From the Treatise to the General Theory

The process of transition from the Treatise to the General Theory began when the Treatise was about to appear. Keynes succeeded in viewing his own ideas with critical detachment as soon as he had put them forward, and even while correcting the proofs of the Treatise he arrived at the conclusion that a different analytical structure would have been better fitted to support his main ideas on the governance of the market economy. The key moment in the transition was from analysis of disequilibria to analysis of underemployment equilibrium. While the causal nexuses going from interest rate to investments and from these to income remained, the possibility - indeed, the likelihood - was recognised that the marginal propensity to consume might take on values lower than one, which opened the way to attributing investments with a crucial role in determination of the equilibrium level of income. Moreover, a theory of interest rates was required. As for the theory of value, Keynes settled for the more familiar confines of short-period analysis that, thanks to the diffusion of Marshallism in England, could more readily be grasped by his readers. Among other things, he was driven in this direction by Richard Kahn, his pupil and closest collaborator.

Between the Treatise and the General Theory there are thus certain crucial differences in analytical structure. The key idea, however, remained unchanged: that in a monetary economy entrepreneurial decisions on production levels do not lead automatically to full utilisation of available resources. In the Treatise we find an analysis of disequilibria; the idea of long-run equilibrium remained in the background. In the General Theory, the main thesis concerns the persistence of equilibriums characterised by unemployment. Hence the importance of active management of the economy - primarily with the monetary-financial lever in the Treatise and with both it and the fiscal lever (public expenditure in particular) in the General Theory - in support of demand in the long run and not only as an anti-cyclical device.

The influence of a group of Keynes’s students and friends (including Richard Kahn, Joan Robinson, James Meade and Piero Sraffa) called ‘the Circus’, and in particular of Richard Kahn, appears important for the development of the analytical structure of the General Theory. Kahn’s contribution consisted not only in the multiplier mechanism (Kahn 1931), although it constituted one of the three analytic pillars of the General Theory, together with the notion of effective demand and the theory of the rate of interest based on the speculative demand for money, but also in suggesting reliance on the Marshallian short-period equilibrium. As developed by Kahn 1929, this notion focussed on firms endowed with some margins of strategic autonomy and some decisionmaking power, not necessarily characterised by decreasing returns but constrained in their growth by difficulty in finding market outlets for their products. Thus we have market imperfections, outside of the Marshallian

vulgata of perfectly competitive equilibriums that implied a passive role for entrepreneurs, while in Keynes’s framework they had an active role with respect to decisions both on production levels and on investments in new productive capacity.

Within the Circus a variety of positions were represented. At one extreme we find (with Meade and Austin Robinson) a more traditional view, closer to the neoclassical tradition. At the other extreme we have, with Sraffa, frontal opposition to it. At the centre, with Kahn and Joan Robinson, we have views more directly influenced by Marshall’s teachings, which eventually prevailed and indeed determined the analytical framework adopted by Keynes. The compromise suggested by Kahn (but also by Keynes’s Marshallian background), despite its immediate success, subsequently showed significant limitations, in comparison both to the neoclassical synthesis foreshadowed by Meade and Austin Robinson and to a reinterpretation of Keynes’s contributions internal to the classical framework revived by Sraffa.

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