Lekachman Ch. 3
I’m going to do this commentary over two entries since this is a fairly large reading.
Chapter 3 of Lekachmen’s The Age of Keynes is entitled “The Road to The General Theory,” and, as the name suggests, it focuses - somewhat on the material and historical but primarily on the intellectual and theoretical - background upon which Keynes’s General Theory was formulated.
Lekachmen first reminds us of the context, which is always important. The Treaty of Versailles required massive reparations from the Central Powers and redrew political boundaries, upsetting the status quo of the pre-WWI era and leading to serious social and economic difficulties both domestic and international. Keynes recognized that this put a serious strain on, among other previously tried and true features of the contemporary economic policy, future primary use of the international gold standard upon which most currencies were based. This was exacerbated by the fact that in the new economic world order, the United State Federal Reserve had enormous power to affect the ebb and flow of gold-backed currency in and out of the economy, and in general most of the power over the value of gold was more and more concentrated in the hands of a few central banks. Already a man with a taste for the heretical, Keynes did little to hide his distrust of the gold standard, and advocated that, at best, governments should hold tightly to the reins of the precious metal.
Over the course of the 1920’s and through to 1933, Keynes published a series of works in which one can observe the birth and adolescence of Keynes iconoclasm and the development of thought that would lead to the General Theory. In due course, he would come more and more to question the validity of Say’s Law (”Supply creates its own demand”) and the notion that troughs in the business cycle called for more savings and lower real wages. To the contrary, Keynes’s suspicion grew that there was no automatic mechanism that matched savings to investment, that thrift was by no means the path to success, and that government machinations may be the only means to kick an economy in the direction of full employment. All of this was flying in the face of most of his colleagues at Cambridge and elsewhere, who like Keynes were students (one way or another) of the neoclassicists like Marshall and Pigou and their intellectual predecessors. Yet it seems no one, not even Keynes, was fully aware of his work’s implications; he was still carving out a niche for himself in his profession.
Keynes would adopt the concept of the multiplier from one of his younger colleagues, R.F. Kahn, and he would come to apply it in a way that made deficit spending and other public expenditures very tempting to policy-makers in his 1933 book “Means to Propserity.” Keynes flirtations with government interference in the market required fair mix of theoretical mastery and political savvy, and the multiplier gave him the means to maintain the latter without leaving the confines of the former. We all know the idea of the multiplier from intermediate macro, but for Keynes it was something of a selling point. Yes, you might spend 4.5 million pounds now, but a third of that will be covered by the new tax revenues resulting from new employment as the money trickles through economy, and who knows how much more of a tax receipt windfall will result from a sustained increase in economic prosperity?
I have provided here only a gloss but I really do recommend this reading; Lekachman is quite the lucid writer and one can only benefit from knowing the foundations from which Keyne’s built his General Theory. I don’t have any substantive commentary on the content of this chapter except that I am extremely curious to see how, with the advent of neoclassical growth, economists of either persuasion begin to reconcile the Keynesian with the neoclassical. It almost seem to me as if the two are well-nigh incompatible, at least with regards to bridging the gap between short-run economic fluctuations and long-term growth.
Source: Lekachman, Robert. The Age of Keynes. Chapter 3: New York: Random House, 1966.
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