I confess, the first time I read The General Theory I was looking for reasons to disagree. Moreover, Keynes’ writing style is, well, challenging, and my own comprehension was still in its formative stages (not that I am a scholar by any stretch at this point), so much of it went over my head anyway. Enter Steve Keen. After reading his book and some papers, I developed a greater appreciation for Keynes and his heterodox ways, feeling compelled to re-read him. Below are my takeaways from that experience:
-Keynes calls his theory “General” to contrast with the classical theory that he believes only applies to the special case of full employment, as it assumes that all unemployment is either frictional or voluntary (the latter of which can always be resolved by lowering wages).
-Thus, his argument for inflation is largely premised from the theory that wages are actually sticky. Put differently, the nominal wage is much more important to a trade union than the real wage. So, if the wage level is an impediment to increasing the level of employment from the point of view of the employer, decreasing the real wage can solve that problem.
-His rejection of Say’s Law (that Keynes formulates as all money that is earned will in turn be spent, whether as present consumption or later on) is derived from the position that there exists a class of people whose objective is the accumulation of wealth as a goal unto itself. And so there can be a “paradox of poverty” in the midst of plenty when money is hoarded and effective demand declines.
-Expectations matter and the planning that the entrepreneur/investor does is constantly evolving and fraught with uncertainty. Each moment and act has a corresponding impact that shifts everything else. We live in a dynamic world, not a static one. Having said that, he makes reference to equilibrium concepts throughout the book which make me think he is not totally consistent on this point.
-He does not seem to think that the macro can be analyzed by building up from the micro. He makes that case intuitively, pointing out that if an individual chooses to save a little more than normal (rather than consume), it will not have a huge impact on his own income in the future. But if everyone in society emulates that behavior, then overall demand will decrease and take aggregate incomes down with it.
-He suggests that redistributive policies can encourage the “propensity to consume” and thereby raise aggregate demand, guided by the belief that as incomes rise consumption does not increase at the same clip (translation: the poor spend a larger percentage of their incomes than the rich and are less likely to “hoard”). He also notes that higher rates of interest will discourage investment, thereby leading to lower incomes, impacting aggregate demand negatively. Put differently, higher rates of interest tend to lower the “marginal efficiency of capital” (defined as the difference between the expected yield from an additional unit of output and its cost of production).
-In times of higher unemployment, Keynes suggests that there is a multiplier attached to each dollar of investment that will cause an increase in utilization beyond the primary employment for which those investment dollars are targeted. It is in the discussion of this concept that Keynes implies that deficit financing in times of depression/recession, even on potentially wasteful activities, can pay for itself by virtue of the overall increase in employment, incomes, and the propensity to consume that results.
-If there is any topic from Keynes’ work that receives a lot of attention, it is his explanation of how the rate of interest is determined. The classical tale is that it is a loanable funds story – as in, the rate of interest is where the demand for capital is in equilibrium with the supply of savings. In contrast, Keynes says it is not just about loanable funds, but also about liquidity preference – the extent to which people want to hold cash for everyday transactions, as a safety buffer for unexpected events, to be able to speculate, or simply because potential yields do not encourage investment; all of which adds a psychological / expectations / confidence component to the analysis. Moreover, Keynes objects to the classical theory on the basis that it is very static, ignoring how the level of income will change as the supply and demand features of the loanable funds story shift.
-And, finally, in his concluding chapter, we come to see what I view as the slippery slope with his theory. In general, society faces sub-optimal levels of employment and gross inequalities of wealth. Keynes does not seem to think these problems are self-correcting in a laissez-faire setting, and so the State can help, be it through redistributive taxes, managing interest rates…or something else. Namely, “determining the aggregate amount of resources” and the rate of reward to those who own them – a reality that he deems a form of limited and minimal socialization.
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My experience in reading other people who hold Keynes in higher regard than I do is that there are three key innovations from his writing: (1) the liquidity preference theory of interest rates; (2) the rejection of Say’s Law; and (3) an emphasis on uncertainty. I’m not fluent in Keynesian theory, but I feel satisfied that I saw each of those ideas come and go in this pass-through.
