Tuesday, May 29, 2012

General Theory Study Guide, Preface and Book 1, Chapter 1

After reading of the Preface and Introduction(Book 1, Chapter 1) of The General Theory I find four things worth mentioning.  The first is why he wrote the book and the urgency with which he writes it.  The second is who he wrote the book for and why.  The thrd is the books relationship to his earlier writing, "A Treatise on Money".  The last thing I'll discuss is Keynes preview of the book and the significance of his title.

In the preface, Keynes lists his reasons for writing the book.  His goal was to deconstruct current economic theory, refute it, and reconstruct a new theory. He wrote the book during the Great Depression.  A time when unemployment was persistently high and didn't seem to be going down.  Most mainstream economists of the time were offering either conflicting or ineffective advice. Keynes noted that the longer the recession went on, the less the public was listening because the traditional advice(let the markets clear!) wasn't working.  Therefore there was an urgency to get things figured to end the Great Depression.

Keynes also made clear that he was writing this book for his fellow economists.  Apparently, he felt that they needed to be convinced before he had any hope of convincing the general public of his new ideas.  Since Keynes work was directed towards his fellow economists, Keynes really lays down the gauntlet.  He declares his book is going to attack current economic theory by refuting some of it's most basic assumptions.  He also warns that his disagreement isn't because he doesn't understand the mainstream economics of the time, but because he believes that mainstream economics is wrong.  As evidence he offers that he once "held with conviction for many years the theories which I now attack, and I am not , I think, ignorant of their strong points".

In the preface, Keynes mentioned something I found interesting about his earlier work, "A Treatise on Money".  His treatise was not only critiqued by his most-famous-rival Hayek, but his contemporaries piled on.  Keynes makes a bold claim in his preface.  He states that any legitimate criticism of his Treatise wasn't the result of him getting too far away from mainstream economics, but because he hadn't gotten far away enough.  If you don't think that's bold, imagine this:  You have an argument with someone.  The other person clearly loses.  The next day that person comes back and states, "I figured out why I lost our debate,  it was because I underestimated how wrong you are".

The last thing that I learned was from the introduction.  In the introduction, Keynes explains why the book is called "The General Theory".  Having never read the introduction before, I assumed that it was called "The General Theory" because he was laying a high level theory explaining the  economy.  Instead, Keynes had a subtler, more important meaning in mind for the title.

The title of the book, according to Keyne's introduction is that most of economics is based on a certain condition:  That the economy is in perfect equilibrium(everyone and thing is employed at what it is most efficient at).  Keynes says his book is an economic theory for when the economy isn't in equilibrium.  And, based on his intro, I believe that he believes the economy is almost never in that state.  From Keynes:

The characteristics of the special case assumed by the classical theory happen not to be those of the economic society which we actually live.
I specifically call this out because I've read economists that have claimed that Keynes was only writing for the Great Depression and his theory, conclusions, and recommendations didn't apply otherwise(see here, and here).  But his introduction leads me to believe that he was writing for almost every occasion.  He doesn't say 'currently' aren't living in.  He says flat-out, we don't "actually live" in the world assumed by classical economists.  I think this is the most significant thing I read as it refutes many people who suggest that Keynes didn't mean for his analysis to apply to non-depressions.

I didn't mention this in the intro, but be sure to read the footnote in Book 1, Chapter 1.  Keynes defines what he means by "The Classical School".  Apparently, he means any economist who can trace their work and theories back to David Ricardo.

For just a Preface and an Introduction, this was some pretty intense reading.  I have a feeling the rest of the book is going to be like this so I'd better settle in for a long ride.
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