29. Summary

0:00Chapter 29 Summary In the present book, we have followed the exposition and argument of the general theory as Keynes presents it. This means that the argument has taken a winding course, often involving repetition. The reader may find it helpful, therefore, if we now briefly summarize some of the main negative or positive propositions in each chapter. Chapter 1. Though Keynes has been praised as the peer of Adam Smith, Ricardo, and even Darwin, not a single important doctrine in his work is both true and original.

0:502. Keynes's effort to overthrow the orthodox contention that the most frequent cause of unemployment is excessive wage rates is unsuccessful. His arguments characteristically rest on en bloc thinking that assumes away the individual differences that make up reality. Prices and wage rates never change uniformly or as a unit, but always relatively and individually. Aggregative and macroeconomics conceal real interrelationships and real causes. 3. Keynes did not succeed in refuting Say's law of markets.

1:38Markets. His attempted refutation consisted merely in ignoring the qualifications that the classical economists themselves insisted on as an integral part of the doctrine. 4. Keynes's thought is honeycombed with contradictions. His central idea of an equilibrium with unemployment is self-contradictory by the very concept and Definition of Equilibrium. Five, Keynes's choice of units for economic measurement was hopelessly confused. What he calls a quantity of employment and puts into algebraic equations as such turns out on his own definition to be not a quantity of employment but a quantity of money received by Laborers Who Are Employed 6.

2:37There is nothing particularly original in Keynes's treatment of the role that expectations play in economic life. He does not, in fact, sufficiently recognize that role. He sees that expectations affect current output and employment, but seems to forget that they They are also embodied in every current price, interest rate and wage rate. 7. The current disparagement of static theory is mainly the result of confusion of thought. Static theory is necessary not only for the solution of many basic problems, but as a preliminary to dynamic theory.

3:25There is no difference in kind between the methods of static analysis and the methods of dynamic analysis. There is merely a difference in the specific hypotheses made. The appropriateness or utility of any hypothesis depends mainly on the particular problem we are trying to solve. 8. Keynes's definitions of his key terms, income, saving and investment, are merely circular. They are all defined in terms of each other. He so defines saving and investment that they are not only necessarily equal but identical.

4:11He repudiates and apologizes for his confusing definitions of these same terms as given in in his Treatise on Money, but absentmindedly returns to these old definitions in his subsequent discussion, particularly when he tries to prove that investment increases employment and that saving reduces it. Keynes treated saving with contempt as far back as The Economic Consequences of the Peace in 1919. 9. Mathematical economics, as Keynes and others use it, can at best give precision to purely hypothetical assumptions. To mistake these hypotheses for known or determinable realities leads to a merely spurious precision and compounds error.

5:14Keynes's alleged consumption function, his fundamental psychological law governing the propensity to consume, is an unsuccessful attempt to turn a loose truism known from time immemorial into a precise and predictable relationship. Even if this relationship existed, it would not have the economic consequences that Keynes attributes to it. 10. Keynes's list of eight motives for saving is arbitrary. It could either be expanded to a much larger number or reduced to one to build up a reserve against future needs or contingencies.

6:01In addition to this motive for plain saving, however, we must set down the motive to capitalistic saving to make roundabout methods of production possible, which is quite overlooked in Keynes's 8. His argument that a rise in the rate of interest will diminish investment rests on the fallacy of assuming an arbitrary or uncaused rise in the rate of interest, rather than a rise 11. Keynes's investment multiplier is a myth. There is never any fixed, predictable multiplier.

6:49There is never any precise, predeterminable or mechanical relationship between social Financial Income, Consumption, Investment and Extent of Employment. An equilibrium with unemployment, to repeat, is a contradiction in terms. No investment multiplier can be calculated or even discussed, except in relation to the extent of maladjustment or discoordination among prices and wage rates, or to the state of Business Sentiment. Keynes's implied definitions of saving and investment constantly shift. He tacitly assumes that what is not spent on consumption goods is not spent on anything at all.

7:42By investment he most frequently means government deficit spending financed by inflation. His multiplier easily lends itself to a reductio ad absurdum. His belief that gold or money is sterile is a relic of medieval prejudice. 12. Keynes uses one of his key phrases, the marginal efficiency of capital, in so many different senses that it is difficult, if not impossible, to keep track of them. He fails to recognize that interest rates are as much governed by expectations as is the marginal efficiency of capital.

8:31Instead of using this latter term to cover at least six different possible meanings, he should have been careful at all times to distinguish between these meanings. But if he had, he might not have written the general theory at all. 13. Keynes's arguments against liquidity and against speculation are untenable. Speculative anticipations and risks are necessarily involved in all economic activity. Somebody must bear them. What Keynes is saying is that people cannot be trusted to invest the money they have themselves earned, and that this money should be seized from them by government officials and spent or invested in the directions in which those officials, seeking to hold on to political power, deem best.

9:3414. It is not helpful to explain interest rates as the reward for parting with liquidity any more than it would be to explain the price of tomatoes or a house as the reward to the buyer for parting with cash for them. Without previous saving, moreover, there can be no liquidity to part with. If Keynes's theory of interest were right, interest rates would be highest at the bottom of a depression and lowest at the peak of a boom, which is almost precisely the opposite of their actual tendency. Keynes is wrong in regarding money as barren.

10:19It is a productive asset, and productive in the same sense as other assets. Keynes is also wrong in regarding interest as a purely monetary phenomenon. His fallacy consists in assuming that because monetary factors can be shown to affect the rate of interest, real factors can safely be ignored or even denied. Whatever is true in Keynes's theory of interest was already recognized by Newt Wichsel and is fully taken account of in the work of the best contemporary economists. 15. Though Keynes attacks the classical theory of the rate of interest, there is no uniform classical theory of interest.

11:13Current theories of interest might be divided into three broad categories. 1. Productivity Theories, 2. Time Preference or Time Discount Theories, and 3. Theories which combine productivity and time preference. As a borrower of funds, in effect, buys or borrows time, or the use or enjoyment of goods before he could otherwise use or enjoy them, time preference or time usance must be recognized as the chief factor in explaining interest and the rate of interest. But investment opportunity, the prospective rate of return over cost, or the expected net value productivity of specific new capital goods, also plays a role, because of its influence on the demand for loans and the rate that borrowers are willing to pay.

12:17Any complete theory of interest must deal not only with real but with monetary factors. At any given moment, the rate of interest is determined by the point of intersection of the supply curve of savings with the demand curve of investment, or the supply of loanable funds with the demand for loanable funds. But the chief long-run determinant of the interest rate is the community's composite rate of time discount. 16. While Keynes formally defines saving and investment as necessarily equal in amount and merely different aspects of the same thing, his theory repeatedly depends on the tacit assumption that saving and investment are separate and independent.

13:16Under the assumption of a constant money supply, saving and investment are necessarily at all times equal. When investment exceeds prior genuine saving, it is because new money and bank credit are being created. When ordinary saving exceeds subsequent investment, it is because the money supply is contracting. An excess of saving over subsequent investment is but another way of describing deflation, and an excess of investment over prior saving is but another way of describing inflation. Keynes's assumption that it would be comparatively easy to make capital goods so abundant that the marginal efficiency of capital is zero is fantastic, and has absurd implications.

14:1417. Keynes's theories of own rates of interest are completely untenable. What he is talking about is not interest rates at all, but merely speculative anticipations of price changes. Keynes's belief that the world is so poor in accumulated capital assets overlooks the fact that at least two out of every three persons in the world today owe their very existence to accumulated capital since the Industrial Revolution. 18. Keynes had confused ideas about economic interrelationships. Particularly absurd was his idea that flexible money wages, adjusting to prior changes in prices and demand, would cause violent oscillations in prices and that we could stabilize the economy by trying to to hold up wage rates regardless of what happened to prices.

15:21His remedy would un-stabilize the economy and create or prolong the very mass unemployment he professed to be trying to cure. 19. Keynes is unsuccessful in his attempt to deny the most strongly established principle in and Economics, that if the price of any commodity or service is kept too high, i.e. above the point of equilibrium, some of that commodity or service will remain unused or unsold. When wage rates are too high, there will be unemployment. Adjusting the myriad wage rates to their respective equilibrium points may not always be in itself A sufficient step to the restoration of full employment.

16:14But it is an absolutely necessary step. Keynes tried to substitute general monetary inflation for piecemeal wage and price adjustment. But without proper wage-price coordination, inflation cannot bring full employment. 20. There is no reason to suppose that there is a genuine and determinable functional relationship between effective demand and the volume of employment. There will be full employment with all sorts of changes in effective demand if a fluid and dynamic equilibrium exists among prices, wage rates, etc.

17:01There will be unemployment with no matter what effective demand if this equilibrium does not exist. Keynes was unjustified in declaring that previous economists had failed to reconcile value theory and monetary theory. 21. Inflation is at once an uncertain remedy for unemployment, an unnecessary remedy for unemployment, Unemployment and a Dangerous Remedy for Unemployment Elasticity of demand is not measurable. The mathematical method is misapplied to it. To try to cure unemployment by inflation rather than by adjustment of specific wage rates is like trying to adjust the piano to the stool rather than the stool to the piano.

18:00The rate of interest is a market price like any other market price, and determined as much by the demands of borrowers as by the offers of lenders. 22. The explanation of an economic crisis as a sudden collapse of the marginal efficiency of capital is either a useless truism or an obvious error, according to the interpretation When we give the phrase the marginal efficiency of capital, if this means simply a collapse of confidence, the explanation is a truism. If it means a collapse in physical productivity, it is nonsense.

18:45If it means a collapse in value productivity, it reverses cause and effect. The Keynesian cure for crises is perpetual low interest rates. The attempt to attain these would lead to a policy of perpetual inflation. The Javonian theory that business conditions vary directly with the size of crops is untenable and particularly implausible in the form maintained by Keynes. 23. Keynes's system, as he came to recognize at the end of the general theory, was actually a reversion to the naive and discredited theories of the mercantilists and underconsumption theorists from Mandeville and Malthus to Hobson. It was also a reversion to all the inflationist Most Theories of the Currency Cranks, from John Law to Silvio Giselle 24.

19:53Keynes's proposals for the euthanasia of the rentier, of the functionless investor, were proposals to rob the productive and expropriate their savings. Keynes's plan for the socialization of investment would inevitably entail socialism and state Seriously carried out, it would remove any significant field for the exercise of private initiative and responsibility. Keynes, in brief, recommended de facto socialism under the guise of reforming and preserving capitalism. Domestic laissez-faire and an international gold standard, blamed by Keynes as among the 25.

21:01Because Keynes was continually contradicting himself, we may not be justified in calling 26. If we try to use the term with scientific or objective precision, full employment is not even definable. Full employment at whatever cost is not even desirable.

21:47It is best either to use the term in a loose, common-sense way to mean the absence of abnormal involuntary unemployment or to replace it by the term optimum employment. It is not an end in itself, but a means to, or an accompaniment, of much broader ends, including mainly the maximization of consumer satisfactions. The economic objective of mankind, after all, is not more work, but less. 27. Estimates to determine the national income in monetary terms have merely a limited usefulness for special purposes.

22:35Actually, all estimates of national income rest on certain arbitrary and sometimes false assumptions. They are not purely objective or strictly determinate. The present fetish made of such estimates leads not only to confusion of economic cause and effect, but to inflationist and totalitarian policies. Economic forecasting based on aggregative economics or the national income approach has been almost uniformly bad. 28. It is not true that deficits in the government budget cure unemployment.

23:22It is not true that low interest rates cure unemployment. The Keynesian prescription leads to a constant race between the money supply and the demands of the Trade Unions, but it does not lead to long run, full employment.