Keynes General Theory Quotes

Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.

The ideas which are here expressed so laboriously are extremely simple and should be obvious. The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.

The General Theory was not truly revolutionary at all but merely old and oft-refuted mercantilist and inflationist fallacies dressed up in shiny new garb, replete with newly constructed and largely incomprehensible jargon.

The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.

If human nature felt no temptation to take a chance, no satisfaction (profit apart) in constructing a factory, a railway, a mine or a farm, there might not be much investment merely as a result of cold calculation.

Keynes was a great economist. In every discipline, progress comes from people who make hypotheses, most of which turn out to be wrong, but all of which ultimately point to the right answer. Now Keynes, in The General Theory of Employment, Interest and Money,set forth a hypothesis which was a beautiful one, and it really altered the shape of economics. But it turned out that it was a wrong hypothesis. That doesn't mean that he wasn't a great man!

A monetary economy, we shall find, is essentially one in which changing views about the future are capable of influencing the quantity of employment and not merely its direction.

We should not conclude from this that everything depends on waves of irrational psychology. On the contrary, the state of long-term expectation is often steady, and, even when it is not, the other factors exert their compensating effects. We are merely reminding ourselves that human decisions affecting the future, whether personal or political or economic, cannot depend on strict mathematical expectation, since the basis for making such calculations does not exist; and that it is our innate urge to activity which makes the wheels go round, our rational selves choosing between the alternatives as best we are able, calculating where we can, but often falling back for our motive on whim or sentiment or chance.

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

As Keynes explained his own methods in The General Theory: “The object of our analysis is, not to provide a machine, or method of blind manipulation, which will furnish an infallible answer, but to provide ourselves with an organised and orderly method of thinking out particular problems….Too large a proportion of recent ‘mathematical’ economics are mere concoctions, as imprecise as the initial assumptions they rest on, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols.”8

Today it is generally accepted that much of what passes as Keynesian thought is not so much the work of Keynes himself as that of his popularizers. Other economists tend to see their own reflection in the works of Keynes. The General Theory of Employment, Interest, and Money (London,1936) has become a Procrustean bed whereby authors trim or stretch Keynes to suit their own purposes.

Prior to The General Theory, economics was almost exclusively concerned with scarcity and efficiency. The very word for the productive output of society—economy—was a metaphor for making do with less. The root cause of human suffering was understood to be a shortage of resources to meet human needs. Social reformers might protest the extravagances of the rich, but poverty and squalor were driven not

Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. ... in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest.

Ancient Egypt was doubly fortunate, and doubtless owed to this its fabled wealth, in that it possessed two activities, namely, pyramid-building as well as the search for the precious metals, the fruits of which, since they could not serve the needs of man by being consumed, did not stale with abundance. The Middle Ages built cathedrals and sang dirges. Two pyramids, two masses for the dead, are twice as good as one; but not so two railways from London to York. Thus we are so sensible, have schooled ourselves to so close a semblance of prudent financiers, taking careful thought before we add to the 'financial' burdens of posterity by building them houses to live in, that we have no such easy escape from the sufferings of unemployment. We have to accept them as an inevitable result of applying to the conduct of the State the maxims which are best calculated to 'enrich' an individual by enabling him to pile up claims to enjoyment which he does not intend to exercise at any definite time.

The second, and related, question was why would an increase in money supply not stimulate spending, returning the economy to full employment? Keynes’s reply was that in a slump the demand for liquidity – emergency money – was so high that further injections of money would simply be absorbed in idle cash balances as a claim on generalised future purchasing power without any impact on current spending. The economy would be stuck in a ‘liquidity trap’. The argument was set out in Chapters 13 and 14 of The General Theory. They are among the more difficult and obscure parts of the book. It

Keynes argued that when short-term and long-term interest rates had reached their respective lower bounds, further increases in the money supply would just be absorbed by the hoarding of money and would not lead to lower interest rates and higher spending. Once caught in this liquidity trap, the economy could persist in a depressed state indefinitely. Since economies were likely to find themselves in such conditions only infrequently, Hicks described Keynes’s theory as special rather than general, and relevant only to depression conditions. And this has remained the textbook interpretation of Keynes ever since. Its main implication is that in a liquidity trap monetary policy is impotent, whereas fiscal policy is powerful because additional government expenditure is quickly translated into higher output.

In a BBC broadcast in 1934, when he was a year away from finishing The General Theory, Keynes pinpointed the fundamental difference between an approach to the Depression based on frictions and imperfections and an approach based on more fundamental defects in the market system: 'On the one side were those who believe that the existing economics system is, in the long run, a self-adjusting system though with creaks and groans and jerks, and interrupted by time-lags, outside interference and mistakes ... The strength of the self-adjusting school depends on its having behind it almost the whole body of organized thinking and doctrine of the last hundred years. If the heretics on the other side of the gulf [among whom Keynes included himself] are to demolish the forces of nineteenth century orthodoxy ... they must attack them in their citadel.

Practical man, who believe themselves to be quite exempt from any intellectual influence, are usually the sleeves of some defunct economist

Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the sleeves of some defunct economist

Weintraub was an excellent student of both microtheory as well as Keynes’s General Theory.

It was the economist John Maynard Keynes, a liberal who believed socialists were well-intentioned idiots, who presented the best approach of the time to taming capitalism. The methods laid out in his 1936 work, The General Theory of Employment, Interest and Money, once implemented, would help spur employment, ensure productive investment, and mitigate crises. Before the Keynesian revolution, the reigning classical theory

In the last chapter of the /General Theory, /quoted above,^35 he [Keynes] falls into the fallacy of supposing that there is some kind of /neutral /policy that a Government can pursue, to maintain effective demand in general, without having any influence upon any particular demand for anything. The Government has to undertake “the task of adjusting to one another the propensity to consume and the inducement to invest” but everything else is best left to “the free play of economic forces.”^36 This is a metaphysical conception as unseizable as /abstract labour /or /total utility. /What is a policy which /merely /adjusts the demand for investable resources to the supply? To increase effective demand when it threatens to flag, various means can be used: to reduce taxation or to shift the burden from those most likely to increase their consumption to those most likely to reduce their savings; to foster competition so as to reduce profit margins; to increase subsidies or outlays on social services — all means which tend to reduce inequalities in consumption. Or Government expenditure on investment can be increased, directly or through nationalized industries, or reductions in taxation and credit policy can be used to encourage private investment. Contrariwise, when effective demand seems excessive, taxes to discourage consumption, credit restriction and reduced Government expenditure can be brought into play. And all this has to be worked out so as to preserve the balance of trade at some level or other, as well as to preserve employment. What is a /neutral /policy? What mixture of these means is it that leaves private enterprise unaffected in content and acts only on the quantity? [pp. 89-90]

A valuation, which is established as the outcome of the mass psychology of a large number of ignorant individuals is liable to change violently as the result of a sudden fluctuation of opinion due to factors which really do not make much difference . . . since there will be no strong roots of conviction to hold it steady.

Wage flexibility may not cure an ailing economy, but simply make the rich richer and the poor poorer; you get an economy driven not by wages, but by assets and if those assets stay in the same hands, there is no dynamism and social mobility.

The analysis of the /General Theory /shows that inflation is a real, not a monetary, phenomenon. It operates in two stages (once more giving a crudely simple account of an intricate process). An increase in effective demand meeting an inelastic supply of goods raises prices. When food is supplied by a peasant agriculture a rise of the prices of foodstuffs is a direct increase of money income to the sellers and increases their expenditure. The higher cost of living sets up a pressure to raise wage rates. So money incomes rise all round, prices are bid up all the higher and a vicious spiral sets in. The first stage — a rise of effective demand — can very easily be prevented by not having any development. But if there is to be development there must be a stage when investment increases relatively to consumption. There must be an increase in effective demand and a tendency towards inflation. The problem is how to keep it within bounds. Some schemes of investment that seem to be clearly indispensable to improvements in the long run, such as electrical installations, take a long time to yield any fruit and meanwhile the workers engaged on these have to be supplied. The secret of non-inflationary development is to allocate the right amount of quick-yielding, capital-saving investment to the consumption-good sector (especially agriculture) to generate a sufficient surplus to support the necessary large schemes. It is in this kind of analysis, rather than in the mystifications of “deficit finance,” that the clue to inflation is to be found. [pp. 110-11]

Keynes’s fundamental insight was that we do not know – cannot calculate – what the future will bring. In such a world, money offers psychological security against uncertainty. When savers become pessimistic about future prospects they can decide to hoard their savings rather than invest them in businesses. Thus there is no guarantee that all income earned will be spent. This amounts to saying that there is no natural tendency for all available resources to be employed. ‘Men cannot be employed’, he wrote in The General Theory:

In The General Theory, money still retains its power to disturb the real economy. But its disturbing power arises from its function as a store of value rather than as a means of exchange. This had the further consequence of calling into question the reliability of monetary policy as an instrument of economic management.

Thus in The General Theory he proposed to bring about the ‘euthanasia of the rentier’ by making it impossible to take ‘usury’ on loans; he also defended the medieval usury laws which restricted interest to a maximum. Yet when his French correspondent Marcel Labordère pointed out to him that ‘stable fortunes, the hereditary permanency of families and sets of families of various social standings are an invisible social asset on which every kind of culture is more or less dependent’, Keynes readily replied: ‘I fully agree with this, and I wish I had emphasised it in your words. The older I get the more convinced I am that what you say is true and important. But I must not allow you to make me too conservative.’ The

The revolutionary thought, brought out more clearly in The General Theory, was that there was no automatic mechanism in a modern economic system to keep intended saving in equilibrium with intended investment.

Thus, after all, the actual rates of aggregate saving and spending do not depend on Precaution, Foresight, Calculation, Improvement, Independence, Enterprise, Pride or Avarice. Virtue and vice play no part. It all depends on how far the rate of interest is favourable to investment, after taking account of the marginal efficiency of capital. No, this is an overstatement. If the rate of interest were so governed as to maintain continuous full employment, virtue would resume her sway;-- the rate of capital accumulation would depend on the weakness of the propensity to consume. Thus, once again, the tribute that classical economists pay to her is due to their concealed assumption that the rate of interest always is so governed.

The system of profit equations that Jerome Levy wrote down in 1914 anticipated a similar set of equations written down by the Polish economist Michal Kalecki in 1935. And Kalecki’s system is regarded by a lot of people as containing nearly all of what’s useful in J. M. Keynes’ General Theory of Employment, Interest and Money, published in 1936 and widely accepted as one of the greatest works of economics ever. Levy went on to demonstrate that the proverb ‘if you’re so smart, why aren’t you rich?’ was not applicable in this case; aided by his sons, the Levy family went into finance with sufficient success that the Jerome Levy Forecasting Institute they endowed at Bard College continues to promote their approach to economics today. You used to be able to buy a copy of the book Jerome wrote in 1943, Economics Is an Exact Science, from them; I got mine in about 2002. In the introduction to that book, Levy sets out his view of the purpose of capitalism: The working class is the original and fundamental economic class . . . The function of the investing class is to serve the members of the working class by insuring them against loss and by providing them with desired goods. The justification for the existence of the investing class is the service it renders the working class, measured in terms of wages and desired goods. The contrary is not true. The working class does not exist to serve the investing class. The working class has the right to insure itself through organizations composed of its members or through government, thereby eliminating the investing class.

The concept of secular stagnation originally goes back to followers of John Maynard Keynes, who discussed the perspectives of ‘mature economies’ in the context of the Great Depression of the 1930s.4 Authors such as Alvin Hansen, Josef Steindl and Michal Kalecki5 assumed that economic growth in industrial societies would gradually come to a halt. They saw the reasons for this in demographic developments, the exhaustion of natural resources, a slowdown in technical progress, a lack of readiness for risky entrepreneurial initiatives, political frictions, and not least a factor that Keynes described in his General Theory of Employment, Interest, and Money as the ‘marginal efficiency of capital’.

The game of professional investment is intolerably boring and overexacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll

The slogan that ‘in the long run we are all dead’ is also a characteristic manifestation of an unwillingness to recognise that morals are concerned with effects in the long run – effects beyond our possible perception – and of a tendency to spurn the learnt discipline of the long view. Keynes also argued against the moral tradition of the ‘virtue of saving’, refusing, along with thousands of crank economists, to admit that a reduction of the demand for consumers’ goods is generally required to make an increase of the production of capital goods (i.e., investment) possible. And this in turn led him to devote his formidable intellectual powers to develop his ‘general’ theory of economics – to which we owe the unique world-wide inflation of the third quarter of our century and the inevitable consequence of severe unemployment that has followed it (Hayek, 1972/1978).

In retrospect, The General Theory would set the intellectual agenda for Friedman’s entire career, but when it appeared, he barely noticed. As Keynes’s ideas were making landfall in American universities, Friedman offered a course through the Columbia University extension school that was a throwback to the early 1930s. Focused on individual demand curves, individual marginal utility, and individual economic decision-making, Friedman’s course, Structure of Neo-classical Economics, made no mention of business cycles, national income, or current economic conditions. Drawing on the approach pioneered by Knight and Simons, it placed the question of “how free enterprise system solves economic problem” front and center.45 At the same time, Friedman did offer an implicit critique of the fiscal revolution, particularly Hansen’s concept of secular stagnation. Picking up a theme from Knight, Friedman told his class, “Once wants are satisfied, new wants are going to be formed; the process of want formation is part of the basic drive.”46 There were two critical implications. First was that perpetual wanting would keep economies always in motion: “Impossibility of completely satisfying all wants. If the greatest want is the desire for new wants … the notion of satiety is silly.” It was more than a philosophical point. Not only was it impossible for the economy to stagnate, but it would be impossible to design a government program that would adequately satisfy wants, which tended to continually increase. Friedman drew out the second implication in another comment. “Attitude toward all policies will be affected by our ideas concerning wants,” he argued.47 In a letter to Arthur Burns, he was more direct. Reflecting on a road trip to visit Rose’s family, he wrote, “The whole West, particularly California, and more particularly Southern California, gives you the feeling that the frontier is not yet gone and makes you feel like telling the stagnationites to come out and take a look.”48 Although he worked for the New Deal, Friedman was not a New Dealer. Nor was he a Keynesian. He thoroughly rejected the ideas that would most profoundly shape economics in the years ahead.

Mark Twain defined a classic as something everyone wants to have read and nobody wants to read. One classic that deserves the attention of all investors is John Maynard Keynes’s General Theory of Employment, and more specifically chapter 12, “The State of Long-Term Expectation.” Expectations are embedded in all the decisions we make, especially investment decisions, but we rarely step back and consider how and why we form our expectations. Keynes guides this reflection.

The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist. Madman in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.

Obviously consumption-goods, taken as a whole, have in this sense the longest period of production, since of every productive process they constitute the last stage. Thus if the first impulse towards the increase in effective demand comes from an increase in consumption, the initial elasticity of employment will be further below its eventual equilibrium-level than if the impulse comes from an increase in investment. Moreover,

All production is for the purpose of ultimately satisfying a consumer.

Like the monetarist Milton Friedman, Keynes looked to price stability as a way to shore up classical economic thinking. For the most part, he believed, laissez-faire economics worked. Supply and demand did bring society to a prosperous equilibrium. They just needed a few pieces of basic economic architecture to work: property rights, the rule of law, and price stability. But unlike Friedman, Keynes had arrived at monetarism as a creative way to expand the power of the state to fight the uncertainties and anxieties of postwar life.

In an interview with Business Wire in November 2011, Buffett said, “If you understand chapters 8 and 20 of The Intelligent Investor (Benjamin Graham, 1949) and chapter 12 of The General Theory (John Maynard Keynes, 1936), you don’t need to read anything else and you can turn off your TV.”2 This advice from Buffett references two classics from the field of investing and economics. Chapter 8 of Graham’s book talks about not letting the mood swings of Mr. Market coax us into speculating, selling in panic, or trying to time the market. Chapter 20 explains that, after careful analysis of a company’s ongoing business and its prospects for future earnings, we should consider buying only if its current price implies a large margin of safety. In chapter 12 of The General Theory of Employment, Interest, and Money (“The State of Long-Term Expectation”), Keynes remarks that most professional investors and speculators were “largely concerned, not with making superior long-term forecasts of the probable yield of an investment over

The hope of a very favourable outcome, which may balance the risk in the mind of the borrower, is not available to solace the lender.

In the 1920s, Oswald Falk was Keynes’s main partner in moneymaking. They started speculating on currencies immediately after the war, and continued in commodities. Despite three major reverses – in 1920, 1928–9, and 1937–8 – Keynes increased his net assets from £16,315 in 1919 to £411,238 – £10m in today’s values – by the time he died. Over the interwar years, his investment philosophy shifted from currency and commodity speculation to investment in blue-chip companies in line with his changing economic theory. The failure of his ‘credit cycle’ investment theory to make him money led him to the ‘animal spirits’ theory of investment behaviour of The General Theory, and to a personal investment philosophy of ‘faithfulness’. (To counter investment volatility he urged that the relationship between an investor and his share should be like that of husband and wife.)