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The Economics of Keynes in Historical Context: An Intellectual History of the General Theory

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Lawlor presents a historical retrospective view of the General Theory(GT,1936).He correctly finds the roots of the GT in Keynes's unofficial training in Marshallian economics in his introductory chapter 2.However,Lawlor completely overlooks,or is unable to work out,Keynes's advanced mathematical model of chapters 20 and 21, in which Keynes proved mathematically that involuntary unemployment will exist ,except in the special case where there is no uncertainty and hence no speculative demand for money so that the elasticities e and ed subscript, on pp.305-306 of the GT, equal 1,as a general rule in all Capitalist societies.This is the neoclassical special case.Involuntary unemployment automatically exists if e and/or e d subscript are < 1.Lawlor completely overlooks all of this.The result is that chapters 4-7 of his book make no sense.Lawlor starts by showing the historical context of the problem confronting Keynes as left unsolved by Marshall and Mill in chapter 4.The reader expects to be shown how Keynes either solved or partially solved or made some progress toward solving this problem.The reader is left completely baffled because at the end of chapter 7 it is clear that,based on Lawlor's presentation,that Keynes,in fact,solved nothing. Lawlor is correct that the GT is a generalization ,at the macroeconomic level ,of Marshall's partial equilibrium ,microeconomic approach operationalized by Keynes through his improvements of the mathematical model presented by Pigou in his 1933 book,The Theory of Unemployment,in part II,pp.86-105.This generalized and improved version eliminates the concept of user cost.Keynes's entire comparison-contrast in the appendix to chapter 19 rests on the following simplification: "This,though he(Pigou ) does not stop to mention it,is tantamount to assuming that marginal wage-cost is equal to marginal prime cost"(p. 272;GT-Appendix to chapter 19).This requires Keynes to make the entire comparison-contrast between Pigou's special theory and his own more general theory "...provided always that we are limiting ourselves to the special case where marginal-labour cost is equal to marginal prime cost".(p.273;GT-Appendix to chapter 19).This is exactly what Keynes does in chapters 20 and 21 which Hugh Townshend could not follow because he had skipped the appendix to chapter 19 ,just as Lawlor has.

Lawlor does an excellent job in chapters 8-10 .These chapters concentrate on the destabilizing role of speculation on the macroeconomy.Lawlor provides an excellent historical review connecting the original analysis of John Stuart Mill and Marshall on speculation to the ultimate conclusions of Keynes in the General theory.these conclusions were that(a)the existence of uncertainty is a necessary condition for the speculative demand for money to exist;(b)speculation is destabilizing under conditions of uncertainty, and (c)it can be stabilizing under conditions of risk where the probability distribution of prices is normally distributed and the experienced speculators outweigh the inexperienced speculators.

Chapters 11-14 are above average and deal with the nexus between money,interest rates,liquidity,liquidity preference(the old propensity to hoard of the Scholastic philosophers-theologians),and monetary policy.Lawlor overlooks the fact that in Part V of the GT Keynes is clearly advocating fixed rules and has completely abandoned the advocacy of discretionary monetary policy.Meltzer,in his 1988 book on Keynes,which is the best exposition on Keynes that currently exists,correctly comes to this conclusion,although he does not explicitly link it to Keynes's analysis on pp.321-327,338-353,and pp.374-377 in Part V of the GT or to the Scholastics.It is interesting that Keynes returns macroeconomics to the ancient wisdom of the Scholastics,Thomists,and Adam Smith.In fact ,Keynes's conclusions ,on fixing the long run rate of interest permanently a little bit above the prime rate and preventing rentiers and speculators[Smith's projectors,prodigals,and imprudent risk takers.See Smith(1776),The Wealth of Nations,pp.280-340,especially his conclusions on pp.339-340,Modern Library(Cannan)edition] from getting access to bank loans/credit ,are a fitting conclusion that derives from Keynes's discussions of the unsolvable problem created by lender's versus borrower's risk assessment conflicts with entrepreneurs that the banks " solve " by skewing credit allocation to speculators.

Lawlor's conclusion,reached in chapter one of his book,that Keynes was a Post Keynesian,must be rejected due to Keynes's rejection of the "..silly and sour .." analysis of the very first Post Keynesians,Richard Kahn,Joan Robinson,and Austin Robinson.Keynes,fittingly,in the last article he ever published, in April,1946,in the Economic Journal,correctly advocated a return to the ancient wisdom of Adam Smith ,and hence the Scholastic and Thomist philosopher-theologians ,who understood the difference between debts and assets(wealth),risk(tolerable security) and uncertainty,the rate of interest and the marginal efficiency of capital(MEC),and enterprise-entrepreneurship and speculation.It is truly amazing that the average 21st century PH.D in economics is decidedly inferior to both Adam Smith and Keynes.

I recommend the purchase of this book for readers who do not yet have a biography of Keynes in their personal library.The best book is still the Meltzer book mentioned above.