Tag Archives: Scope of Economics

A Foreword to Keynes’s General Theory

Published in 1936, The General Theory of Employment Interest and Money remains a valuable book for both economists and policy makers. The recent financial crisis and the ongoing economic crisis have revived popular interest in this 1936 classic. The year 2009 saw the publication of two concise books on Keynes by two eminent scholars, Skidelsky and Clarke; an earlier blog post reviewed both their works. Not much will be said about the author – John Maynard Keynes, in the following paragraphs. The main objective of this blog post, as the title suggests, is to provide a foreword to The General Theory. By foreword, we mean the following: ‘The introduction to a literary work, usually stating its subject, purpose, scope, method, etc.’ (Oxford English Dictionary).

The rapidly expanding market for economics textbooks has, to a significant extent, substituted the reading of original works. In this environment, where our understanding of Keynes is based upon what Blanchard, Branson, Mankiw or Romer write, the following blog post strives to remain faithful to Keynes unlike the IS-LM version of Keynes proposed by Hicks and popularised by these textbooks. Keynes labelled Ricardo, Marshall and Pigou as Classical economists; this definition is not adhered to in the present blog post for Classical economics is a system of economic theory (to which Ricardo belongs) which is distinct from and a rival to Marginalist economics of which Marshall and Pigou are important members (see Thomas 2011 for more).

For Marshall, Pigou and marginalist economists of today, unemployment is a transitory phenomenon caused by ‘imperfections’ in the operation of the market forces. In their theoretical world characterised by competition, full employment is the ‘general’ case. However, Keynes demonstrated that this notion was based on assumptions contrary to the real world such as flexibility of money wages, absence of store of value function of money and rate of interest as a real phenomenon capable of equilibrating savings and investment and hence can only be considered a ‘special’ case. As he writes, ‘there has been a fundamental misunderstanding of how in this respect the economy in which we live actually works’ (p. 13). Opposed to this state of affairs, Keynes argued that the ‘general’ situation in an economy with competitive markets is the prevalence on unemployment. In other words, the central purpose of Keynes’s work is to demonstrate that unemployment is the usual situation in a competitive economy.

The main subject matter of The General Theory is the determination of aggregate employment and income or ‘the theory of output as a whole’ (Preface, p. vi). This needs to be seen against the then prevalent mode of economic analysis which was largely Marshallian in nature. Marginal productivity theory along with the principle of substitution was employed to understand the allocation of a given level of output; under conditions of competition, in equilibrium, full employment was (and still is) expected to prevail. And questions concerning the determination of the level of output were carried out within a theory whose primary subject matter was allocation, and not determination, of output levels. (On this, see especially Keynes’s preface to the German edition of his 1936 book.)

Marginalist economics, in the 1900s, looked up to the works of Marshall, and Pigou.  Keynes was brought up on a large dose of their works. Theories of production concentrated on determining the output levels in individual markets, and more often on allocation of output. Similarly, theories of distribution examined the allocation of income to workers and capitalists. Policy recommendations were made on the basis of such theories. The remedy to unemployment, according to Pigou and other orthodox economists, consisted in lowering workers’ wages. Economics certainly did not have an apparatus or a framework to study the ‘level of output as a whole’, or macroeconomics as it is called today. Besides output levels, Keynes also stressed the role played by money in ‘real’ analysis – the examination of income, employment, investment, consumption and saving. Rate of interest, according to Keynes, is a monetary phenomenon which depends on liquid preference. In short, the scope of his work remained the same as that of earlier economists – the study of wealth. Today, economics has broadened its scope to include any subject which can be examined by employing some form of the cost-benefit analysis. (See Malthus: The Scope of Political Economy)

Being brought up in the marginalist Marshallian tradition, Keynes attempted to completely break away from their method. In the preface to the German edition, he makes his desire explicit: ‘It was in this [Marshallian] atmosphere that I was brought up. I taught these doctrines myself and it is only within the last decade that I have been conscious of their insufficiency. In my own thought and development, therefore, this book represents a reaction, a transition away from the English classical (or orthodox) tradition.’ However, his attempt was not entirely successful. This is especially visible in his analysis of investment, where he develops the ‘marginal efficiency of capital’; much has been written on this in the context of the capital theory debates. The role he assigned to ‘expectations’ and the links to investment levels have been considered an improvement of the economists’ toolkit and consequently seen as an improvement in the capacity of economic theory to understand reality.

The aim of this blog post has been mainly to put The General Theory in the 1936 context, where Marshallian economics reigned supreme. Today, central governments, central banks and policy makers employ macroeconomic theory to understand the real world and to frame policies which increase output levels, stabilise prices and ensure financial stability. However, majority of these theories remain rooted in the orthodox tradition (variants of Marshall, Walras, Pigou and others resurface in the form of DSGE, New Classical macroeconomics or New Keynesian macroeconomics) which Keynes broke away from. Truly, The General Theory published in 1936 remains an economics classic, which is of enduring value to those who find terrible problems with the current orthodoxy!

Malthus: The Scope of Political Economy

In these difficult times we live in, what economics needs is perhaps, depth and not breadth. Unemployment, poverty, inflation, food insecurity, financial fragility, debt crisis, etc can be better understood and tackled by diverting increased resources (time and financial) in understanding the production, distribution, exchange and consumption of wealth. This blog post very briefly examines Thomas Malthus’s (1766-1834) view of political economy – its method, scope, uses and limitations.  For this purpose, I have used John Pullen’s definitive variorum edition of Malthus’s Principles of Political Economy published as 2 volumes by Cambridge University Press in 1990.

According to the Cambridge Advanced Learners Dictionary, ‘scope’ is defined as the ‘range of subjects covered’. In the context of political economy, scope refers to the range of subjects it covers. That is, the scope of political economy informs us about the sphere of analysis, the boundaries or limits, the kind of situations it describes and its applicability in the real world or, its relevance. Keeping in mind that mathematics played only a small role in political economy during Malthus’s time, let us see what his view of political economy is: ‘the science of political economy bears a nearer resemblance to the science of morals and politics that to that of mathematics’ (p. 2). Undoubtedly, morals played and still play an important role for interventions in the economy based on what we consider to be a ‘good society or economy’. And politics, distributional conflicts over income, land, natural resources and employment are integral part of any economy. Thus, it is important that political economy (and economics) takes into account these distributional conflicts when theorising or modelling an economy. However, for purposes of theory, these conflicts can be taken as given from outside economics (exogenous) or can be determined within economics, in the manner of behavioural economics.

It would not have mattered if political economy was/is not a very important branch of knowledge. Reminiscent of Keynes’s words, Malthus writes: ‘The science of political economy is essentially practical and applicable to the common business of human life. There are few branches of human knowledge where false views may do more harm, or just views more good’ (p. 12). But, Malthus wrote it more than a century earlier. (See also Sismondi’s words of a similar nature). Since Malthus viewed political economy to have significant practical applications, the complete title of his book reads ‘Principles of Political Economy Considered with a View to their Practical Application’. The editor, Pullen, gives us a bit more information on this matter. ‘This was apparently a lifelong concern. As a student at Cambridge in 1786 Malthus wrote to his father: ‘I am by no means, however, inclined to get forward without wishing to see the use and application of what I read. On the contrary I am rather remarked in college for talking of what actually exists in nature, or may be put to real practical use’’ (p. 291, Vol II; all other page numbers excepting this refer to Vol I).

Malthus understands that ‘To trace distinctly the operations of that circle of causes and effects in political economy which are acting and re-acting on each other, so as to foresee their results, and lay down general rules accordingly, is, in many cases, a task of very great difficulty’ (p. 12). Economic processes are caused by a multiplicity of causes and often not by a single one. Owing to this and because of his view of economics as a practical science, he maintained that ‘[t]o know what can be done, and how to do it, is, beyond a doubt, the most valuable species of information. The next to it is, to know what cannot be done, and why we cannot do it’ (p. 17). In other words, we must be very aware of the ‘scope’ of our knowledge.

Furthermore, if our objective is to understand the problems of unemployment and poverty, we must perhaps, as mentioned in the introduction, study in-depth the process of generation and distribution of wealth. I conclude with a statement by Malthus: ‘If we wish to attain anything like precision in our inquiries, when we treat of wealth, we must narrow the field of inquiry, and draw some line, which will leave us only those objects, the increase or decrease of which is capable of being estimated with more accuracy’ (pp. 27-8).