Tuesday, November 5, 2013

Keynes and Marginalism

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 [1936]. 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.


  1. Yes, the General Theory is a mess... a beautiful and inspired mess, but a mess all the same. I can sympathise with Robinson who said that Kalecki's later framework was superior but I don't think it had the same non-ergodic thrust that the GT had basically all throughout (apart from Chapter 18...). So, you take later Kalecki you get coherence but you lose the firm insistence on non-ergodic historical time or you take Keynes and you lose the coherence.

    Anyway, its all largely an historical matter -- perhaps even an aesthetic one. Post-Keynesian economics has long overcome these problems.

  2. It's practically a crime against humanity that General Theory did not get a revised edition with necessary corrections. Keynes elaborated on his theories or corrected himself in several journal articles in 1937-1939 (like adopting pro-cyclical wages), but they remain obscure and forgotten.
    Perhaps one day some Post-Keynesians will publish an edition of GT containing extended commentaries, later articles and references to the said articles (like: "Note! Keynes changed his mind in 193X based on this and this evidence, here are his later writings on this subject", or something). But I'm pessimistic about this.

    1. That's an interesting idea. I've always thought that the GT should be run by a good mainstream publisher. Maybe Routledge or Penguin or something. I might actually look into this at some point. Thanks for the suggestion.

  3. But what if Keynes was right in assuming there was such a thing as a marginal product of labor? (Or capital, for that matter. Or land.) As an insight into production, it is a pretty useful concept (although it is certainly an abstraction), particularly if you look at the whole path of the curve. It seem to me that it was the link between the slope of the labor curve and (real) wages (or of the capital curve and prices) that was the real issue. But could not one accept the MPL insight into how real output is generated and reject the implications of this insight around wages and prices? What needed to be rejected was the perfect competition assumption that mandated this link. Instead, the PK cadre has gotten stuck with all these constant returns and fixed coefficients - all embarrassments in my view.