A Proto-Keynesian Paley?

Paley could get the best of both worlds, however, because he ignored scarcity. Given q, the degree of luxury, the outputs of provisions and ‘luxury’ goods, and the levels of employment and population are all determined by the exogenous components of demand in either sector. (In my version, there is only R, but the point is general.) There is no land scarcity in Paley, no diminishing returns, no opportunity costs, no relative prices, and no problem of resource allocation. Though a market-clearing exchange rate (r=qA/pL) must exist between provisions and ‘luxury’ goods, it is never mentioned. There is no consideration of economic growth. None of the analytical concerns of classical political economy appear: not even those which are adumbrated in Heys lectures. Strictly speaking, Paley’s economic thought is not really ‘economics’ at all: not at least in any way that could interest Smith and his successors. I wish to suggest that it is in this second, methodological sense, as much as the first, historical sense, that Keynes may have regarded Paley as ‘the first of the Cambridge [or at any rate, “Keynesian”] economists’.

This is illustrated—not to say caricatured—by the model set out in Figure 10.1, which is, of course, isomorphic with Romney Robinson’s (1952) analysis of the interdependence of national incomes in a two-country, ‘Keynesian’ (i.e. underemployed, fixed price) world. Robinson’s model may well be the high-water mark of ‘crude Keynesian’ macroeconomics. All supply curves are horizontal, interest and prices are irrelevant, and the only thing that matters is aggregate demand.

Obviously, there are some fundamental differences between Paley’s and Robinson’s conceptions of the economy, leaving aside (as we may) the fact that the former deals with one country, the latter with the world. In Robinson’s model, demand determines supply in the (Marshallian) short period because a given population, workforce, and capital stock are massively underemployed and all prices are stationary or sluggish. If prices adjusted rapidly, or if full employment were approached, his story would change drastically. In Paleys model, demand determines supply in the (Malthusian) long period because population, and fully employed workforce, is perfectly elastic at the socially determined subsistence wage.

However, what they have in common is precisely what distinguished Keynes’s vision of the economy (during a period from the Michaelmas Term of 1932 to sometime after 1936) from that of all his other predecessors, including Malthus. For although Malthus insisted on the importance of ‘effective demand’ in his controversy with Ricardo, and attempted to make analytical use of the concept in his Principles (1820, 1836) [1989], and though it may well be true, as Steven Kates (1994) has persuasively argued, that Keynes actually got his central idea as a consequence of reading the Malthus-Ricardo correspondence in late 1932, the fact remains that Malthus’s model of the economy—inasmuch as there is any such thing— is more than merely demand driven. From one standpoint no doubt, the whole of Chapter VII of Principles (Malthus ibid.: Book I, 345-373) may be regarded as a vast elaboration of Figure 10.1. But its exposition is fatally flawed. Land scarcity and diminishing returns are recognised, but they are not integrated with ‘effective demand’ into a coherent model, and at one point, Malthus actually enounces a theorem which is seriously at variance with the predictions of Paley’s purely demand driven model (see Waterman 1996: 685-686). Indeed, so ‘classical’ does Malthus frequently appear in Principles that one eminent, present-day economist—presumably unaware of Paley’s demand theory which lies behind portions of this work—has declared that ‘Malthus is not so much an underconsumptionist as a supply- sider’ (Negishi 1989: 152).

Of course, there is more to ‘the economics of John Maynard Keynes’ than mere ‘Keynesian economics’ in Samuelsons elementary textbook sense. But in so far as the latter may genuinely be discovered in some parts of The General Theory, its relentless concentration on the causal nature of aggregate demand has more in common with Paley’s bold reductionism than with Malthus’s conscientious but flawed attempt to do justice to the whole of economic reality. This may possibly have occurred to Keynes when he added the footnote on Paley to his rewritten Malthus essay in the autumn of 1932.