Chapter 1. Introduction.
Canonization.
The most famous economist of the 20th century is John Maynard Keynes,
and the most influential economic book of the present era both on theory and on economic policy
is his general theory of employment, interest and money, published in 1936.
The fact is recognized not only by his admirers and disciples, but even by his sharpest critics.
Open any issue of almost any of the scholarly economic journals,
and you will find his name and the phrases that he coined or popularized sprinkled generously through its pages.
Open the newspaper and you will find interpretations of current economic events or proposals for economic and monetary policies that owe at least their ubiquity, if not their origin, to his writings.
To illustrate the unique place that Keynes's reputation occupies, I select a few quotations almost at random.
On his death, the London Times called him a very great Englishman, a man of genius who, as a political economist, had a worldwide influence on the thinking both of specialists and of the general public.
To find an economist of comparable influence, one would have to go back to Adam Smith.
G. D. H. Cole, the socialist economist, calls the general theory the most important theoretical economic writing since Marx's Capital,
or, if only classical economics is to be considered as comparable, since Ricardo's Principles.
What he has done triumphantly and conclusively is to demonstrate the falsity, even from a capitalist standpoint, of the most cherished practical morals of the orthodox economists and to construct an alternative theory of the working of capitalist enterprise so clearly nearer to the facts that it will be impossible for it to be ignored or set aside.
Professor Alvin H. Hansen of Harvard, usually regarded as Keynes's leading American disciple,
writes of the general theory,
There are few who would deny, as of now, 17 years later, that the book has had a greater impact on economic analysis and policy, even in this short time than any book since Ricardo's Political Economy.
It may be a little too early to claim that, along with Darwin's Origin of Species and
Karl Marx's Das Kapital, the general theory is one of the most significant books which
have appeared in the last hundred years, but it continues to gain in importance.
In the starry eyes of some admirers, even the book's faults seem somehow to add to
Professor Paul A. Samuelson, of the Massachusetts Institute of Technology, author of the most
widely used college textbook in economics at the present time, writes of the general
theory,
It is a badly written book, poorly organized.
Any layman who, beguiled by the author's previous reputation, bought the book, was
was cheated of his five shillings. It is not well suited for classroom use. It is arrogant,
bad-tempered, polemical, and not overly generous in its acknowledgments. It abounds in mares'
nests and confusions. In short, it is a work of genius.
Even stranger in Samuelson's implication that the very obscurity of the book is an embarrassment,
Not to the disciples of Keynes, but chiefly to his critics.
It bears repeating that the general theory is an obscure book, so that would-be anti-Keynesians
must assume their position largely on credit.
It is of course not surprising to find an extravagant judgment by R. F. Herrod, Keynes's
biographer.
To put the matter quite bluntly, I believe that the future historian of economic thought
will regard the assistance rendered by Keynes on the road of progress as far more important
than that of his revered master Alfred Marshall.
He seems, to my judgment, to stand rather in the same class as Adam Smith and Ricardo.
In logical penetration, he was much superior to Adam Smith, in lucidity of writing to Ricardo.
Professor Dudley Dillard of the University of Maryland, in his book, The Economics of
John Maynard Keynes, writes,
By any test, Keynes ranks as one of the great economists of all time, and as the most influential
Economic Thinker the 20th Century has so far produced.
Within the first dozen years following its publication, John Maynard Keynes's The General
Theory of Employment, Interest and Money, 1936, has had more influence upon the thinking
of professional economists and public policy makers than any other book in the whole history
of Economic Thought, in a comparable number of years.
Like Adam Smith's Wealth of Nations in the 18th century and Karl Marx's Capital in the
19th century, Keynes's general theory has been the center of controversy among both
professional and non-professional writers.
Smith's book is a ringing challenge to mercantilism.
Keynes' book is a searching criticism of capitalism.
Keynes' book is a repudiation of the foundations of laissez-faire.
Many economists acknowledge a heavy debt to the stimulating thought of Lord Keynes.
If the influence of Lord Keynes were limited to the field of technical economic doctrine,
it would be of little interest to the world at large.
However, practical economic policy bears even more deeply than economic theory the imprint of Keynes's thought.
Quotations like this could be continued indefinitely, but they already grow repetitive.
Even the most hostile critics of Keynes's theories do not question the extent of his influence.
I cite but one.
Keynes's influence in the Roosevelt administration was very great.
His influence upon most of the economists in the employ of the government is incredibly great.
There has arisen a volume of theoretical literature regarding Keynes almost equal to that which has arisen around Karl Marx.
Uses of Refutation
Yet, about the general theory, there is a strange paradox.
The Keynesian literature has perhaps grown to hundreds of books and thousands of articles.
There are books wholly devoted to expounding the general theory in simpler and more intelligible terms.
But on the critical side, there is a great dearth.
The non-Cainsians and anti-Cainsians have contented themselves either with short articles, a few parenthetic pages, or a curt dismissal on the theory that his work will crumble from its own contradictions and will soon be forgotten.
I know of no single work that devotes itself to a critical chapter-by-chapter or theorem-by-theorem analysis of the book.
It is this task that I am undertaking here.
In view of the quotations I have just made, such an undertaking should require no apology.
But, there are two possible objections that I should like to consider.
The first is the claim that Keynes' theories have been rapidly losing their influence in recent years,
theories, that they have been refuted by the actual course of events and require no further
answer.
The second is the contention that we need only present true theories in a positive form,
that it is of little value to analyze error because the possibilities of error are infinite
and the mere statement of the truth is itself a refutation of error.
Concerning the first of these possible objections, I may reply that, though there has been some
diminution of Keynes's influence, and though several of his theories have been given a
decent burial, his influence both on academic thought and on practical policy is still tremendous.
It would in any case be a poor service to clear thinking simply to allow his theories
to be forgotten, even if we assume that this is what may occur.
One of the peculiarities of recent speculation, especially in America, once wrote Santayana,
is that ideas are abandoned in virtue of a mere change of feeling, without any new evidence
We do not nowadays refute our predecessors.
We pleasantly bid them goodbye.
Simply to bid our predecessors goodbye does not further clarity or progress of thought.
Unless we know not only that some past doctrine was wrong, but precisely why it was wrong,
we have not learned all the lessons that the error has to teach us.
And there is real danger that it may make its appearance in another form.
In the history of thought, great new contributions have often been made as a sort of byproduct
of what were originally intended to be merely refutations.
Adam Smith's Wealth of Nations grew in large part out of a refutation of the errors of
the mercantilists.
Malthus' famous Essay on Population grew out of an attempt to refute the optimistic doctrines of Godwin.
Kant's critique of pure reason began as an effort to refute the theories of Hume.
John Stuart Mill's examination of Sir William Hamilton's philosophy became more famous than any of the writings of the philosopher he attacked.
I hope I shall not be regarded as presumptuous enough to be comparing the present modest work with any of the great books just mentioned.
I cite them merely to show that refutation of error is far from a futile occupation.
It is an important method not only of defending, expounding and clarifying known truths, but of advancing to new truths and greater insight.
As logic and mathematics sufficiently prove, the more we understand the implications of any theorem, the better we understand the theorem itself.
Nor, in examining the views put forward by a single man or his disciples, do we necessarily confine ourselves to those views.
Their analysis becomes a way of gaining a clearer and wider grasp of the problems with which that writer dealt.
In the first chapter of his examination of Sir William Hamilton's philosophy, 1865, Mill wrote,
My subject, therefore, is not Sir W. Hamilton, but the questions which Sir W. Hamilton discussed.
It is, however, impossible to write on these questions in our own country and in our own time without incessant reference, express or tacit, to his treatment of them.
The subject of this book, likewise, is not John Maynard Keynes, but the problems he discussed.
And we cannot discuss these problems at the present day without discussing his treatment of them.
A Pathbreaking Pioneer
Now though I have analyzed Keynes's general theory in the following pages, theorem by theorem, chapter by chapter and sometimes even sentence by sentence,
To what to some readers may appear a tedious length, I have been unable to find in it a
single important doctrine that is both true and original.
What is original in the book is not true, and what is true is not original.
In fact, as we shall find, even much that is fallacious in the book is not original,
but can be found in a score of previous writers.
Frankly, when I began this task, I did not think I would arrive at so sweeping a conclusion.
My first thought was that I might do a short work, analyzing Keynes's chief doctrines,
so that the reader who wished a critical analysis would be able to find one in a brief and readable
But when I actually embarked upon a line-by-line analysis, my experience was strangely like
the one John Stuart Mill describes in his Autobiography regarding his analysis of Sir
William Hamilton.
As I advanced in my task, the damage to Sir W. Hamilton's reputation became greater than
So I have found, in Keynes's general theory, an incredible number of fallacies, inconsistencies, vaguenesses, shifting definitions and usages of words, and plain errors of fact.
My desire for thoroughness in pointing these out has carried the length of this book much
beyond what I originally intended.
There has, however, I venture to think, been a certain compensation for the length of this
analysis.
The results are not merely negative.
They do not merely prove that Keynes's main contentions were wrong.
For, in dealing with the Keynesian fallacies, we are obliged not only to scrutinize very closely his own arguments,
but the classical or orthodox doctrines that he was denying.
And in doing so, we shall often find that some of these orthodox doctrines have been only dimly understood, even by many of their proponents.
In other cases, we shall find errors or gaps in the usual statement of some of the orthodox doctrines themselves.
One other possible objection to the present volume remains to be considered.
This is that it is directed against an author no longer in a position to reply.
But any advantage that I might gain from this will certainly be more than outbalanced by the number and controversial ardor of Keynes's disciples.
For the same reason, I make no apology for the outspokenness of my criticism, or the fact that I write of Keynes in the present tense and often discuss his work as if the author were still living.
and Living.
This is, after all, only a way of confessing that Keynes's doctrines are still very much
alive in the influence they exert.
In one respect, the range of the present book is narrower than I had originally intended.
There is no effort to cope with all the errors in the immense body of Keynesian literature.
Such an effort would have been hopeless, as I realized when I was once well-launched on
my task.
The reader will find only a few passing references to works of the Keynesians or post-Keynesians.
Even my references to Keynes himself are confined almost entirely to the general theory, other
Another of his works being cited only when I am calling attention to some inconsistency
or to some statement of the same doctrine in another form.
The examination of the fallacies of Keynes himself in the general theory alone has carried
me to as great a length as I felt my task could justify.
Once we have thoroughly examined the fallacies in the Master, we can economize time by not
troubling to dissect them again, usually in an even more vulnerable form in the disciples.
In the preface to the general theory, Keynes tries to anticipate some general criticisms.
He apologizes for the highly abstract argument that is to follow, by declaring that his book is chiefly addressed to my fellow economists, page Roman numeral 5, and that, at this stage of the argument, the general public, though welcome at the debate, are only eavesdroppers, page Roman numeral 6.
I do not think we can excuse the bad writing in most of the general theory on this ground.
For Keynes succeeds, as we shall see, in being involved and technical without being precise.
One of the most striking characteristics of the book is the looseness of many of the leading
terms and the constantly shifting senses in which they are used.
Cain to anticipate another criticism, Cain's remarks,
Those who are strongly wedded to what I shall call the classical theory will fluctuate,
I expect, between a belief that I am quite wrong and a belief that I am saying nothing
new.
Page Roman numeral 5.
This insinuates an argumentum ad hominem.
It attempts to discredit critics in advance for not being converted to the New Revelation.
Actually, as we shall find, it is not necessary to fluctuate between these two beliefs.
Keynes's main contributions are demonstrably wrong, and in those cases in which he is saying
something that is true, he is indeed saying nothing new.
Finally, Keynes presents himself to the reader, not very modestly, as a great intellectual
pioneer, treading along unfamiliar paths.
Page Romanumeral 7
What is strange about this, however, is that toward the end of the book, in Chapter 23,
he cites as confirmation of the truth of these new path-breaking ideas, the fact that most
Most of them were held by the mercantilists of the 17th century.
THE GENERAL THEORY
After some hesitation, I have decided that the best way to analyze the general theory
is to do so chapter by chapter.
Keynes's book is not well organized.
Therefore, my criticism, like the book itself, will not follow the most logical order, and will be sometimes repetitive.
To compensate for these shortcomings, I have given my own chapters, for the most part, the same numbers as the corresponding chapters that they discuss in the general theory.
This will make it easier for readers who may wish to confirm or amplify any quotation I have made from The General Theory, or to follow Keynes's argument in its original form, if they should question my own interpretation.
Fortunately, Keynes's Chapter 1, The General Theory, is only a single paragraph long.
But that paragraph raises three points that call for my comment.
I have called this book The General Theory of Employment, Interest and Money, placing the emphasis on the prefix general.
The object of such a title is to contrast the character of my arguments and conclusions
with those of the classical theory of the subject, upon which I was brought up and which
dominates the economic thought, both practical and theoretical, of the governing and academic
classes of this generation, as it has for a hundred years past.
Page 3
I shall argue, Keynes continues, that the postulates of the classical theory are applicable
to a special case only and not to the general case, the situation which it assumes being
a limiting point of the possible positions of equilibrium.
Page 3
Good economists prior to 1936, however, like good economists since then, do not depend on
postulates that fitted special cases only.
It dealt with the business cycle, with periods of prosperity and depression, as well as with
simplified static theory.
It is Keynes's economics, as we shall find, that applies to a special case only, and it
does not give a correct analysis of that special case.
The characteristics of the special case assumed by the classical theory, Keynes goes on, happen
not to be those of the economic society in which we actually live, with the result that
that its teaching is misleading and disastrous if we attempt to apply it to the facts of
experience, page 3.
This is not an argument but mere assertion.
For the present I shall content myself with the counter-assertion that sound, orthodox
economics was always flexible enough to analyze actual conditions, and that it is Keynes's
My criticisms of Chapter One must apply to every sentence in it.
They must apply also to his curious use of the term Classical, which he defends in a
footnote.
where he points out that the classical economist was a name invented by Marx to cover Ricardo
and James Mill and their predecessors.
I have become accustomed, he writes, perhaps perpetrating a solicism to include in the
classical school the followers of Ricardo, those, that is to say, who adopted and perfected
The Theory of the Ricardian Economics, including, for example, J.S. Mill, Marshall, Edgeworth,
and Professor Pigot, page 3.
This extended use of the term classical is merely confusing.
It gives the reader a quite false picture.
He is being asked, in effect, to consider practically all economics prior to the appearance
of the General Theory in 1936, no matter by whom written, as both a uniform theory and
an agreed-upon theory.
But there was enormous diversity in the views of particular writers, and many controversies
between the so-called classical economists.
There were also points which some of them did not pretend to have settled.
Mises writes as if all the economists before him had dozed off into a sort of dogmatic
slumber, thoughtlessly incanting after each other some unexamined clichés of thought.
His references to the classical school are misleading in more than one respect.
He includes among the classical economists the pioneers and continuers of the subjective
value or marginal utility theories that represent a break with the classical economics.
And when he writes about orthodox economics, he seems to confine himself most of the time
to Marshall and Pigot.
He writes as if he were unaware of the great advances beyond these writers that were made,
particularly in Capital and Interest Theory by Boehm-Bawerk, John Bates Clark, Newt Wicksell, Irving Fischer, Ludwig von Mises and F. A. Hayek.
Keynes's frame of reference is strangely provincial.
He seems to assume that whatever was not discovered by either Marshall or Pigot, or discussed
in his little circle at Cambridge, was never thought of at all.