The General Theory Chapter 1

The first chapter of John Maynard Keynes’ The General Theory of Employment, Interest and Money is only a paragraph long; but it already exhibits one of the recurring themes of the book, which is Keynes’ insistence that what he calls the “classical theory” of economics is still valid on its own terms. Keynes’ argument is that the classical theory only applies to a “special case only and not a general case”.

He also argues that “the characteristics of the special case assumed by the classical theory happen not to be those of the economic society which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience.” This is an amusingly roundabout way of saying that the traditional theory is pretty much worthless, without actually coming out and saying so.

I read this as a rhetorical gambit on Keynes’ part. He wants his new theory to be palatable to his professional colleagues, so he can’t just dismiss the classical theory as nonsense outright. He has to skirt around the issue. I think this need to conform to certain “economic” assumptions and modes of thinking hampers the presentation at various points later on in the book, but I’ll get into that later.

One particular line in the first chapter needs drawing out:

I shall argue that the postulates of the classical theory are applicable to a special case only and not to the general case, the situation which it assumes being a limiting point of the possible positions of equilibrium.

I don’t like economic equilibrium. It’s one of those tricky economic ideas that seems built on top of a whole raft of other tricky ideas. First you have to accept the existence of two unobservable entities: the demand curve and the supply curve. You then have to assume these two unobservable things have a particular set of characteristics (that they are functions, that they slope in a particular direction, that they are monotonic). You then have to assume they stay in the same shape for an extended but often unspecified length of time. Then you have to accept that there exists some (again more-or-less well described) set of forces causes prices to move to the point of equilibrium (the single point of intersection of these two curves).

So the fact that Keynes is talking about equilibrium at all is disappointing. The reference to a “limiting point” is interesting, but we’ll have to wait and see how this gets developed.

In a footnote to the first chapter Keynes writes that he’s decided to refer to both “classical” (i.e. pre-Marx) and “neoclassical” economists as “classical”. He admits this might be a solecism, but goes right ahead and does it anyway.