A Question of Relevance: The General Theory in Keynes's Time and Ours

• Date: 01 September 1983
• DOI: http://doi.org/10.1111/j.1813-6982.1983.tb00800.x
• Author: VICTORIA CHICK
• Published date: 01 September 1983

A Question of Relevance: The General Theory in Keynes's Time and Ours

VICTORIA CHICK *(1)

CONTENTS

1. Assumptions of The General Theory.

2. Unemployment

3. Price Stability

(a) Prices and Labour Supply

(b) Causes ofPrice Stability and its Breakdown

4. The Money Supply

(a) The Gold Standard and Inelasticity

(b) Money in the Short Run

5. The Short Run

6. Stable Population

7. Inadequate Capital

8. A Closed Economy

9. The Role ofGovernment

10. Conclusion

NOTHING could stand as a better monument to Keynes, whose centenary this issue of The South African

Journal of Economics iscelebrating, than the fact that people are still arguing about his work: arguing not only for

the sake of setting the record straight but also to understand what his work has to tell us about our

present-day world. The General Theory (Keynes, 1936) is the focus of most of this discussion, and for good reason:

despite the enormous volume of work which has been done since under the name of 'macroeconomics', the

General Theory still stands as the major work in which macroeconomic questions - the theory of

output-as-a-whole and of aggregate employment - have all been dealt with in a coherent manner. It is a

theory whose parts fit together. Later 'macro-theorists' have tinkered with the parts and never put the pieces

back together again to create something new. So we find, somewhat surprisingly, that after forty-seven years

the General Theory is still the best, indeed the only, macroeconomics we have.

It is, therefore, worth asking if Keynes's theory is still worth having. Is it still relevant, and if not, in what

areas is it most in need of revision? That is the purpose of the present paper. As a by-product, the exercise

suggests an empirical basis for some of the misunderstandings and criticisms of the General Theory which have

led to 'Keynesian' reformulations of an unhelpful nature.

1983 SAJE v51(3) p381

There is a basic belief underlying this exercise: a belief that economic theories are seldom true or false in any absolute sense except

that of logical consistency. A theory one describes as 'true' captures important features of reality as one perceives it. A theory

which is 'true' in that sense can become 'false' through the mere passage of time, because the world has changed.

The paper proceeds to set out the assumptions which the author believes to be central to the structure of the General Theory and

to evaluate their relevance to interwar Britain. Then their robustness through time is evaluated, indicating where modification or

even radical reconstruction seems to be necessary, to take account of major changes.

1. Assumptions of the General Theory

In this author's view there are eight key assumptions - although they are at very different levels - on which the General Theory

depends. They are the following:

1. unemployment is the norm;

2. there is broad price stability;

3. the money supply is quite inelastic;

4. the capital stock and techniques are given;

5. the population is not growing substantially;

6. the capital stock is 'inadequate';

7. the economy is 'closed';

8. the government is but a minor economic agent.

Not all these assumptions are heralded as such in the General Theory, and not all of them are sustained throughout: for example,

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there are remarks on the balance-of-payments repercussions of wage changes, and Chapter 17 is devoted to the longer-run

consequences of capital accumulation. Nevertheless these assumptions were decisive in determining the over-all shape of the

argument in the General Theory.

2. Unemployment

Keynes based his claim for 'generality' on the fact that his theory encompassed both full employment and unemployment states.

The theory against which he was setting himself, neoclassical theory, argued for the existence of forces which would continually

restore full employment. His theory concludes that there is no case to suggest the existence of such forces.

On the face of it that would seem to suggest either that full employment and unemployment were equally likely or that, since for

any level of wages there was one position of full employment but many positions of unemployment, unemployment was the more

likely.

Whether from the latter reasoning or from empirical observation, Keynes for his analytical work assumed that unemployment was

the norm. He gave reasons for supposing unemployment to be the long-term outcome, but gave none for the dominant, short-run

context.

1983 SAJE v51(3) p382

Table 1 illustrates the realism of the assumption in relation to the British economy in the 1920s and 30s. The American experience, it

will be noted, was very different: there was no long drawn-out depression from the 1920s but a sharp decline in the 1930s. This

different experience may partly account for the resistance to the notion of unemployment equilibrium by the American

Keynesians, since there was no such phenomenon requiring explanation.

Analytically, the assumption of unemployment as the norm suggests beginning any analysis of labour market phenomena from an

unemployment position, whereas a neoclassicist would automatically begin from a position of full employment. Theassumption

that one begins from positions of unemployment gives Keynes an enormous technical advantage in presenting the static version

of his theory, for it is then possible to talk about variations in the demand for labour without

Table 1 Unemployment and Wages: United Kingdom and United States, 1922-39.

United Kingdom United States

Unemployment as Average Weekly Unemployment*(2) Hourly Earnings*(3)

% of insured Wage Rate*(4) (millions) (1931 = 100)

workers *(5) (1931 = 100)

1922 14,3 114 - -

1923 11,7 102 - -

1924 10,3 103 - -

1925 11,3 105 - -

1926 12,5 105 - -

1927 9,7 103 -102

1928 10,8 102 -103

1929 10,4 102 1,4 105

1930 16,1 101 4,2 104

1931 21,3 100 7,9 100

1932 22,1 98 11,9 87

1933 19,9 97 12,6 87

1934 16,7 97 11,0 104

1935 15,5 98 10,2 107

1936 13,1 100 8,6 108

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