Monday, December 8, 2008

The General Theory

Last week I mentioned that Tyler Cowen over at Marginal Revolution was doing one of his "book clubs" on The General Theory of Employment, Interest and Money by John Maynard Keynes. I suspect the reason he's doing this book is because so many people are comparing the current economy to the Great Depression (GD); and it's hard to discuss the economics of that time without mentioning the GD. He has his post on Chapters 1 & 2 up. Chapters 3 & 4 will come on Thursday.

I had forgotten much of the first two chapters. I was actually embarrassed at how much. But there were two things I took out of these chapters. One was Keynes’s discussion of real and nominal wages. I think he describes the problem of the "money illusion" quite well in this early chapter. The idea of workers being reluctant to reduce money wages when real wages are rising is important. It could have been even more difficult when most people were not aware of the connection of the true impact of changes in price level. And they were probably also less aware of price behavior outside their local community. Certainly those in larger cities may have better understood the extent of price changes, but those in less populated areas could have seen it as a less pervasive phenomenon. I expect that would affect their expectations.

For me, the second thing was the sense that this was more a general theory about special circumstances.

What did you get from the first two chapters? Feel free to respond here as well as at MR. (The comments on Tyler's book clubs are often as interesting as the posts.

***UPDATE***
And here's an interesting op-ed about deflation that appeared in Forbes magazine. It mentions Keynes prominently and discusses his views.

1 comment:

Tanya White said...

I had kind of hoped that Professor Cowen would say something about the various prefaces to the GT (if he had done this previously, I've missed it?).

After all, there are some really important passages in the English and other (German, Japanese, French, other?) prefaces. For example, Keynes on writing the GT as being a "struggle of escape" from old ideas - gripping stuff.

I also think it is important that in the preface to the German edition Keynes wrote: "The Manchester School and Marxism both derive ultimately from Ricardo,—a conclusion which is only superficially surprising." He has already made clear that he is out to destroy the Ricardian assumptions - and this means that he is out to destroy the Ricardian premises of Marxism as much as of the laissez-faire branch of "classical economics".

Both Skidelsky and Markwell in their studies of Keynes stress that Keynes was strongly ANTI-Marxist, and I think that this is implicitly evident even as early as the German (if no other) preface. Keynes's anti-Marxism is very important - important to our understanding that he was out to save capitalism by reforming and managing it, not out to undermine it (as extreme Austrians are sometimes tempted to claim).

No doubt Prof Cowen will get around to this?