Chapter I INTRODUCTION

1. Canonization

The most famous economist of the twentieth century is John Maynard Keynes; and the most influential economic book of the present era, both on theory and on economic policy, is his General Theory of Employment, Interest, and Money, published in 1936.

The fact is recognized not only by his admirers and disciples, but even by his sharpest critics. Open any issue of almost any of the scholarly economic journals, and you will find his name and the phrases that he coined or popularized sprinkled generously through its pages. Open the newspaper, and you will find interpretations of current economic events, or proposals for economic and monetary policies, that owe at least their ubiquity, if not their origin, to his writings.

To illustrate the unique place that Keynes’s reputation occupies, I select a few quotations almost at random.

On his death the London Times¹ called him “a very great Englishman... a man of genius, who as a political economist had a world-wide influence on the thinking both of specialists and of the general public.... To find an economist of comparable influence one would have to go back to Adam Smith.”

G. D. H. Cole, the Socialist economist, calls the General Theory:

The most important theoretical economic writing since Marx’s “Capital,” or, if only classical economics is to be considered as comparable, since Ricardo’s “Principles.”... What he has done, triumphantly and conclusively, is to demonstrate the falsity, even from a capitalist standpoint, of the most cherished practical “morals” of the orthodox economists and to construct an alternative theory of the working of capitalist enterprise so clearly nearer to the facts that it will be impossible for it to be ignored or set aside.

Professor Alvin H. Hansen of Harvard, usually regarded as Keynes’s leading American disciple, writes of the General Theory:

There are few who would deny, as of now, seventeen years later, that the book has had a greater impact on economic analysis and policy even in this short time than any book since Ricardo’s Political Economy. It may be a little too early to claim that, along with Darwin’s Origin of Species and Karl Marx’s Das Capital, the General Theory is one of the most significant books which have appeared in the last hundred years.... But... it continues to gain in importance.²

In the starry eyes of some admirers, even the book’s faults seem somehow to add to its greatness. Professor Paul A. Samuelson, of the Massachusetts Institute of Technology, author of the most widely used college textbook in economics at the present time, writes of the General Theory:

It is a badly written book, poorly organized; any layman who, beguiled by the author’s previous reputation, bought the book was cheated of his 5 shillings. It is not well suited for classroom use. It is arrogant, bad-tempered, polemical, and not overly generous in its acknowledgments. It abounds in mares’ nests and confusions.... In short, it is a work of genius.³

Even stranger is Samuelson’s implication that the very obscurity of the book is an embarrassment, not to the disciples of Keynes, but chiefly to his critics: “It bears repeating that the General Theory is an obscure book so that would-be anti-Keynesians must assume their position largely on credit.”⁴

It is of course not surprising to find an extravagant judgment by R. F. Harrod, Keynes’s biographer:

To put the matter quite bluntly, I believe that the future historian of economic thought will regard the assistance rendered by Keynes on the road of progress as far more important than that of his revered master, Alfred Marshall. He seems, to my judgment, to stand rather in the same class as Adam Smith and Ricardo. In logical penetration he was much superior to Adam Smith, in lucidity of writing to Ricardo.⁵

Professor Dudley Dillard of the University of Maryland, in his book The Economics of John Maynard Keynes writes:

By any test, Keynes ranks as one of the great economists of all time and as the most influential economic thinker the twentieth century has so far produced....

Within the first dozen years following its publication, John Maynard Keynes’ The General Theory of Employment, Interest, and Money (1936) has had more influence upon the thinking of professional economists and public policy makers than any other book in the whole history of economic thought in a comparable number of years. Like Adam Smith’s Wealth of Nations in the eighteenth century and Karl Marx’s Capital in the nineteenth century, Keynes’ General Theory has been the center of controversy among both professional and non-professional writers. Smith’s book is a ringing challenge to mercantilism, Marx’s book is a searching criticism of capitalism, Keynes’ book is a repudiation of the foundations of laissez-faire. Many economists acknowledge a heavy debt to the stimulating thought of Lord Keynes.

If the influence of Lord Keynes were limited to the field of technical economic doctrine, it would be of little interest to the world at large. However, practical economic policy bears even more deeply than economic theory the imprint of Keynes’ thought.⁶

Quotations like this could be continued indefinitely, but they already grow repetitive. Even the most hostile critics of Keynes’s theories do not question the extent of his influence. I cite but one: “[Keynes’s] influence in the Roosevelt Administration was very great. His influence upon most of the economists in the employ of the Government is incredibly great. There has arisen a volume of theoretical literature regarding Keynes almost equal to that which has arisen around Karl Marx.” ⁷

2. Uses of Refutation

Yet about the General Theory there is a strange paradox. The Keynesian literature has perhaps grown to hundreds of books and thousands of articles. There are books wholly devoted to expounding the General Theory in simpler and more intelligible terms. But on the critical side there is a great dearth. The non-Keynesians and anti-Keynesians have contented themselves either with short articles, a few parenthetic pages, or a curt dismissal on the theory that his work will crumble from its own contradictions and will soon be forgotten. I know of no single work that devotes itself to a critical chapter-by-chapter or theorem-by-theorem analysis of the book. It is this task that I am undertaking here.

In view of the quotations I have just made, such an undertaking should require no apology. But there are two possible objections that I should like to consider. The first is the claim that Keynes’s theories have been rapidly losing their influence in recent years, that they have been refuted by the actual course of events, and require no further answer. The second is the contention that we need only present true theories in a positive form; that it is of little value to analyze error because the possibilities of error are infinite and the mere statement of the truth is itself a refutation of error.

Concerning the first of these possible objections, I may reply that though there has been some diminution of Keynes’s influence, and though several of his theories have been given a decent burial, his influence both on academic thought and on practical policy is still tremendous. It would in any case be a poor service to clear thinking simply to allow his theories to be forgotten, even if we assume that this is what may occur. “One of the peculiarities of recent speculation, especially in America,” once wrote Santayana, “is that ideas are abandoned in virtue of a mere change of feeling, without any new evidence or new arguments. We do not nowadays refute our predecessors, we pleasantly bid them good-bye.” ⁸

Simply to bid our predecessors good-bye does not further clarity or progress of thought. Unless we know not only that some past doctrine was wrong, but precisely why it was wrong, we have not learned all the lessons that the error has to teach us, and there is real danger that it may make its appearance in another form.

In the history of thought great new contributions have often been made as a sort of by-product of what were originally intended to be merely refutations. Adam Smith’s Wealth of Nations grew in large part out of a refutation of the errors of the mercantilists. Malthus’s famous Essay on Population grew out of an attempt to refute the optimistic doctrines of Godwin. Kant’s Critique of Pure Reason began as an effort to refute the theories of Hume. John Stuart Mill’s Examination of Sir William Hamilton’s Philosophy became more famous than any of the writings of the philosopher he attacked.

I hope I shall not be regarded as presumptuous enough to be comparing the present modest work with any of the great books just mentioned. I cite them merely to show that refutation of error is far from a futile occupation. It is an important method, not only of defending, expounding, and clarifying known truths, but of advancing to new truths and greater insight. As logic and mathematics sufficiently prove, the more we understand the implications of any theorem, the better we understand the theorem itself.

Nor, in examining the views put forward by a single man (or his disciples), do we necessarily confine ourselves to those views. Their analysis becomes a way of gaining a clearer and wider grasp of the problems with which that writer dealt. In the first chapter of his Examination of Sir William Hamilton’s Philosophy (1865), Mill wrote: “My subject, therefore, is not Sir W. Hamilton, but the questions which Sir W. Hamilton discussed. It is, however, impossible to write on those questions in our own country and in our own time, without incessant reference, express or tacit, to his treatment of them.”

The subject of this book, likewise, is not John Maynard Keynes but the problems he discussed. And we cannot discuss these problems at the present day without discussing his treatment of them.

3. A Path-Breaking Pioneer?

Now though I have analyzed Keynes’s General Theory in the following pages theorem by theorem, chapter by chapter, and sometimes even sentence by sentence, to what to some readers may appear a tedious length, I have been unable to find in it a single important doctrine that is both true and original. What is original in the book is not true; and what is true is not original. In fact, as we shall find, even much that is fallacious in the book is not original, but can be found in a score of previous writers.

Frankly, when I began this task I did not think I would arrive at so sweeping a conclusion. My first thought was that I might do a short work, analyzing Keynes’s chief doctrines so that the reader who wished a critical analysis would be able to find one in a brief and readable form. But when I actually embarked upon a line-by-line analysis, my experience was strangely like the one John Stuart Mill describes in his Autobiography regarding his analysis of Sir William Hamilton: “As I advanced in my task, the damage to Sir W. Hamilton’s reputation became greater than I at first expected, through the almost incredible multitude of inconsistencies which showed themselves on comparing different passages with one another.” ⁹ So I have found in Keynes’s General Theory an incredible number of fallacies, inconsistencies, vaguenesses, shifting definitions and usages of words, and plain errors of fact. My desire for thoroughness in pointing these out has carried the length of this book much beyond what I originally intended.

There has, however, I venture to think, been a certain compensation for the length of this analysis. The results are not merely negative. They do not merely prove that Keynes’s main contentions were wrong. For in dealing with the Keynesian fallacies we are obliged not only to scrutinize very closely his own arguments, but the “classical” or “orthodox” doctrines that he was denying. And in doing this, we shall often find that some of these “orthodox” doctrines have been only dimly understood, even by many of their proponents. In other cases we shall find errors or gaps in the usual statement of some of the “orthodox” doctrines themselves.

One other possible objection to the present volume remains to be considered. This is that it is directed against an author no longer in a position to reply. But any advantage that I might gain from this will certainly be more than outbalanced by the number and controversial ardor of Keynes’s disciples. For the same reason, I make no apology for the outspokenness of my criticism,¹⁰ or for the fact that I write of Keynes in the present tense and often discuss his work as if the author were still living. This is, after all, only a way of confessing that Keynes’s doctrines are still very much alive in the influence they exert.

In one respect the range of the present book is narrower than I had originally intended. There is no effort to cope with all the errors in the immense body of Keynesian literature. Such an effort would have been hopeless, as I realized when I was once well launched on my task. The reader will find only a few passing references to works of the Keynesians or “post-Keynesians.” Even my references to Keynes himself are confined almost entirely to the General Theory, other of his works being cited only when I am calling attention to some inconsistency or to some statement of the same doctrine in another form. The examination of the fallacies of Keynes himself, in the General Theory alone, has carried me to as great a length as I felt my task could justify.

Once we have thoroughly examined the fallacies in the master, we can economize time by not troubling to dissect them again, usually in an even more vulnerable form, in the disciples.

In the preface to the General Theory, Keynes tries to anticipate some general criticisms. He apologizes for the “highly abstract argument” that is to follow, by declaring that his book “is chiefly addressed to my fellow-economists” (p. v), and that “at this stage of the argument the general public, though welcome at the debate, are only eavesdroppers” (p. vi).

I do not think we can excuse the bad writing in most of the General Theory on this ground. For Keynes succeeds, as we shall see, in being involved and technical without being precise. One of the most striking characteristics of the book is the looseness of many of the leading terms, and the constantly shifting senses in which they are used.

Attempting to anticipate another criticism, Keynes remarks: “Those, who are strongly wedded to what I shall call ‘the classical theory,’ will fluctuate, I expect, between a belief that I am quite wrong and a belief that I am saying nothing new” (p. v). This insinuates an argumentum ad hominum. It attempts to discredit critics in advance for not being converted to the new revelation. Actually, as we shall find, it is not necessary to “fluctuate” between these two beliefs. Keynes’s main “contributions” are demonstrably wrong, and in those cases in which he is saying something that is true he is indeed saying nothing new.¹¹

Finally, Keynes presents himself to the reader, not very modestly, as a great intellectual pioneer “treading along unfamiliar paths” (p. vii). What is strange about this, however, is that toward the end of his book, in Chapter 23, he cites as confirmation of the truth of these new path-breaking ideas the fact that most of them were held by the mercantilists of the seventeenth century!

4. The “General” Theory

After some hesitation, I have decided that the best way to analyze the General Theory is to do so chapter by chapter. Keynes’s book is not well organized. Therefore my criticism, like the book itself, will not follow the most logical order and will be sometimes repetitive. To compensate for these shortcomings, I have given my own chapters for the most part the same numbers as the corresponding chapters that they discuss in the General Theory. This will make it easier for readers who may wish to confirm or amplify any quotation I have made from the General Theory, or to follow Keynes’s argument in its original form if they should question my own interpretation.

Fortunately Keynes’s Chapter 1, “The General Theory,” is only a single paragraph long. But that paragraph raises three points that call for comment.

I have called this book The General Theory of Employment, Interest and Money, placing the emphasis on the prefix general. The object of such a title is to contrast the character of my arguments and conclusions with those of the classical theory of the subject, upon which I was brought up and which 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 (p. 3).

I shall argue [Keynes continues] that the postulates of the classical theory are applicable to a special case only and not to the general case, the situation which it assumes being a limiting point of the possible positions of equilibrium (p. 3).

Good economics prior to 1936, however, like good economics since then, did not depend on postulates that fitted special cases only. It dealt with the business cycle, with periods of prosperity and depression, as well as with simplified “static” theory. It is Keynes’s economics, as we shall find, that applies to a special case only; and it does not give a correct analysis of that special case.

The characteristics of the special case assumed by the classical theory [Keynes goes on] happen not to be those of the economic society in which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience (p. 3).

This is not argument but mere assertion. For the present I shall content myself with the counter-assertion that sound “orthodox” economics was always flexible enough to analyze actual conditions, and that it is Keynes’s assumptions that “happen not to be those of the economic society in which we actually live.”

My criticisms of Chapter 1 must apply to every sentence in it. They must apply, also, to his curious use of the term “classical,” which he defends in a footnote. There he points out that “the classical economists” was a name invented by Marx to cover Ricardo and James Mill and their predecessors. “I have become accustomed,” he writes, “perhaps perpetrating a solecism, to include in ‘the classical school’ the followers of Ricardo, those, that is to say, who adopted and perfected the theory of the Ricardian economics, including (for example) J. S. Mill, Marshall, Edgeworth, and Prof. Pigou” (p. 3).

This extended use of the term “classical” is merely confusing. It gives the reader a quite false picture. He is being asked, in effect, to consider practically all economics prior to the appearance of the General Theory in 1936, no matter by whom written, as both a uniform theory and an agreed upon theory. But there was enormous diversity in the views of particular writers, and many controversies between the so-called “classical” economists. There were also points which some of them did not pretend to have settled. Keynes writes as if all the economists before him had dozed off into a sort of dogmatic slumber, thoughtlessly incanting after each other some unexamined clichés of thought.

His references to the “classical” school are misleading in more than one respect. He includes among the classical economists the pioneers and continuers of the subjective-value or marginal-utility theories that represent a break with the “classical” economics. And when he writes about orthodox economics he seems to confine himself most of the time to Marshall and Pigou. He writes as if he were unaware of the great advances beyond these writers that were made, particularly in capital and interest theory, by Böhm-Bawerk, John Bates Clark, Knut Wicksell, Irving Fisher, Ludwig von Mises, and F. A. Hayek.

Keynes’s frame of reference is strangely provincial. He seems to assume that whatever was not discovered by either Marshall or Pigou, or discussed in his little circle at Cambridge, was never thought of at all.

¹ April 22, 1946. Reprinted in The New Economics, ed. by Seymour E. Harris, (New York, Alfred Knopf, 1952).

²A Guide to Keynes, (New York, McGraw-Hill, 1953).

³The Development of Economic Thought, ed. by Henry William Spiegel (New York: Wiley, 1952), p. 767.

⁴Ibid., p. 768.

⁵The Life of John Maynard Keynes, (New York, Harcourt Brace, 1951), p. 466.

⁶ (New York, Prentice-Hall, 1948), pp. vii and 1-2.

⁷ Benjamin M. Anderson, Economics and the Public Welfare, (New York, Van Nostrand, 1949), p. 391.

⁸ George Santayana, Character and Opinion in the United States, (New York, Scribner’s, 1920), p. 9.

⁹ (Oxford, World’s Classics edition), p. 234.

¹⁰ Keynes’s own attitude is thus described by his biographer: “There is no doubt that Keynes... thought that all was fair in argument, and that a man should not have a grievance if he was refuted without mercy.... If sensitiveness was not in place in a game, still less was it so in the discussion of public affairs or economic problems.” R. F. Harrod, The Life of John Maynard Keynes, (New York: Harcourt Brace, 1951), pp. 329-330.

¹¹ I may supplement this by a footnote in a review of the General Theory by Professor Frank H. Knight, in The Canadian Journal of Economics and Political Science of February, 1937, p. 122: “This, of course, is one of two ‘arguments’ regularly hurled by revolutionary thinkers at those who do not immediately join up, the other being that the refusal is based on a vested interest.... Since it has become quite the fashion to account for differences in intellectual position by psychoanalysing, or somehow ‘explaining,’ one’s opponent (and the example of following the fashion having in this case been set by Mr. Keynes), it may be permissible to note that our civilization of today, being essentially romantic, loves and extols heretics quite as much as its direct antecedent a few centuries back hated and feared them. The demand for heresy is always in excess of the supply and its production always a prosperous business. Where once it was necessary in writing to pose as merely restating and interpreting doctrine handed down from the Fathers, the surest way to public interest and acclaim now lies through pulling down and overturning everything established or accepted.”