On Re-reading The General Theory

I read Keynes' GENERAL THEORY for the history of economic thought I am now teaching. This was the first time I read the book since graduate school. Given the resurgence in interest in Keynes and his work, it was interesting to read it with fresh eyes. I think that some of what he emphasized is important and should be emphasized, but have to disagree with much else.

First, the good: Keynes emphasized strongly the importance of uncertainty when business people are deciding on investment projects. This emphasis was not the result of the Great Depression, but was part of his dissertation on probability. (His doctorate was in mathematics). His discussion of uncertainty is similar to that of Frank Knight, who distinguished between risk and uncertainty, where risk can be calculated such as with actuarial tables but uncertainty cannot be calculated. The future is inherently uncertain. Keynes goes so far to suggest that based on pure calculation, no one would make the investments that business people make. It is the fact that we humans like to be doing something that brings investment about--his notion of animal spirits. He then notes that when business people get pessimistic, they will not invest. It is the lack of investment that causes aggregate demand to be ineffective in bringing about full employment.

The rest of his arguments fall short, in my view. He denies the equilibrating of investment and saving via changes in the interest rate, putting much more focus on propensity to consume, and therefore the propensity to save, than on responses to interest rates. He saw the economy as inherently unstable and called for a socialization of investment. We could not leave investment in the hands of the private sector and public investment would have to ready and willing to make up for inadequate private investment to bring about full employment. Further, he argued, we have seldom had full employment. Hence the government needs to consistently spend on infrastructure to provide full employment. It is unclear what the government would do once the entire country is paved over.

Reading the book again made me appreciate Axel Leijonhufvud's interpretation of Keynes and the Keynesians. It is clear that what came to be Keynesianism after World War II differed substantially from Keynes own writings. For example, Keynes did not aggregate output; he aggregated either labor or things measured in money prices. I tend to think Axel's interpretation of Keynes' contributions are incorrect as Keynes' views, but make sense anyway. In particular, the idea that the economy is normally self-regulating, but if buffers are eliminated, the self-regulating mechanisms can break down. To me, it explains the depth and severity of the Great Depression and helps explain the Great Recession as well.