While one can argue that Keynes’s General Theory of Employment, Interest, and Money (1936) was one of the most important and influential attacks on marginalism in modern economics, nevertheless there remain curious oddities about Keynes’ relationship to marginalist theory.
Modern Post Keynesians contend that the essential insight of the General Theory is that aggregate demand drives output and employment, rather than the supply-side factors emphasised by neoclassical marginalism (King 2002: 13). In Chapter 12 of the General Theory, Keynes stressed the role of uncertainty in causing instability in the aggregate level of investment in market economies, and also in thwarting any reliable mechanism by which investment is equated with saving (King 2002: 13). Keynes thus denied the loanable funds interpretation of the interest rate, and instead argued that interest is a monetary – not a “real” – phenomenon determined by liquidity preference, not the “real” forces of productivity and thrift (King 2002: 13).
But King (2002: 12) points out that Keynes still equated the real wage with the marginal product of labour* (Keynes’ “first classical postulate”), and in Chapter 18 of the General Theory summarised his ideas in a way that glossed over the role of fundamental uncertainty, and allowed subsequent marginalists to reformulate the General Theory as a general equilibrium system where the rate of interest has a crucial equilibrating role (King 2002: 14).
In much the same way, Keynes’s “marginal efficiency of capital” idea (and arguably the “own rates” concept) is a legacy of marginalism that may well inadvertently smuggle in the Wicksellian natural rate of interest (King 2002: 209) into his theory – something which Keynes had repudiated.
The subsequent history of the emergence of Post Keynesianism as a school is of course complicated but, fundamentally, involves rejecting the last mistaken marginalist ideas of Keynes, along with superior theories of capital, prices and distribution.
* Though in Keynes (1939), he seems to repudiate this marginalist idea.
Keynes, J. M. 1939. “Relative Movements of Real Wages and Output,” Economic Journal 49: 34–51.
Keynes, J. M. 1964 . The General Theory of Employment, Interest, and Money. Harvest/HBJ Book, New York and London.
King, J. E. 2002. A History of Post Keynesian Economics since 1936, Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.