FOCUS
ON
ECONOMIC THEORY
Keynes on the “Nature of
Economic Thinking”
The Principle of Non-Neutrality of Choice
and the Principle of Non-Neutrality of Money
By GIUSEPPE FONTANA*
ABSTRACT. In the last two decades there has been a flourishing of
writings on the methodological approach of Keynes. Whereas broad
interpretations of Keynes’s work may have a role to play for future
economics the main argument of this paper is to propose a return to
the theoretical foundations of a truly Keynesian economics. In the
main economic writings of Keynes it is possible to discern a body of
beliefs, which is (a) consistent in its own terms and (b) susceptible of
being used in the explanation of different realities. That body of beliefs is grounded on (1) the principle of non-neutrality of choice and
(2) the principle of non-neutrality of money. Both principles were essential parts of the core of Keynes’s A Treatise on Money (1930) and
*Dr. Giuseppe Fontana is Lecturer of Economics at the Leeds University Business
School (LUBS), Maurice Keyworth Building, University of Leeds, Leeds LS2 9JT, UK,
e-mail: [email protected]. Dr. Fontana’s interests include macroeconomics, monetary
economics, history of economic thought, and methodology. Recently he has concluded
his PhD programme in Economics at the University of Leeds with a thesis titled Essays
on Money, Uncertainty and Time in the Post Keynesian Tradition. He has publications
in the Revue d’Economie Politique, Studi Economici, Journal of Post Keynesian Economics, and Philosophical Psychology. A previous version of this paper was presented in
seminars at the Fringe Conference (University of Nottingham, March 1999), the Scottish
Economic Society Conference (University of Napier, Edinburgh, April 1999), and the
Charles Gide International Conference (Sorbonne, Paris, September 1999). The author is
grateful to Mark Blaug, Anna Carabelli, Victoria Chick, Claude Gnos, Augusto Graziani,
Geoff Harcourt, Laurence Moss, Sergio Rossi, Malcolm Sawyer, Mark Setter-field, and to
participants at the seminars for their helpful comments.
American Journal of Economics and Sociology, Vol. 60, No. 4 (October, 2001).
© 2001 American Journal of Economics and Sociology, Inc.
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The General Theory (1936), and should be used as foundation for
future development of Keynesian economics at the methodological as
well as at the theoretical level.
I
Introduction
IN THE LAST TWO DECADES there has been a flourishing of writings on the
methodological approach of Keynes.1 One of the main outcomes of
that research is the idea that “a continuity between the Treatise’s [A
Treatise on Probability (1921/1973a)] epistemology and the method of
his [Keynes’s] economic writings existed” (Carabelli 1988:7). The idea
is that Keynes during his career adopted a particular method of investigation based on the close connection between theory and practice.
More precisely, according to Hicks “one has to talk about Keynes’s
methods, in the plural, since there are so many of them. It is not
merely that there were changes of method between his three main
books on money—the Tract on Monetary Reform of 1923, the Treatise
on Money of 1930, and the General Theory of 1936. Even in the General Theory itself, the main method is a hybrid, a combination of two,
which it is useful to distinguish. And there are the beginnings of other
methods also” (Hicks 1985:52). It could be more appropriate to say
that if Keynes always made a close connection between theory and
practice it is also true that Keynes’s thought about the form of that
connection went on developing throughout his life.
Recently, Harcourt and Sardoni (1994) have restated the same idea
arguing that “Keynes’s philosophical attitudes meant that in his economics he never liked to stray very far from actual happenings, from
concrete situations and the use of language and concepts and practices which were grounded in them” (Harcourt and Sardoni 1994:134).
According to these scholars Keynes’s method represents the main legacy for the development of modern economics.
Through the accidents of world history, then, Keynes’s concerns seem
again to have become our concerns. Of course there are still many differences between his time and ours, and it would be naive to say that we can
hope to find concrete solutions for all of the problems of today’s world in
strategies formulated in the nineteen thirties. What we may reasonably
hope to learn from Keynes and the interwar period, however, is something
Keynes on the “Nature of Economic Thinking”
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about the general nature of a social and economic reasoning that works in
a world which power is diffused, but where the many of the problems facing the world ramify across nations and societies. (Davis 1994b:4)
Whereas it is not difficult to agree with those ideas, the danger of a
full commitment to such an approach is also evident. Keynesian economics in recent years has been defined as “a way of thinking”
(Samuelson). Keynesian economics seems trapped in a vicious circle:
in order to propose theoretical advances an appropriate methodology
is recommended but the latter can only be put in place as long as
there are important developments in the analytical structure. The main
shortcoming of that approach is a never-ending debate on the methodological foundation of Keynesian economics. Moreover, the lack of
a definite research agenda for the future of Keynesian economics left a
vacuum that simplistic proposal filled. For instance, Chase (1998)
speaks enthusiastically of a new approach to Keynesian economics in
which Keynes’s “philosophical and methodological thought, his political and financial endeavors, his artistic interests and intellectual influences, not to mention speculation concerning the role of his sexuality
. . . provide a more secure foundation for a truly Keynesian economics” (Chase 1998:872).2
Whereas broader interpretations of Keynes’s life-influences and predilections may have a role to play for the future of Keynesian economics the main argument of this paper is to propose a return to the
theoretical foundations of a truly Keynesian economics.3 In the main
economic writings of Keynes it is possible to discern a body of beliefs,
which is (a) consistent in its own terms and (b) susceptible of being
used in the explanation of different realities. That body of beliefs is
grounded on (1) the principle of non-neutrality of choice and (2) the
principle of non-neutrality of money. Both principles were essential
parts of the core of Keynes’s A Treatise on Money (1930) and The General Theory of Employment, Interest and Money (1936), and should be
used as foundation for future development of Keynesian economics at
the methodological as well as at the theoretical level. Keynes used
these principles in different ways according to the specific scope of
the analysis. As Carabelli remarked, Keynes adopted a theoretical
framework “pliable to different objects and to different cognitive contexts” (Carabelli 1988:8). Keynes used different ways to articulate his
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analysis4 (Keynes’s methods of Hicks) and he built several consistent
pictures of modern economies.5
Sometimes Keynes reminded his readers that what he was offering
was “a collection of material rather than a finished work” (Keynes
1971:xviii). At other times he used the art of rhetoric to emphasise the
generality of his theory against the particularity of orthodox analysis
(Fontana and Gerrard forthcoming). Yet choice and money were crucial parts in both A Treatise on Money and The General Theory. An
analysis of the principle of non-neutrality of choice and the principle
of the non-neutrality of money may thus be used to reveal the theoretical framework used by Keynes in tackling different objects and different contexts.6
II
On the Nature of Economic Thinking in Keynes
IN CHAPTER 18 OF THE GENERAL THEORY Keynes “gather[s] together the
threads” of his theory of employment. He explains that his analysis is
built on a peculiar “schematism” in which the main variables of the economic system have specified roles to play.7 The quaesitum of the research are the dependent variables. The latter depend on both “atomic
independent elements,” i.e., the independent variables, and given factors that “in the place and context” of the research can be considered
without effects on the dependent variables. However, Keynes was keen
to express the transient nature of the choice of the variables.
The division of the determinants of the economic system into the two
groups of given factors and independent variables is, of course, quite arbitrary from any absolute standpoint. The division must be made entirely on
the basis of experience. . . . Our present object is to discover what determines at any time the national income of a given economic system and
(which is almost the same thing) the amount of its employment; which
means in a study so complex as economics, in which we cannot hope to
make completely accurate generalisations, the factors whose changes
mainly determine our quaesitum. (Keynes 1973e:247)
Keynes maintains the vision of an economy moving through time:
an economy that is complex and difficult to analyze because organizations change, unexplored opportunities arise, and new choices are
made. New factors could come into the picture and the main determinants of analysts’ quaesitum may change. Furthermore, the quaesitum
Keynes on the “Nature of Economic Thinking”
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itself may change as new problems develop. The peculiar nature of
Keynes’s schematism is that it is constructed to tame “the extreme
complexity of the actual course of events” (Keynes 1973e:249). It is
based on actual experience but it has the nature of a logical simplification such that some progress in the analysis of real economies may be
made. It points toward the definition of the main determinant of the
research quaesitum but its outcomes cannot be automatically extended to different cases. Keynes’s schematism is necessarily both
context-specific and only vaguely precise. It reflects his complex view
of the nature of economic analysis. As Shackle said, “he was a logician
with a humane imagination. Logic is black and white. Imagination is
full of color” (Shackle 1973:518).
In choosing a “vaguely” precise method, Keynes was following
closely the suggestions of his old master Marshall. Hicks remarks that
Marshall was “never tired of emphasizing . . . [that] the theory made no
claim to be a precise theory—it would be quite sufficient if the assumptions just listed were very approximately true” (Hicks 1985:45).
For his part Keynes maintained that “theoretical economics often has a
formal appearance where the reality is not strictly formal. It is not, and
is not meant to be, logically watertight . . . it is a generalisation which
lacks precise statement of the cases to which the generalisation applies” (Keynes 1979:37–38). Keynes acknowledged the importance of
the internal logical properties of a theory. He insisted that a theoretical
framework should be logically consistent with its basic assumptions.
Indeed he praised orthodox economics for having erected a superstructure “with great care for logical consistency” (Keynes 1973e:xxi).
But a logically watertight theory may be seen as unsatisfactory if it has
been achieved at the cost of becoming detached from reality. “Completely formal”8 models present a description of the economic system
that is too precise for encompassing the substantial fluidity of the real
world. Those models make such accurate generalizations that theory
requires considerable amendment if it is applied, for instance, to a
world in which agents have a “knowledge of the future [that] is fluctuating, vague and uncertain” (Keynes 1973f:113).9 On this ground,
Keynes argued with Harrod against Tinbergen:
In chemistry and physics and other natural sciences the object of experiment is to fill in the actual values of the various quantities and factors appearing in an equation or a formula; and the work when done is once and
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for all. In economics that is not the case, and to convert a model into a
quantitative formula is to destroy its usefulness as an instrument of
thought. Tinbergen endeavours to work out the variable quantities in a
particular case, or perhaps in the average of several particular cases, and
he then suggests that the quantitative formula so obtained has general validity. Yet in fact, by filling in figures, which one can be quite sure will not
apply next time, so far from increasing the value of his instrument, he has
destroyed it. (Keynes 1973h:299; italics added)
In 1939 Tinbergen carried out on the behalf of the League of Nations some very pioneering testing on business cycle theories. The
main purpose of the analysis was to disentangle the laws of action of
business cycles in the United States. Keynes was asked to comment on
the proof copy of the work.
Keynes devoted his comments mainly to the central questions of
methodology arising out of Tinbergen’s analysis. He warned against
any dogmatic use of quantitative methods along the line of natural science. He questioned the general application of statistical methods to
economics. As Patinkin firstly noted, Keynes anticipated in his comments modern econometrics problems like specification bias or simultaneous-equation bias (Patinkin 1982:228). More generally he made a
list of potential problems with the linear regression model that are still
relevant today (Hendry 1980:396). “Forty years after Keynes wrote, his
review [of Tinbergen’s books] should still be compulsory reading for
all who seek to apply statistical methods to economic observations”
(Hendry 1980:396). Hendry’s authoritative opinion suffices to dismiss
the argument (e.g., Morgan 1990:121) that Keynes’s criticisms of Tinbergen’s work were the outcome of his sheer ignorance of econometrics techniques.
Keynes criticizes Tinbergen for his special method of analysis. He
disputes the general validity of Tinbergen’s results. The search for a
“quantitative formula” valid over a long period of time is fruitful only
if, over time, the economic system is “constant and homogeneous.”10
Tinbergen’s method was an attack on Keynes’s project of an analysis
based on a close connection between theoretical construction and
(unstable) reality.
Keynes often complained that “those writers who try to be strictly
formal generally have no substance” (Keynes 1979:38). Against the
formalism of orthodox theory11 Keynes believes in the possibility of
Keynes on the “Nature of Economic Thinking”
717
building an analysis based on a strict connection between theory and
practice. He aims to serve both the analyst and practitioner with a
“general system of thought” (Keynes 1971:292). He proposes a logical
schematism that could be made context-specific. In that sense an economic model is “an instrument of thought.”
Solow (1984) elaborated those considerations for what he believes
should be “one’s attitude toward economic theory itself.”
If economics were really a science—in the aggressive sense—as most modern economists think it is, there would be little or nothing to choose
among alternative models so long as one way or another they contain the
same equations, and thus have the same implications. Either there would
be nothing to choose, or else we would choose on fundamentally trivial
grounds. But suppose economics is not a complete science in that sense,
and maybe even has very little prospect of becoming one. Suppose all it
can do is help us to organize our necessarily incomplete perceptions about
the economy, to see connections the untutored eye would miss, to tell
plausible stories with the help of a few central principles. Suppose, in
other words, that economics is a “discipline, not a science”. . . . In that case
what we want a piece of economic theory to do is precisely to train our intuition, to give us a handle on the facts in the inelegant American phrase.
(Solow 1984:15)
In Solow’s mind what economists should do is to propose a simple
and useful way to organize the main economic facts;12 to advance,
“with the help of few central principles,” a basis for their intuition. In
that perspective an economic model represents a little instrument of
thought rather than the complete system of the world. However,
Solow also admonishes against negative speculations on the role of
“logical rigour” in economics.
I hope no one will fall into the error of thinking that this low-key view of the
nature of economics is a licence for loose thinking. Logical rigour is exactly
as important in this scheme of things as it is in the more self-consciously scientific one. The difference is not in the standards of model-building but in
the scope and ambitions of model-building. (Solow 1984:15)
Keynes had a clear idea of the scope and ambitions of economic
modelling. He argues that, depending on the context under investigation, there are factors that seem, more than others, “useful and convenient to isolate.”13 On the basis of experience a temporary distinction
between dependent variables, on one side, and independent variables
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and given factors on the other side may be made. In that way a logical
schematism copes with the vast complexities of the facts of the real
world. “If we examine any actual problem along the lines of the above
schematism, we shall find it more manageable; and our practical intuition (which can take account of a more detailed complex of facts that
can be treated on general principles) will be offered a less intractable
material upon which to work” (Keynes 1973e:249; italics added).
Keynes again remarks on the limitations of the mechanical application
of general principles to the examination of a given economic system.
He suggests a practical way to pass those limitations. He tries “to
arouse and appeal to the reader’s intuitions” (Keynes 1979:151).
Carabelli speculated on Keynes’s use of the term intuition. She contends that intuition “was seen by Keynes as belonging to the category
of direct judgements, as is proved by a sentence like ‘direct judgements or intuition’” (Carabelli 1988:27). Intuition represents knowledge by “direct acquaintance with things.” Thus for Keynes intuition is
an important instrument to put at work in his logical schematism. It
gives content to his context-specific method of analysis.14
Keynes also explains in detail how to use in practice his logical
schematism. He adopts the Marshallian method of ceteris paribus. “All
the factors in a monetary economy which make up the total economic
situation are in some degree interdependent, and react on one another” (Keynes 1973c:397). Thus since the real world is a complex system, economists should start “by isolating the complicating factors one
by one” (Keynes 1973e:297). Economists should assume all independent variables except one constant, and analyze the effects of the latter
on the dependent variable. This assumption is nothing but an expedient “to clear our minds” (Keynes 1973c:397). It will make sure that
some conclusions, albeit provisional conclusions, are reached.
However, Keynes is well aware of the main limitation of the Marshallian method of ceteris paribus. Joan Robinson firmly spelt it out:15
The Marshallian method of exposition is to attempt to trace the effects over
the future of a particular event happening “today” by the one-at-a-time
method, that is to say by assuming that we know what would have happened over that particular period of future time if this event had not occurred. . . . [But Marshall] knows that other things in fact will not be
equal—history marches on—but he supposes that it is possible to trace the
effects of a single specified event as though it was the only change that occurred at a particular date. (Robinson 1980b:93)
Keynes on the “Nature of Economic Thinking”
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Keynes recommends the Marshallian method of ceteris paribus because dynamic complications are very difficult to handle at the start of
an analysis. The hypothesis of strict independence between the determinants of the economic system is only an initial approximation. At
the next stage that hypothesis must be relaxed. After locking up all
sorts of changes in “the pound of ceteris paribus” analysts must move
on to the analysis of the complex dynamics of modern monetary
economies.
We then have to go back on ourselves and allow, as well as we can, for the
probable interactions of the factors amongst themselves. This is the nature
of the economic thinking. (Keynes 1973e:297)
Keynes urges us to rethink all initial approximations. He recommends us to revise the provisional conclusions in the light of the complexities and interdependencies of the real world. He thus adds extra
weight to Marshall’s method. His assumptions are less demanding because they are continually released. History marches on even though
in a discontinuous and partial way. For that reason he goes on to exalt
the superiority of ordinary discourse against strict mathematical formalization.
It is a great fault of symbolic pseudo-mathematical methods of formalising
a system of economic analysis . . . that they expressly assume strict independence between the factors involved and lose all their cogency and authority if this hypothesis is disallowed; whereas, in ordinary discourse,
where we are not blindly manipulating but know all the time what we are
doing and what the words mean, we can keep “at the back of our heads”
the necessary reserves and qualifications and the adjustments which we
shall have to make later on, in a way in which we cannot keep complicated partial differentials “at the back” of several pages of algebra which
assume that they all vanish. (Keynes 1973e:297–298)
Keynes’s method of ceteris paribus allows plenty of space for reservations, qualifications, and adjustments that are “at the back of our
heads.”
Keynes is very explicit about the nature of economic thinking. He
explains that his theory does not “provide a machine, or method of
blind manipulation, which will furnish an infallible answer.” He reveals with candor that the object of his analysis is but “to provide ourselves with an organised and orderly method of thinking out
particular problems” (Keynes 1973e:297; italics added).16
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That property means that his enquiries were framed in a particular
context but he had in mind a general framework beyond the model
used in the specific case. Keynes did not provide several exclusive
models to analyze particular problems; rather he unveiled a homogeneous and comprehensive framework to be used in different contexts
to investigate different objects.17 On the sound foundations of the
principle of non-neutrality of choice and the principle of non-neutrality of money, he built a theoretical framework in which the most important problems of modern economies could be analyzed.
III
The Principle of Non-Neutrality of Choice
CHOICE IS AGENTS’ DETERMINATION of their actions. Agents without actual
or prospective action are not agents. A choice-theoretic account of what
agents do is part of the foundations of any economic theory. However,
theorists have different opinions on the kind of actions open to agents’
decisions. Coddington refers to a “reductionist programme” as the standard analysis of choice in economics. “The central idea is the reduction
of market phenomena to (stylized) individual choices” (Coddington
1976:1258). In orthodox economics markets are the place where in the
aggregate agents’ objectives are realized. But market equilibrium is
grounded on the idea that agents have well-defined objective functions.
For stable and given objectives are the sine qua non to realize agents’
choice.18 Then, Coddington argues, once Keynes called into question
the orthodox theory of choice all classical economics was threatened.
Keynes scrutinizes the foundations of the theory of choice in orthodox models. In those models choice is a fully specified program for action, and is completely informed. It is a matter of a simple algorithm
between known endowments and given ends; “just as in the Benthamite calculus of pains and pleasures or of advantage and disadvantage”
(Keynes 1973f:113). Keynes concludes that in classical economics
choice is an empty decision, nothing but a mechanic response to an
external reality.19 Ignorance of future events does not matter. Time
does not matter.
I accuse the classical economic theory of being itself one of these pretty,
polite techniques which tries to deal with the present by abstracting from
the fact that we know very little about the future. (Keynes 1973f:115)
Keynes on the “Nature of Economic Thinking”
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Orthodox analysis is misleading because it assumes the existence of
an immutable economic system. It deals with a predetermined reality
in which “at any given time facts and expectations were assumed to be
given in a definite and calculable form” (Keynes 1973f:112). Change is
not completely ruled out, but at any given time period all present and
future events are governed by fixed and stable parameters. Change in
the nature and structure of economic system is precluded to agents
(Davidson 1996). The economic system is a closed system. “The problem is to determine the way in which they [i.e., the factors of production] would be used and their relative rewards” (Keynes 1973f:112).
Exogenous forces cause all malfunctioning and disorders of the system
as well as unintended or involuntary outcomes.
Two main implications derive from the classical theory of choice.
First, if ignorance of future events does not matter then choice disappears. As Shackle argued “conventional economics is not about
choice, but about acting according to necessity. Economic man obeys
the dictates of reason, follows the logic of choice” (Shackle 1961:272).
The neo-classical world is made of given opportunities and well-defined actions. Choice is but a mechanical selection of the most appropriate course of action.
Second, if time does not matter then choice is deprived of its prospective and hence conditional nature. The flow of events and circumstances surrounding agents’ choices are described by well-defined
constraints. Agents know perfectly those constraints and that is all
they need to know for future decisions. Once the choice is made the
desired outcome is obtained. There are no intermediate stages. In the
orthodox view there are no gaps in the causal chain toward the final
outcome of agents’ choice. There are no points at which the economic
process is susceptible of influence.20 Indeed, Keynes criticized all
forms of quantity theory because “they do not, any of them, have the
advantage of separating out those factors through which, in a modern
economic system, the causal process actually operates during a period
of change” (Keynes 1971:120).21 Against the particular vision of human agency proposed by classical economists, Keynes advanced a
more general choice-theoretic foundation. In his view ignorance of future events and time do matter for agents’ choice.
Agents are creative individuals facing a variety of events. Knowledge
is not necessarily complete. There are circumstances in which “we sim-
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ply do not know.” As Keynes states, “actually . . . we have, as a rule, only
the vaguest idea of any but the most direct consequences of our acts”
(Keynes 1973f:113). Beliefs and vague feelings rather than being commanded by reason then inspire choice. Thus partial ignorance of future
events makes a difference for agents’ decisions. Indeed, Keynes reminded that “at all times the vague panic fears and equally vague and
unreasoned hopes are not really lulled, and lie but a little way below the
surface” (Keynes 1973f:115). Since agents’ knowledge of the future is
“based on so flimsy a foundation, it is subject to sudden and violent
changes” (Keynes 1973f:114). For this reason Keynes suggested abandoning the postulate of a cooperative economy in which “by whatever
roundabout methods every factor of production ultimately accepts as its
reward a predetermined share of the expected current output either in
kind or in terms of something which has an exchange value equal to
that of the predetermined share” (Keynes 1979:77; italics added). A cooperative (or real wage) economy is a primitive economy in which consumers allocate a given amount of goods and services between
competing uses in order to maximize their utility. Production is also
organized such that “the factors of production desire and receive as the
reward of their efforts nothing but a predetermined share of the aggregate output” (Keynes 1979:76). Both consumers and producers’ behavior follow the logic of choice. Choice is a well-defined course of action
completely determined by “the dictates of reason.” Keynes argued that
the postulate of a cooperative economy have been used by classical
economists for the analysis of modern societies.22
The starting up of productive processes largely depends on a class of entrepreneurs who hire the factors of production for money and look to their
recoupment from selling the output for money, provided that the whole of
the current incomes of the factors of production are necessarily spent, directly or indirectly on purchasing their own current output from the entrepreneurs. (Keynes 1979:77; italics added)
Keynes alludes to the classical description of modern economies as
a neutral economy. As in the case of a cooperative economy choice
disappears because time for, and ignorance of, future events are ignored. Consumers as well as producers act according to the necessity
of their well-defined objective functions. In particular, consumers
spend the whole of their current income for buying current output
Keynes on the “Nature of Economic Thinking”
723
and they could not act differently. Producers know that consumers
necessarily use up their income on purchasing current goods and services and they recognize that they could not have done otherwise.23
Shackle has relentlessly insisted that genuine choice is non-deterministic.24 He suggested that the agents’ “decision is in a special sense
‘uncaused’, that the range of thoughts amongst which choice is made
is in part ‘inspired’ from a source not susceptible of investigation”
(Shackle 1961:271).
However, Keynes paid attention also to the structural constraint of
agents’ choice. In his analysis agents are considered in their social
context. The institutional framework partially defines aims and constraints of their actions.25 Agents are entrepreneurs, households, bankers. Each group of agents plays a particular role in the economic
process. Entrepreneurs have the leading role in the economic process
because they decide “the scale on which to produce and the offers
which it is worth while to make to the factors of production” (Keynes
1971:143). Bankers have a very active role in the starting of the economic process. They have the essential role of deciding how much
and at what price level they would accommodate the working capital
need of entrepreneurs.26 Indeed, Keynes made a mockery of bankers’
explanation of monetary instability.
Each Bank Chairman sitting in his parlour may regard himself as the passive instrument of outside forces over which he has no control; yet the
“outside forces” may be nothing but himself and his fellow-chairmen, and
certainly not his depositors. (Keynes 1971:23)
Households also have important choices to make with their incomes. “They can use them to purchase the current output of the
firms’ finished goods (X1); they can hoard part of their incomes in cash
(H); they can lend the money to the firms either to finance an increase
in the latter’s working capital or to make good their losses (L)”
(Keynes 1979:93).27
The course of events is determined by a unique sequence of
choices. There is a well-defined timing of choices that determines the
final outcome of the economic process. Yet the possibility of producing unexpected results is preserved.
A decision to consume or not to consume truly lies within the power of the
individual; so does a decision to invest or not to invest. (Keynes 1973e:65)
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Davidson argued that in Keynes’s theory “decision-makers recognize that the external reality in which they operate is in some, but not
necessarily all, economic dimensions not only uncertain but also
transmutable or creative” (Davidson 1996:482). Thus, if choice is real
rather than illusory then when agents decide for an option they could
really have acted in a different way. Agents have to follow beliefs and
vague feelings in the decision-making process because they do not
have firm knowledge of the future. But ex post they could appreciate
their mistakes and they may want to revert to the initial position. However, in historical time, reversion to ex ante positions may not be an
option.
Any economic choice that once undertaken cannot be undone without significant (income or capital) costs must mean that the initial circumstances
in all its relevant attributes cannot be replicated. (Davidson 1996:500n)
If choice makes a difference then agents are committed to the result
of their decision. Agents may decide to postpone their choice till ignorance of future events is less (but always enduring) a threat to the
choice of their appropriate course of actions (Davidson 1972, 1994).
It is also the case that once the choice is made there is no guarantee
that plans and expectations will be realized. The realization process is
constantly disrupted and remains characterized by fluidity and volatility. Then, if choice is non-empty, agents may transform plans and objects as a result of the unfolding of (historical) time. Agents can
accomplish the necessary transactions that are forced on them as they
adjust to the unforeseen and unforeseeable.
In this sense Keynes’s theory of choice was a potent attack on the
orthodox theory of a self-adjusting economy.28 The economic process
should be seen as a cumulative sequence of choices toward an undefined level of output and employment. It is the evolution of a complex
interaction of decisions rather than the unfolding of a natural path toward an ideal equilibrium.29
Keynes provided a very general theory of choice. He criticized classical theory for neglecting the analysis of economic behavior under
conditions of uncertainty. Choice was then transformed in a simple algorithm between known endowments and given ends. He preferred to
speak of potential results rather than fixed outcomes. The fundamental
Keynes on the “Nature of Economic Thinking”
725
error of classical economists was later on explained by Lawson when
he argued that “in the context of [their] specific economic models,
agents have usually ended up optimising something; a potential is reduced to its exercise and its exercise successfully actualised” (Lawson
1997:106). Keynes kept his theory of choice framed in terms of an analysis of agents’ capacities rather than of actualities of their decisions.
However, he always took distance from any nihilistic temptation. As
Shackle said “there are no laws of certainty about what will happen
when a human individual does this or that, but there are constraints as
to what range of diverse things can happen” (Shackle 1961:271).
Overall, Keynes proposed a complex theory of choice in which
agents are creative individuals that must take decisions based on an
incomplete knowledge of the outcome of their acts. In this sense his
theory deals with “choices in all the idiosyncratic detail in which actors conceive of them, . . . in terms of the elusive and wayward manner in which actors make up their minds” (Coddington 1976:1258–
1259). However, agents’ choice is partially constrained by the role that
each agent plays in the economic process. Each individual is—within
the boundaries of his or her social function—an active instrument in
the determination of the final outcome of the economic system.
IV
The Principle of Non-Neutrality of Money
KEYNES RECKONED THAT IN MODERN ECONOMIES30 money is the crucial
means through which agents regulate complex exchange and production activities.31 Money plays a crucial part in the decision-making
process of those activities. Money is even more essential in carrying
out those decisions. Thus monetary issues should be a main concern
for modern economists. Unfortunately Keynes had to recognize that
there exists, extraordinarily enough, no printed treatise in any language . . .
which deals systematically and thoroughly with the theory and facts of representative Money as it exists in the modern world. (Keynes 1971:xviii; italics added)
In the eyes of Keynes, traditional analysis delivered a theory of value
and a theory of money, but it was missing an analysis of “what route or
journey connects them” (Keynes 1973e:292). Shackle explains what
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was the problem. “There was value and there was money. Value was
about things useful and desirable by reason . . . Money was not of this
kind. It was a mere lubricant or a mere language” (Shackle 1974:50).32
Keynes strongly opposed that division. It was “a false division” that
omitted entirely from economics an analysis of monetary issues. In the
traditional framework, he argued, money is “a convenient means of
effecting exchanges—as an instrument of great convenience, but transitory and neutral in its effect. It is regarded as a mere link between
cloth and wheat. . . . It is not supposed to affect the essential nature of
the transaction from being, in the minds of those making it, one between real things, or to modify the motives and decisions of the parties to it” (Keynes 1973d:408; italics added).
Keynes lived in a period of great changes.33 In the minds of agents
there was much concern about money. Money seemed to have deleterious effects on the total volume of goods and services produced as
well as on the number of workers employed. In contrast with orthodox precepts money seemed not neutral. Practical problems called
Keynes’s attention to monetary issues.34 As Shackle says, “since it was
clear that if money could upset the business of exchange and the business of production, this meant that money was intimately involved in
those businesses, there seemed to be a need for a theory which could
embrace both value and money, which would unify them” (Shackle
1974:51).
For Keynes, then, money had to have a pivotal role in economic
modelling. “Money plays a part of its own and affects motives and decisions and is, in short, one of the operative factors in the situation, so
that the course of events cannot be predicted, either in the long period
or in the short, without a knowledge of the behaviour of money between the first state and the last” (Keynes 1973d:408–409). For that
purpose Keynes adopted what has been defined as the monetary context of behavior. “Money provides the context of behaviour in the
sense that monetary, not commodity, returns act as the motivation of
economic behavior. . . . Production and exchange are driven by monetary concerns” (Gerrard 1995:453).
Keynes’s focus on money was the natural outcome of the choice for
a method based on the close association between theory and practice.
It is not a coincidence that money is in the title of both his main
Keynes on the “Nature of Economic Thinking”
727
works. And it is not a coincidence that he maintained that “everyone
would, of course, agree that it is in a monetary economy in my sense
of the term that we actually live” (Keynes 1973d:410). However, monetary issues were very complex ones and Keynes tackled them in different ways.
V
“The Two Books are the Same Book”:
A Treatise on Money and The General Theory
SHACKLE HAS OBSERVED that A Treatise on Money and The General Theory of Employment, Interest and Money “express the same vision, the
same distillation of experience, the same construction of thought. Yet
their formal method and assignment of importance are vastly different” (Shackle 1974:80). He sees in the two masterpieces of Keynes a
common ground, a similar concern with the foundations of agents’
choice. The lack of knowledge about the outcome of current decisions is the crucial theme that runs persistently through all Keynes’s
work. However, Shackle accuses Keynes of using sometimes “conceptual tools quite alien to his purpose and to each other.” He opposes the “disequilibrium theory” of A Treatise to the theory of
“adjusted states of affairs” that characterizes The General Theory.
Then, he asks himself, “how can such seeming double-think make
sense?” (Shackle 1974:70).
More recently, Amadeo (1989) argued that “the main difference between these books [A Treatise on Money and The General Theory] is
. . . that Keynes moved from a ‘historical’ to an ‘equilibrium’ method of
analysis, and that this change in method is associated with a change in
the object of analysis—from the study of fluctuations around a norm
characterized by full employment to the determinants of the norm itself” (Amadeo 1989:4).35
It is also evident that early interpretations of Keynes’s work did not
help to clear the matter. Hicks’s famous paper “Mr Keynes and the
Classics” (1937) is unanimously criticized by Post Keynesian economists as a complete misunderstanding of Keynes’s theory. Hicks is
now severe with his IS-LM model: “as time has gone on, I have myself
become dissatisfied with it. That diagram . . . is now much less popu-
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lar with me than I think it still is with many other people” (Hicks
1982:318). However, it was Keynes, when commenting on a draft
copy of that controversial paper, who maintained “I found it very interesting and really have next to nothing to say by way of criticism”
(Keynes 1973g:79).36
Hicks (1985) himself argued that it is more appropriate to talk about
Keynes’s methods rather than—as it was the case for other great economists—the method of Keynes. He speaks of classes of models that
Keynes used in A Treatise on Money and The General Theory. He explains that it is not only a matter of different methods for the two books.
Sometimes, a combination of methods—what Hicks calls a hybrid—is
the common case. He also proposes an explanation for that attitude.
For during the years in which these books were written, his thought went
on developing; and one can tell, from the slighter things that he was able
to write between the General Theory and his death in 1946, that the General Theory itself was not the end of that development. (Hicks 1985:52)
That may sound more like the familiar description of Keynes as a
sort of erratic writer of economic models than Hicks is trying to suggest. The essential point is that Keynes never moved far from concrete
situations and thus his models reflected that choice.
The clue, as so often with Keynes, is what was happening around him.
(Hicks 1985:53)
Keynes was building a coherent theoretical framework for the analysis of particular problems. He grounded that framework on the principle of non-neutrality of choice and the principle of non-neutrality of
money. He explicitly stated that “I am more attached to the comparatively simple fundamental ideas which underlie my theory than to the
particular forms in which I have embodied them” and suggested that
“time and experience and the collaboration of a number of minds will
discover the best way of expressing them” (Keynes 1973f:111).
A Treatise on Money is about the nature and origin of money.
Money itself is the object of study. Money is analyzed in its role of
“general purchasing power.” It is a flow of means of payment used by
entrepreneurs to start the production process. As Keynes says, “in order that producers may be able, as well as willing, to produce at a
higher cost of production and to increase their non-available output,
Keynes on the “Nature of Economic Thinking”
729
they must be able to get command of an appropriate quantity of
money” (Keynes 1971:163).
In A Treatise the focus of the analysis is on money and its link with
the supply side. Producers are in the business of making profit by the
supply of goods and services. Arrangements for the production process are made and an appropriate quantity of money is invested. Then
plans are carried out. Finally, goods and services are converted into
money and eventually profit is made. What is peculiar to this process,
or any production process, is the certainty of the initial flow of money
to finance the purchase of inputs against the uncertainty of the final
monetary outcome from the selling of output. Producers want to end
up with more money then they start with. However, at the beginning
of the process producers can only have expectations about what the
monetary outcome of the process will be. Choice of type and level of
production is thus crucial. Choice is not neutral, as the long chain of
historical failures and successes demonstrates. Money is also non-neutral. As Shackle put it, “who knows whether they [i.e., goods and services]37 will be what the market of that day desires? Someone has got
to answer the unanswerable question. How do you answer the unanswerable? By conjecture, by committed conjecture, by gambling on
your guess” (Shackle 1974:5). Money is the producers’ commitment
(and at bankers, too, for producers require loans in order to accommodate their working capital needs). For only agents who are able to
get command of the appropriate quantity of money and who are willing, in the face of current uncertainties, to use it for a production activity that profit may be achieved.
The General Theory represents in Keynes’s mind the definite parting
from orthodoxy. The novelty of the theory was rhetorically enforced
before and after the publication of the book. It was “breaking away
. . . escaping from something, to be gaining an emancipation” (Keynes
1973e:xxxi). The critical message of Keynes was that modern economies are not self-adjusting. Modern economies may be trapped in a
persistent state of underemployment. For that outcome choice and
money were given a special role to play.
“In the [General] Theory, Keynes had been driven by the dramatic
and disastrous history of those times, the early 1930s, to single out one
particular class of the consequences of money, namely, its role and re-
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sponsibility in engendering massive general unemployment” (Shackle
1974:2; italics added). Keynes himself hints at the development of
ideas that lead from A Treatise to The General Theory when he argued
that “the meaning and significance of this conception [i.e., “the propensity to hoard”] and its vital difference from (I) [i.e., the volume of
savings deposits or “inactive” deposits] is what in my Treatise I have
evidently failed to make sufficiently clear” (Keynes 1973b:221). The
focus of the analysis is on the uncertainties surrounding agents’ choice
and the consequent holding of money as a store of value.38
Choice matters because it means commitment of resources for a period of time. It means tying up general purchasing power to a specific
decision. Since agents’ choice is made in conditions of incomplete
knowledge, they may be willing to postpone that choice. The holding
of money is postponing current choice for a future one. It represents
the possibility “of the continuing management of emergent events”
(Loasby 1976:165). As Shackle put it, “money, in its role as the vehicle
of consumption expenditure, makes it possible for choice to be deferred until knowledge of needs and opportunities has improved (i.e.,
has become more exact, complete, or assured)” (Shackle 1974:62).
Money is then a particular asset held by agents to defer current decisions at a less uncertain time. In Keynes’s own words: “for the importance of money essentially flows from its being a link between the
present and the future” (Keynes 1973e:293–294). The core of the analysis is money, its peculiar properties as a liquid asset, and its effects
on the demand side of the economy.
Keynes presses into service the principle of non-neutrality of money
to stress that depressions are peculiar phenomena of modern economies.
The conditions required for the “neutrality” of money . . . are . . . precisely
the same as those which will insure that crises do not occur. (Keynes
1973d:410–411)
Agents’ choice for money rather than goods and services means that
aggregate demand, the level of employment, and output are negatively affected. “Unemployment results because the owners of wealth
demand what cannot be produced (money), and do not demand what
can be produced (other forms of wealth)” (Dillard 1955:16).
Keynes on the “Nature of Economic Thinking”
731
Against orthodox models of full employment Keynes argued that in
his theory the level of employment did not have any predetermined
value. He analyzed the causes of the level of income and output for
the whole economic system. In particular he could investigate how involuntary unemployment could arise. He maintained that money in its
role of liquid store of value could explain the persistent depression of
the 1930s.39 Taking together A Treatise and The General Theory it is
clear that Keynes saw in the lack of a proper monetary theory the
main shortcoming of orthodox analysis.
So long as we limit ourselves to the study of the individual industry or firm
on the assumption that the aggregate quantity of employed resources is
constant . . . it is true that we are not concerned with the significant characteristic of money. But as soon as we pass to the problem of what determines output and employment as a whole, we require the complete theory
of a monetary economy. (Keynes 1973e:293; italics added)
Keynes did not deliver in A Treatise or in The General Theory the
“complete theory of a monetary economy.” But he did make clear that
in a monetary economy money must not be “treated as being in some
sense neutral” (Keynes 1973d:408). In several writings Keynes gave
content to the principle of non-neutrality of money. His theoretical
framework was used at times to explain the nature and the origin of
money, i.e., how money was used. At other times the focus was on
money holding and its effect on the level of employment. In terms of a
theory as a whole, then, it is clear that, as Graziani puts it, “Keynes had
in mind a sort of complete model” (Graziani 1996:147). Money was
non-neutral in both its role of general purchasing power and store of
value. If this interpretation is correct, it is “true that the Treatise and
the General Theory are in a sense one book” (Moore 1988:178).40
VI
Conclusions
THE MAIN ARGUMENT OF THE PAPER has been that in The Treatise on Money
and The General Theory Keynes presents a body of beliefs that is
(a) consistent in its own terms and (b) susceptible to be used in the
interpretation of different realities. That body of beliefs is grounded
on (1) the principle of non-neutrality of choice and (2) the principle
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of non-neutrality of money. It has then been suggested that those two
principles should be used as foundations for future development of
Keynesian economics at the methodological level as well as the theoretical level.
Notes
1. See Carabelli (1988), Chick (1983), Davis (1994a), Dow (1984, 1996),
Gerrard (1989, 1994, 1997), O’Donnell (1989). That copious production is reviewed in Gerrard (1992). Gerrard argues that much of those writings suffer an
“either/or” dualism syndrome. According to those scholars in Keynes’s thought
there is either continuity or discontinuity. Against that view he suggests a more
dynamic interpretation of the evolution of Keynes’s thought based on the encompassing principle. The encompassing principle is the methodological proposition that Keynes’s early beliefs were interpreted and developed in a more
general system of beliefs. “Keynes’s thought is characterized by a dialectic process of change in which he attempted to reconcile seemingly oppositional
philosophical positions by defining the limits to their relevance. The General
Theory emerged as the product of a long struggle of escape from the restrictions
of established economic theory as well as those of Keynes’s own earlier
thought” (Gerrard 1992:90). Fontana and Gerrard have then argued that the encompassing principle provides an appropriate characterisation of the Post
Keynesian way of thought (Fontana and Gerrard forthcoming)
2. For Chase a “truly Keynesian economics . . . [aims to] understand properly what Keynes’s economics was really about and thereby the true nature of
his revolution” (Chase 1998:872) and build on those foundations.
3. Those broad investigations of Keynes’s work represent first attempts to
challenge the revisionist historiography of Keynes’s contributions to the policies and the economic theory of the interwar period. As Clarke explains “the
original Keynesian account was of the eventual triumph of the forces of light
over the forces of darkness. Not only was Keynes always right: the Treasury
and Pigou seemed merely silly. Some recent examples of revisionist historiography, however, have simply turned this version upside down, so that it is
now Keynes who seems merely silly” (Clarke 1988:5).
4. Note the evident similarities between that interpretation of Keynes’s
method and the modern methodological position known as critical realism.
For the latter “the explanatory process will inevitably involve looking at certain features of some structure or mechanism or system to the (momentary)
neglect of others, understanding some structure, etc., from a particular angle,
leaving certain questions at any stage unanswered (so far) and warranting of
further attention” (Lawson 1997:270–271; also Rotheim 1999).
5. Harcourt and Sardoni (1994) speculate on the particular approach to
economics used by Keynes. They argue that Keynes had in mind an economic
Keynes on the “Nature of Economic Thinking”
733
system open to all sorts of changes and volatile swings. They then go on to
suggest that Keynes proposed several logical constructions (see also Kregel
1976) that could be used to tame the complexities of the real world. In that
process “facts of experience” seem to represent, in their necessarily temporary
nature, a valid indication for the “progressive improvement in the choice of
models” (Keynes 1973h:296).
6. Dow recognizes Keynes’s role in developing what she calls “Babylonian
thought”: “argument in the Babylonian style is thus conditioned by the problem at hand, employs a range of methods suited to the problem, and these
methods cannot be combined into one formal deductive argument without
drastically changing their nature” (Dow 1996:13).
7. See Gerrard (1997) for an analysis of Keynes’s complex methodology in
The General Theory.
8. Keynes used this expression in an unpublished letter to Harrod (July 2,
1936) as it is reported by O’Donnell (1997:149–150).
9. Coddington (1975) discusses at some length the difficulty of applying a
formal framework to the analysis of particular problems.
10. Dobb (1972) described precisely the limitations of the type of approach
proposed by Tinbergen: “ . . . in all such abstract systems there exists the serious danger of hypostatizing one’s concepts; of regarding the postulated relations as the determining ones in any actual situation, instead of contingent
and determined by other features; and hence of presuming too readily that
they will apply to novel or imperfectly known situations, with an abstract dogmatism as the result” (Dobb 1972:130).
11. Chick rightly speaks of the “hegemony of formalist” in modern economics. She maintains that “their [i.e., formalists’] certainty that any other approach
is inferior or downright wrong, and the view that those who do not embrace
formal techniques are against their use, has stifled debate” (Chick 1998:1859).
Unfortunately, the same conclusion may be held for all economists who argue
against the use of formal techniques in economics. Often those economists
misinterpret Keynes’s view about formalism. “On this line, the essential
themes of The General Theory—ignorance and uncertainty, sudden appearances of new information, mass psychology and temporal inconstancy, for example—are prevented from incorporation in formal models by the very nature
of mathematics. Hence Keynes rejected mathematics in economics because it
excluded the central features of his system” (O’Donnell 1997:151–152). However, as O’Donnell convincingly argues, Keynes neither proposed nor hinted
at the rebuttal of any conceivable use of formal techniques in economics.
Once, invested of the problem of evaluating the work of mathematical trained
people, he hoped that the latter “may learn to be mathematicians and economists simultaneously, capable of keeping in their minds at the same time formal thinking and shifting uncertain material” (Keynes letter to Harrod, July 2,
1937; as quoted in O’Donnell 1997:150).
12. Along these lines Harcourt expresses approval of Solow’s “sense of the
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need for humility within the profession, for it to be content, sometimes, both
in theory and even more in application and policy, with being vaguely right
rather than precisely wrong, for us to know our limitations as well as our
strengths as professional economists” (Harcourt 1998:1872). In a similar way
Chick warned that “formal methods are admired precisely because they eliminate vagueness and imprecision, but they eliminate them only in the theory;
theory can never eliminate vagueness inherent in the data or objects of study”
(Chick 1998:1864). It is an ironic coincidence that in the same journal issue
where those comments were made the well-known economist Paul Krugman
made a mockery of those warnings: “most of the topics on which economists
hold views are both different from ‘common sense’ and unambiguously closer
to the truth than popular beliefs involve some form of adding-up constraint,
indirect chain of causation, feedback effect, etc. Why can economists keep
such things straight when even highly intelligent non-economists cannot? Because they have used mathematical models to help focus and form their intuition” (Krugman 1998:1834).
13. Lawson (1997) refers to abstraction as an essential method of investigation. “Abstraction, meaning looking at something in a ‘one-sided’ manner, is
indispensable in science. Its object is to individuate some component or aspect of a concrete entity in order better to understand the latter” (Lawson
1997:236). However, Lawson, like Dobb (1972) before him, is concerned with
modern practice of pushing that method so far that all consequent propositions of that process are devoid of any context-related content: “ . . . there is
literally a world of difference between leaving something (temporarily) out of
focus and treating it as though it does not exist. The achieving of an abstraction and treating something as though it existed in isolation are not the same
thing at all” (Lawson 1997:236).
14. Harcourt and Sardoni insist that in Keynes “what is methodologically crucial is the relationship between the logical necessity of theory and the ‘safe generalizations from experience,’ and the conceptual difference between these two
analytical levels” (Harcourt and Sardoni 1994:139). Keynes seems to maintain a
clear difference between these two levels of analysis. An economic model is an
instrument of thought. Its object is “to segregate the semi-permanent or relatively constant factors from those which are transitory or fluctuating so as to develop a logical way of thinking about the latter, and of understanding the time
sequences to which they give rise in particular cases” (Keynes 1973h:296–297).
At the same time Keynes praises a continuous attention to real events. “I think it
most important, for example, to investigate statistically the order of magnitude
of the multiplier, and to discover the relative importance of the various facts
which are theoretically possible” (Keynes 1973h:299). Indeed, Keynes maintained that economists should not be reluctant to “soil their hands.” “The
specialist in the manufacture of models will not be successful unless he is constantly correcting his judgement by intimate and messy acquaintance with the
facts to which his model has to be applied” (Keynes 1973h:300).
Keynes on the “Nature of Economic Thinking”
735
15. In a similar way Hicks argued that “if a complete static theory led nowhere, we must make do with an incomplete static theory. We must lock up
our difficulties in ‘the pound of ceteris paribus’. That, in short, is the method
of Marshall. There is no question that it is a powerful method; . . . [but] it
would only work so long as the things that had been put into the ‘pound’
would stay there” (Hicks 1985:44).
16. That is consistent with his definition of economics as “a science of
thinking in terms of models joined to the art of choosing models which are
relevant to the contemporary world” (Keynes 1973h:296).
17. Dow uses the concept of open system to rationalize that method of
analysis: “an open system can be segmented into subsystems which can be
approximated to closed systems for partial analysis, but which are always
open organically to influences from other parts of the overall system” (Dow
1996:14). If reality is seen as an open system then there is scope for different
economic environments characterized by various choice situations, e.g., the
case of perfect certainty to the case of choice under fundamental uncertainty
(see Fontana and Gerrard 1999).
18. It is of interest to note that this idea is still the hidden assumption of “modern classics.” In a recent tribute to Lucas’s work, it is argued that “macroeconomic questions necessarily involve dealing with dynamics and uncertainty.”
However, to the question “how does one model this decision making and the
way in which anticipations are made and revised” the answer provided is:
“since outcomes depend upon the actions of everyone in society, agents must
form expectations about the actions of others, and indeed expectations of the
expectations of others, and so on. This feature can be captured by the notion of
equilibrium” (Chari 1998:172–173). Unfortunately, as Leijonhufvud (1984) observed it seems rather unlikely that dynamics and uncertainty can be captured
by the notion of equilibrium. “Pure decision theory, formalized as optimization
subject to constraints, is essentially timeless. The choice among the foreseen
outcomes of alternative actions is a purely logical calculus that does not involve
time in any essential way” (Leijonhufvud 1984:27). Hahn (1984) also admits that
the Arrow-Debreu construction does not explicitly and essentially confront “information processes and costs, transactions and transactions costs and also expectations and uncertainty” (Hahn 1984:53).
19. In recent times Lawson has reinforced this argument. He argues that
“most economists appear to acknowledge an intuition that human beings possess the capacity of exercising real choice. . . . Yet it isn’t. In the formal ‘models’ found in mainstream journals and books, human choice is ultimately
denied. For if real choice means anything it is that any individual could always
have acted otherwise. And this is precisely what contemporary ‘theorists’ are
unable to allow in their formalistic modelling” (Lawson 1997:8–9).
20. In more recent times Hahn referred to this requirement of orthodox
models as “the absence of sequential learning.” Hahn speaks of “inessential”
transaction dates for the equilibrium of the economic system. “A condition for
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this to be the case is that the sequence of markets and the extra prices should
not make possible more information on the environment than was available
when transactions were concentrated in the first period” (Hahn 1984:159). See
Fontana (1999) for an application of this idea to the endogenous money debate between accommodationists and structuralists.
21. Robinson developed this argument further. She maintains that “the
post-Keynesian system dwells in historical time. . . . The system is set up like
an artist’s mobile. A flick on any point sets everything in motion, but it is possible to see which are the principal interactions and which way causation runs
from one to another” (Robinson 1980a:16).
22. See Fontana and Gerrard (1999).
23. Against classical theory Keynes maintained that “output which would be
produced in a co-operative economy may be ‘unprofitable’ in an entrepreneur
economy” (Keynes 1979:80). Monetary returns rather than commodity returns
are the driven force behind agents’ behavior. The former are different from
the second because agents’ choice is decisive in determining fluctuations of
effective demand.
24. In a similar way Loasby argued that “choice must be neither random nor
predetermined. There must be some grounds for choosing, but they must be
inadequate; there must be some possibility of predicting the consequences of
choice, but none of perfect prediction. If knowledge is perfect, and the logic
of choice complete and compelling, then choice disappears; nothing is left but
stimulus and response” (Loasby 1976:5).
25. Lawson (1997) warns against the risk of adopting either a “voluntaristic”
approach or a “deterministic” approach to explain the agency-structure relationship. For the former any social structure is conceptualized as the exclusive
outcome of agents’ behavior whereas for the latter all human agency is completely determined by the existence of an external social structure. Lawson
suggests to go beyond that dualistic view and to substitute the traditional
ideas of creation and determinism with the notions of “reproduction” and
“transformation.” “Human intentional activity does not create social structure
for, to repeat, the latter is presupposed by such activity. Instead individual
agents draw upon social structure as a condition of acting, and through the action of individuals taken in total, social structure is reproduced or (in part at
least) transformed. Equally, though, social structure cannot be reified. Only at
the moment of acting can it be interpreted as given to any individual. Through
individuals drawing upon it in (always potentially transformative) action,
structure is continually reproduced or modified in form” (Lawson 1997:168–
169).
26. Keynes argued firmly that “one paradoxical fact of outstanding importance—already mentioned, but worth repeating . . . [is that] the addition to the
accumulated wealth of the community over any given period of time depends
on the decisions which are taken, mainly by entrepreneurs and financiers,
during that period as to the amount of output in the shape of fixed or working
Keynes on the “Nature of Economic Thinking”
737
capital, and not on the decisions of the body of individual citizens as to what
part of their money incomes they will save” (Keynes 1971:283).
27. Lawson (1997) recognizes that at any given point in time agents are located in a range of different positions each one associated with various interests, and sometimes contradictory needs and objectives. Against optimization
theory of the representative agent he suggest that agents’ choice be better explained by “a theory of situated rationality.” In the latter individuals take economic decisions on the ground of (i) the uncertain knowledge of options
open to choice and (ii) the “context of their birth and development,” which influence the “expressions of their needs and motives, the manner in which
their capacities and capabilities have been moulded, their values and interests
and so forth” (Lawson 1997:187). He then concludes that choice should be
seen as “a process in motion, of dynamic, structure and agency inter-dependency” (Lawson 1997:187).
28. In a similar way Hicks argued that “‘convergence to equilibrium’ has
been shown to be dubious; but it has also been shown to be unimportant.
Even at the best, it will take a long time; and in most applications before that
time has elapsed, something else (some new exogenous shock) will surely
have occurred” (Hicks 1975:366). Unfortunately, Hicks seems to underestimate an important argument of Keynes’s agency theory. Agents are creative
individuals and thus shocks to the system are mainly the outcome of agents’
decisions rather that the result of some mysterious events.
29. A modern version of this idea is the concept of path-dependent equilibria. Setterfield contrasts the traditional equilibrium approach with the latter.
He concludes that “if we are to take the idea of historical time seriously—the
idea that events occur in a unidirectional sequence that is decomposable into
prior cause and subsequent effect, and in which earlier events therefore influence later ones (but not vice versa)—equilibrist methodology must be abandoned” (Setterfield 1997:73).
30. It is worth recalling Robinson’s admonishment that in choosing a model
it is crucial “to specify to what kind of economy the model applies, for various
kinds of economies have different sets of rules” (Robinson 1980:34). Indeed,
she accused Keynes of being “rash in applying its conclusions equally to
mediaeval England and ancient Egypt.” However, in the light of what has
been argued above it seems that Keynes was rash to apply nothing but his
theoretical framework rather than conclusions for the interpretation of particular historical contexts.
31. Often in current literature it is argued that agents use money for their economic activities. Unfortunately, those scholars forgot Keynes’s admonishment
that there is “ambiguity or obscurity as to what exactly is meant by ‘using
money’” (Keynes 1979:85). In the next section it is argued that there is an important difference between using and holding money (see also Fontana 2000a).
32. Shackle argues that traditional economics assumes away uncertainty. As
a result of that exclusion he concludes that money “has no place in a purely
738
American Journal of Economics and Sociology
rational system, for its purposes are search, the finding of partners for multilateral exchange, and liquidity, a means of providing against contingencies; but
rationality pre-supposes complete knowledge, which would abolish both
these purposes” (Shackle 1974:72).
33. Robinson argued along this line. She pointed out that “George Shackle
treated ‘high theory’ as a purely intellectual movement, but in fact it arose out
of the actual situation of the thirties—the breakdown of the world market
economy in the great slump” (Robinson 1980a:1).
34. Fontana (1998:130) argues that a similar concern for the economic
events in the 1930s was the driving force behind the monetary work of the little-known French economist Emile Mireaux (1885–1969). Against orthodox
economists Mireaux maintained that the existence of bank deposits changes
the structure of the economic system, modifies the behavior of agents and
calls for a new monetary theory based on the idea that money is an endogenous creation of modern societies (Fontana 1997).
35. Clarke (1988) adopts a similar historical account to explain how Keynes
made a revolution in economic theory. Clarke tells the story of how Keynes
moved from A Treatise on Money to The General Theory, or (for what
amounted to be the same) how “the analysis of unemployment itself emerged
as a professionally contentious matter.” “No longer did Keynes join with Pigou
in identifying the rigidities that allowed disequilibrium to persist in the real
world. Instead, he joined issue with Pigou, arguing that an equilibrium at less
than full employment was possible—indeed, in the real world, normal (Clarke
1988:230).
36. Solow suggests a possible solution to the dilemma on the controversial
value of the IS-LM model. “IS-LM survived because it proved to be a marvellously simple and useful way to organize and process some of the main macroeconomic facts. I think J.R. [Hicks] saw it that way too. ‘We have invented a
little apparatus’ he says, and proceeds to ‘give it a little run on its own’”
(Solow 1984:15; also Fontana 2000b, 2000c). It may be argued that interpretation could also have received the sympathy of Keynes. Solow is also aware of
the abuses of such model in the modern history of macroeconomics. “Just because the apparatus is so simple, it lends itself to the arithmetization of macroeconomic theory. There is a tendency for even generally subtle people to treat
it not merely as a guide to the intuition but as a substitute for intuition, and for
more extended and deeper theory. That is undoubtedly a bad thing” (Solow
1984:24–25).
37. Shackle bounds his insights by limiting his analysis to the case “of producing additional means of production” (Shackle 1974:5). However at the initial
moment of financing production there is no distinction between consumption
goods and capital goods. See Graziani (1995) for a discussion of this important
issue in Post Keynesian writings.
38. After the publication of The General Theory Keynes was forced by several criticisms to clarify the main content of that book. An important paper in
Keynes on the “Nature of Economic Thinking”
739
that direction was “The General Theory of Employment,” which appeared in
1937 in the Quarterly Journal of Economics, in which Keynes argued that
“money . . . serves two principal purposes . . . as a money of account . . . [and
as] a store of wealth” (Keynes 1973f:115). Thus in The General Theory Keynes
sets aside the role of money as “general purchasing power”—as in A Treatise—in order to focus attention only to a particular function of money and its
special effect on the level of employment and income.
39. Since orthodox economists interpret Keynes’s theory as the analysis of
crises it is worth stressing that the alternative interpretation held here is that
Keynes advanced an analysis of income and output in which the level of employment may rest at a level below its full use. Thus that theory is a general theory of the level of employment of a modern economy rather than the theory of
equilibrium unemployment. Unemployment is only a case of that analysis,
though historical conditions convinced Keynes of the need to stress the importance of that particular case. Along this line Keynes held that readers of The
General Theory are “led to a more general theory, which includes the classical
theory with which we are familiar, as a special case” (Keynes 1973e:xxiii).
40. Gnos (1998) shows how A Treatise on Money and The General Theory
complement one another with regard to the principle of effective demand.
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