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P5:Intellectual & Theoretical Context

from Asad Zaman

Fifth Post in a sequence on Re-Reading Keynes.

Chapter 1 of General Theory is just one paragraph, displayed in full HERE

Briefly: Keynes writes that Classical Economics is a special case of his General Theory. Furthermore, the assumptions required for the special case do not hold for contemporary economic societies,”with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience”

The discussion below borrows extensively, without explicit point-by-point acknowledgement, from Brian S. Ferguson, “Lectures on John Maynard Keynes’ General Theory of Employment, Interest and Money (1): Chapter One, Background and Historical Setting” University of Guelph Department of Economics and Finance Discussion Paper No. 2013-06:

1.       RHETORIC: Keynes wishes to persuade fellow economists. Instead of saying that they are all wrong, blinkered idiots, he says that they are studying a special case, which he wishes to generalize. He also acknowledges that he was misled by the same errors, and creates common ground to enable dialog. He is also making a subliminal appeal to the hugely influential General Theory of Relativity published earlier by Einstein.

2.       INVENTION OF MACRO: The revolutionary contribution of Keynes is to study aggregates, instead of micro-level behavior. He is correctly labelled the inventor of macro-economics; prior to him, economists thought that the aggregate behavior would be obtained simply as a sum of the individual behaviors; there is no need to study macroeconomics separately. Parenthetically, it is this same position to which macro-economists retreated in the 70’s and 80’s with the development of DSGE model. Ferguson writes that:  read more 

  1. Paul Davidson
    December 5, 2016 at 4:58 pm

    AS I have written many times, the essence of Keynes’s General Theory is chapter 17 of the GT entitled “The Essential Properties of Interest and Money” which are (1) the elasticity of production is zero and (2) the elasticity of substitution is zero.

    Thus in a money using economy, where money [liquidity] is needed to meet all money contractual obligations and all market transactions are organized via legal money contracts, and all savings out of current income is held in the form of liquid assets. Accordingly all savings out of current income is income that is spent on the purchase of nonproducibles and therefore are not creating jobs] while producible goods are not substitutes for liquid assets in which people hold their savings.
    THus when there are some people in the aggregate doing positive savings out of current income [and thus destroying job opportunities] then other decision makersmust dissave an equal amount [i.e., spend more than their current income] if no unemployment is to occur.

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