much more than of historical value.

3:40For example, in 1937, he reviewed some work by the famous econometrician, Niko Tinbergen, of Money. He said, how could we know just from certain collections of statistics that this is just anything more than a description of what certain events that have happened at one time or other, how could we conclude from this that there are any laws or any truths about what will happen just because certain things, certain mathematical relationships have been shown to occur in the past. So as I say, in this respect, he resembled, he took a somewhat position somewhat like that of the Austrians and you'll also find if you look at the general theory, although there are a few equations in it, there's actually very little math and he really didn't go in for that much unlike some of his latter-day disciples.

4:38Now, one thing, if he thought we couldn't get knowledge by statistics, then how could we get such knowledge as was available? Well, he thought that, as I say, in general, knowledge rests on induction, and he distinguished two different types of induction. One was pure induction, which is thinking that something will happen just because it's happened before.

5:34We see an analogy between the different instances that there's sort of some explanation we can come up with of why this relationship should hold. So we thought this would give us some reason to think that it might generally be true that if the price of a commodity goes up, the quantity demanded will go down. sort of very, as you see, very strictly reasoning by analogy. Now, one thing he was very insistent on is in this kind of reasoning by analogy, one couldn't just arbitrarily pick points of analogy, but one had to take account of all the analogies and disanalogies in a whole system of events.

6:20For example, in studying, he was very doubtful that one could just study particular individuals, Say, as it's done in the Austrian approach, where economics is developed from certain axioms of human action, and then one starts with individuals who are exchanging commodities and build up the theory of economics from that basis. Keynes thought doing that way would have been an abstraction from the whole system. One has to do things, sort of consider them all together, considering both the analogies The Theory of Money and Credit

7:27The concept of the wage unit on page 41, it's a measure of aggregate wages, not individual wages, and always concerned with aggregates. Now, one instance of this, in particular, is probably the most famous, is the so-called paradox of thrift that I'm sure most of you are familiar with from your textbook. Actually, Keynes never describes it in the general theory by that name, paradox of thrift. And he does say that while one individual can save, it doesn't follow that everyone in the economy can save because some people's saving may be offset by others. So in his view, you see how it's a fallacy to take account of how individuals react just by themselves and then build up the rest of economics from that.

8:24And he has to realize that, as he sees it, that the total system may be entirely different from just what happens when we take individuals into account. Now, if some people, when they explain this so-called paradox of thrift, say that King's point was that there is a fallacy of composition involved, that is to say, it doesn't follow if something is true of a part, it's also true of a whole. I think that's right, but most of the textbooks get the wrong thing as a fallacy composition. They'll say something like, King's thought a particular individual can add to his wealth through savings, but it's not true that everybody can add to his wealth through savings.

9:10Now he doesn't say that, but he says if you look at this passage from page 8 to page 3, he says that an individual can save, but it doesn't follow that all individuals can save. doesn't say anything to suggest that there's some individual who can save but not add to his wealth, but that's just a digression. I just put that in because I think it's important to be accurate about the stating things exactly as he had them. Now, again, another view of his that comes in, the philosophical view of his on knowledge that comes in very much in his economics, is again, with this idea of the total system, is that one has to consider the surface properties of things very closely.

9:58One can't claim that there are obviously certain underlying factors that really account for everything in the system. One has to go according to what the surface properties are and then have one's explanations from this. For example, Keynes places great emphasis on the fact that wages are negotiated in money, When he has his famous view that there can be an equilibrium with unemployment, many writers after this suggested, like Franco Modigliani had a famous article in 1949 on this, and Eric Lindahl also suggested this.

10:44They said Volkanes is assuming that wages are rigid downwards, that wages can't be lowered because it seems from elementary economic theory that if there's a surplus of a commodity then by lowering the price one can clear the market. So people wonder how can there be an equilibrium with unemployment if can't the workers simply The Theory of Money and Credit

11:43I mentioned that the bargaining takes place in money terms. So he thought it doesn't really matter what happens to real wages unless you could show that it somehow affects the way people bargain in money. It's not clear to me how the argument is supposed to go because I don't think it's correct, but that at any rate was his position. Now one thing I've perhaps given a wrong impression so far when I describe, I should give also one other instance, a famous one where Keynes stresses the surface properties is in his criticism of Mises' theory of interest in the general theory. I think this is the only time he mentions Mises' entire book which is on note on pages 192 and 193 and he said Mises has a very and the peculiar theory of interest, which he says corresponds to what he calls the marginal efficiency of capital.

12:47It doesn't actually correspond to marginal efficiency of capital, as Keynes defines it, but it does have some similarity to it. But he says Mises wrongly assumes that just because people decide to invest instead of consume, that they'll be able to do so. So, what Mises is forgetting is that interest is a monetary phenomenon, the interest rate is determined by demand and supply of loanable funds, so it doesn't matter if what Mises calls people's time preference shifts, there must be some way of having this affect the money market before it can have any, the effect, the kind of In fact, Mises was concerned with that to say, for example, supposing people's time preference lowers and as a result, entrepreneurs decide to increase investment.

13:47Now, the way Mises takes it, unless there's some peculiar circumstance, they'll be able to get the money to do so. But Keynes thought because the rate of interest is determined by the rate of time preference. But Keynes thought this wasn't right. It's the money that rate, that determines the rate of interest. One could have what he calls, even if people wanted to invest, they'd be unable to get the money to do it because money interest rates are too high for them to obtain this. to obtain this. So you see again how he rests everything on the surface properties because money is a, because the interest rate on the surface is a monetary phenomenon. He thinks one can't neglect that in determining the analogies and disanalogies in things.

14:40I've given so far a perhaps misleading impression of Keynes' views in that when I've spoken of his views on knowledge, I suggested that he did think there was at least some knowledge obtainable of this indirect kind by induction through analogy. Now, it isn't wrong to say that in the sense that he denied this, but he really wasn't sure about it, because he said all induction rests on what he calls the principle of limited variety, that's to say that certain things vary with certain other things, and it's not randomly, but certain things, what he called in the treatise on probability, logical or legal atoms, it's rather unusual terminology, it's sort of things that all If these occur, if there are things that always vary together, then we do have some basis for inductive inference, but we can't know that this principle of limited variety is true.

15:42I mean, you might have, supposing the economy is what he calls, on page 249 of the treatise, an organic system, that's, say, one that's always changing, and there aren't any constant relationships, The Theory of Money and Credit

16:24They say Keynes did say that the economy was an organic system just like that, but he never does say that. I think they rightly point out that Keynes was influenced a lot by the philosopher G. Moore, who discussed organic unities, but that's an entirely different thing. And that concerns, that Moore's idea was that something can be, a whole can be better than the sum of its parts. That's if you take the parts of things and ask how good is each one, it won't necessarily be the case. If you add them all up, you'll get the good of the whole. You could have more good in the total than the part.

17:10So that really is quite different from what Keynes meant by an organic system and I don't think there's any evidence he called the economy an organic system. Now supposing we do have this kind of, we do get some analogies of the kind Keynes thinks appropriate. I should mention also, before this, what about the Misesian view that one can derive economics by strict deduction from logically true axiom. Well, Keynes doesn't directly comment on this, but I think it's clear what his views would have been on this.

17:56Now, if you hold the Misesian view, you're holding certain truths or synthetic, that say, to give us information about the world, but are also knowable without reference to experience. Professor Hoppe has written very well on this point, is basic to Mises' position. But Keynes didn't deny that there were such synthetic a priori truths, as these are called, but he was rather skeptical about them. He thought he did give examples that he thought might be such truths, but he had a very limited view of what they consist of. So I think that he would not have accepted the Misesian praxeology as a legitimate approach, because he would have thought this is making too many things synthetically, synthetically a priori, and we can't really know this.

18:55Now, there's one other part of his theory of knowledge that I think is very important in understanding is economics. This enables us to get to the second topic I suggested, which is his views on ethics and politics and how these affect his economics. Supposing we have a whole system, we do get certain knowledge by analogy in the way I've suggested Keynes thought might be possible. We then have the problem, how do we know in the system which things cause which other things? Now, Keynes has a very interesting treatment of causality in Treatise on Probability. It's just a brief comment, page 277, where he says, like most things, he's really not sure what the nature of causality is.

19:45He says there's one position that David Hume held that says one thing causes another, just to say that they're always in a constant relationship. Relationship

20:24to the investigator to separate out what he calls the independent and dependent variables. And he has a rather peculiar view of what these consist of, that the independent variables are the things that change faster. For example, he takes the money rate of interest as an independent variable because that fluctuates a lot, whereas money wage rates would be a dependent variable because these tend not not to shift so rapidly, or at least it was defined by his method of wage units. So one thing he's very concerned with here is that you get the ones that are changing rapidly and pick them as the causal agents.

21:14Now this isn't, why do you do it this way, it isn't purely a matter of what is likely to be true, but it's very definitely for purposes of control. In fact, in one passage in general theory, which I think is one of the keys to understanding the motivation book on page 247, where he discusses this question of dependent-independent variables, he said something like the independent variables might turn out to be the ones that are most able to be subject to conscious and deliberate control by the central authority. So he was sort of interested not just in studying the economy but changing it in a certain way and that's why he selected certain things as the independent variable.

22:01Now, before turning to his ethical views, I think there's one other thing I need to mention on his views on knowledge and this is his view of people's rationality or he He tended, except for a small elite of which he naturally included himself, to think that most people acted in a manner based on habit rather than on rational thinking. He tended in a very famous passage of the general theory. He suggests that even if there are reasons for doing something, one needs to have a sort of feeling of optimism in order to impel one to act.

23:02It isn't enough that there's a good case for something one sort of has to feel like doing it. I think this view in part derives from David Hume, whom Keynes studied very carefully and is one of the leading Hume scholars of his time. But where this comes in in his economics is that one reason he doubted that there would be an equilibrium, say, gained by cutting wages is he thought that this would depend and very much on how speculation took the matter. He thought it wouldn't necessarily be that businessmen would say, all right, real wages are now lower, therefore our costs are lower and we can now invest more.

23:54He thought businessmen might say, oh, well, maybe wages will go down even further, so we're still not going to invest. He tended, I think, disregarding the type of work Mises later did in his essay, Profit and Loss, and Kirzner on entrepreneurship, again, he tended to think of the entrepreneurs just as a class, he didn't consider that particular businessmen might be able to have correct ideas about the future and then by doing so would be able to bring the economy to equilibrium

24:59The Theory of Money is all irrational, but he just thinks there is this factor of animal spirits that needs to be taken into account. So now to turn to the second topic, which is Keynes' views on ethics and political theory and how they affect his economics. As I think other speakers will be going into more detail, Keynes was very influenced by the philosophers who were at Cambridge, which was his university in the early years of the century, particularly Jean Moore, but also others like John McTaggart, Richard Russell who was a very good friend of his Ludwig Wittgenstein I see and C.D. Broad and to some extent Alfred North Whitehead who was at Cambridge in a somewhat earlier period but it then shifted to the Imperial Technical College in London but this was probably at this time mainly when King was writing Trees on Probability he worked on it I think from the early years of the century until its publication. This was Cambridge was probably the leading century

26:10in the world for analytical philosophy. This is where really the, there was sort of really the top philosophers in the world were at this time. I mean a figure like C. D. Broad would have been a major figure anywhere else was just sort of a second-rater at Cambridge when they had Russell and Wittgenstein around. But one thing that Keynes was very influenced by Moore was that Moore thought I thought that when we say that something is good, we're just sort of, we can just intuit what this, what things are good. It's sort of goodness is what he called a simple, non-natural property, just like I can see, say, this lectern is brown, more held, I could see certain things are good, goodness isn't a physical quality Property Perceivable by Senses, but I can just intuit this, see things as good and more particularly how the best things were certain states of friendship and certain types of contemplation of beautiful objects.

27:25Now, in practice, this goodness of its highest sort could only be enjoyed by a small group. of Money. Again, this is the kind of group Keynes included himself in. He was a member of a society called the Cambridge Apostles, which was kind of an elite group of undergraduates. And he was later associated with the literary circle called the Bloomsbury set. This is after the neighborhood that most many of them lived in, which is near the Bloomsbury Square, near the British Museum. But people of this sort stress that they were kind of elite who were able to have this kind of higher activity of contemplation, whereas most people were irrational and needed to be subjected to direction by these experts.

28:18In 1935, he was writing a book on economics that would immediately revolutionize the subject just by his saying, just as soon as people realize he was right, or at least enough of the right people realize this, they would be able to put his ideas into effect. Eugen is assuming, he states, near the end of the general theory, that the ideas of intellectuals of his kind are of primary importance in leading the masses, sort of what, although in the 19th century he thought that material interests were more important, attached considerable importance to certain capitalists who were willing to invest regardless of this situation at the moment, He thought things had now changed in response to a letter from Dora Russell, which appeared in New States, saying, well, if this view is true, why haven't Keynes' ideas been put into effect yet?

29:31yet so he said he answered he said well i i haven't convinced people yet but i will so you see it's a complete reliance on his intellectual power as capable of leading the rest of society in his terms the socialization of investment you remember what i mentioned before he had thought He thought that when businessmen were investing, even if they wanted to do so, they might be blocked by the fact the money rate of interest was too high. Now, he thought there was a temporary cure for that, which is his famous fiscal policy of government spending, particularly on public works.

30:18proponent of public work spending as he said in one of his essays in his characteristic elegant literary style two pyramids two masses for the dead are twice as good as one not so two railways from London to York but this policy public work spending was just a temporary expedient what he really thought was necessary since he took a very dim view of the stock market and he in one occasion to a casino, another famous passage you discuss, the famous analogy of the stock market to a beauty contest. I won't go into the details of that, but that's very, very interesting logical. It has very interesting logical points in it.

31:05But he thought we should get rid of this entirely and have the government take over investment. He'd have what, as a result, he'd have what they called, what he called the euthanasia of the Rancier. The Rancier is the person who, sort of the, what's sometimes called satirically a coupon clipper. That's to say, someone who gets interests, say, on stocks or bonds and who, in Keynes's view, although I think quite wrongly, really didn't contribute much to the economy. He viewed the Ranthiers just as sort of engaging in a speculative game. So he wanted to eliminate these. Now euthanasia means sort of a happy death, it means painless death.

31:53One could question whether the Ranthiers would take that view of this, of their death in quite the way Keynes thought of it, but that's a matter he doesn't go into. to be socialized. He likes the idea of having a market for consumer goods, and he says that the idea of choice is a good one, particularly likes experiments that people might do in Getting Various Commodities, Getting Various Different Kinds of New Commodities, Particularly, and he allows some inequality of income because he says this is the way certain kinds of valuable things like art are produced by wealthy patrons giving them money.

32:50Of course, again, it's, I think, no coincidence that Keynes himself was a wealthy patron who and was responsible for various commissions in the British government dealing with art. So he allowed some inequality of income, but he wanted all investment to be socialized. I think if we recall how much of the economy concerns investment, this is really a very great deal. So sometimes Keynes is presented as somewhat of a moderate. For example, there's some people who cite Keynes' last article in 1946 on the balance of payments where he referred to much modern stuff which has gone sour and silly, but there's no evidence he meant his own views by that.

33:42I really don't think that's much, I mean he does quite clearly say in the general theory that he favors socialization of investment and he was, the one constant even throughout the book is his very negative view of interest and speculation on money, for example in the preceding chapter 23, he's very favorable to the mercantilist policy of piling up gold reserves and having the so-called The Theory of Money and Credit

35:12This will lead to major unemployment. So he thought that by having the government take over all investment, this will enable this problem to be solved since the government officials won't be dependent on speculative ideas. I should say this doesn't mean Keynes Mises was a Marxist in his views, he was quite hostile to Marxism, not so much on the grounds that he didn't like socialism, he speaks of favoring a liberal type of socialism, but he didn't like the idea of the proletarian ruling, the working class, he said, I am a bourgeoisie, This is my class. I don't want these inferior people taking over.

36:08So that was his principal objection to Marxism. Also, he thought that Marx's economics were outdated. He took a very dim view of the value of Marx's Das Kapital. He rather, in one letter, told off Bernard Shaw for overrating the book. In the book he said that no doubt Shaw was right that it had been influential, but that really didn't mean it had any significant ideas in it. So one thing one needs also to mention, again, I think this reflects in part Moore's influence. Moore, in addition to these intuitionist views I mentioned on nature of good, was in his His moral system, a utilitarian, he thought that, as I mentioned, what's good can be directly intuited, but he didn't say what the right thing to do is, is a matter of direct intuition. He thought the right thing to do is to produce the most good possible. Now, this is a utilitarian view. However, how was one to do this? In Moore's view, which he gives it the end of it near the end of his 1903 Finkepie Ethica he says it's almost it's impossible to tell what the consequences of various suggested alternatives are going to be we really can't calculate or determine what would happen if we did various things this is I think argument which those of you familiar with Professor Hoppe's work will find some

37:52and what familiar is, he used a variation of this argument, his own criticism of utilitarianism. So more thought in contrast to the view that one should have a rights-based morality, more thought that people ought to in general follow customary rules on the grounds that we have no real reason to think anything is better than that since we can't calculate consequences. Mises didn't agree with that in Trees on Probability. There's a section, I think, around page 307 where he says Moore is wrong about this because all this argument shows is we can't know the consequence of the certainty, but maybe we can know them with what's probably the case, but again, it's not everybody who's capable of knowing these things. It's again just this elite group. Most people are governed by habit or irrational impulses, and again, one needs an elite to

39:20Ethics and Political Philosophy and Ethics and the Economic Views that are familiar to you in the general theory. Thanks very much.