Let us make an in-depth study of the revolution of Keynes’s General Theory.
Keynes vehemently attacked the contents of classicism and put forth his’ General Theory’, which dealt with all levels of employment and the factors that determine it at a time.
There is a group of economists (Keynesians) who consider it no exaggeration to say that Keynes thereby led a revolution in economic thinking.
According to some economists, however, Keynes hardly evolved a new approach or brought about a revolution in thought; to them, it was just an extension of classical economics to the macro field of economics. In their opinion “General Theory is simply classical economics, further developed and embroidered.”
1. Use of Old Concepts:
They hold that it was difficult for Keynes to get rid of early impressions. His thinking was essentially based on the study of early classical economists. It is pointed out that somewhere in literature every element of the Keynesian system was at some time discussed. Malthus had already given the idea of effective demand. Mercantilists had given the idea of liquidity preference. R.F. Kahn had already used the concept of multiplier. Keynes brought these ideas together.
2. Use of Supply and Demand Curves:
It has been contended that Keynes used the same methodology of equilibrium through supply and demand schedules which Marshall had applied to an industry. Keynes had only given them an aggregative character. He talked of aggregate demand and aggregate supply.
3. Use of Marshall’s distinction between ‘Overhead Costs’ and ‘Supplementary Costs’:
Keynes gave two separate concepts of national income in his General Theory. In one he deducted what he called ‘user cost’ and in the other he deducted all the costs. The two concepts referred to Marshall’s distinction between the two costs in the short period. This is why the ASF sloped from left upward to the right.
It is, however, not so easy to agree with the view that Keynesian economics does not represent a genuine break. Although it is a matter of judgement and a satisfactory answer is not easy to give, it is not the same old wine in new bottles. The Keynesian theory was essentially new as compared with the whole body of doctrines prevailing in the twenties.
4. His demonstration that unemployment is possible in equilibrium and his analysis of the factors determining the size and changes of employment and income are generally regarded as Keynes’ most important theoretical discoveries. The revolution was solely the development of a theory of effective demand i.e., a theory of the determination of the level of output as a whole. For a while the whole classical structure stood shaken.
According to S.E. Harris, “As a result of Keynes’ work, the classicists will have to check their assumptions, pay much more attention to institutional and short-run problems, better integrate the theory of money income and output, make theory more useful in the area of public policy, be more concerned with general demand, thrift and expectation, and be less certain on the relation between wage cutting and employment.”
Although Keynes’ gratitude to the classical masters was profound, it will be quite unfair to deny him the credit he deserves. After all, “every contributor to any field of knowledge stands on the shoulders of his predecessors. Specialists in any- field of knowledge know that no one man ever single-handed invented anything.
In a sense there are no revolutionary discoveries.” As remarked by Prof. Harris, “Keynesian economics may seem like and may largely be a new plant; and yet its debts to the older economics are quite clear.” Keynesian assumption of the existence of free and perfect competition is truly classical in nature. Similarly is the assumption of diminishing returns. In an article which appeared after his death in 1964, Keynes, paying tributes to the classicals and warning the younger Keynesian enthusiasts, wrote, “I find myself moved, not for the first time, to remind contemporary economists that the classical teaching embodied some permanent truths of great significance .….”
Despite Keynes’ rejection of the neoclassical theory, his system was deeply rooted in it. Marshall’s individual demand was a disaggregated image of Keynes’ total demand. Again, aggregate supply was an extension of the optimum output of the firm in the short period. Keynes, following Marshall, divided total depreciation into user cost and Supplementary cost which represents Variable costs and Fixed costs at the level of a firm. In both, the short period predominated and equilibrium was the central problem of economic analysis.
We, thus, reach the conclusion that as far as the logical content of Keynes’ theory goes, no revolution has taken place. General Theory, no doubt, marks a milestone, but not a break or a new beginning in the development of economic theory. Keynes was perfectly conscious of his debt to the early writers as well as his own contributions.
Keynes himself made pertinent remarks in the preface to the ‘General Theory’: “Those who are strongly wedded to what I 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.” His judgements of the typical shapes of the various functions are indeed revolutionary. No other economist had ever worked out a complete and determinate model based on the propensity to consume, marginal efficiency of capital and liquidity preference.
Did Keynes Recant?
Many critics of Keynes have gone to the extent of saying that towards the end of his life, Keynes had recanted many of his doctrines, i.e., declared publicly that he had changed his opinion and started advocating the classical doctrines. In support of their view they quote the following lines from an article published after his death in June 1946: “The Balance of Payments of the United States” in the Economic Journal. They cite the praises showered by Keynes in favour of the classical medicine and quote his reference to “much modern stuff, gone wrong and turned sour and silly” along with his remarks in the said article: “I find myself moved, not for the first time, to remind contemporary economists that classical teaching embodied some permanent truths of great significance which we are likely to overlook because we associate them with other doctrines which we cannot accept, without much qualification.”
It is some evidence in support of their contention that Keynes did recant. But such an impression is erroneous. Keynes had a feeling that he might be misunderstood. In the same article he wrote: “I don’t suppose that the classical medicine will work by itself or that we can depend upon it.”
It should be clear to anyone that creative genius like Keynes can never be a static mind. He always ‘changed’ his views in the sense that they developed. He was always finding a way for broader synthesis. The new generalisations grew out of the old. Speed of thought was his characteristic in all things. He loved to disturb complacency.
Much as he was critical of the classical doctrine, he was never dogmatic about his own ideas. Had he lived longer, he would have certainly developed his theoretical and practical ideas along new lines rather than reverting to classical doctrines as some are prone to think. Serious students of his work are not inclined to endorse the view that Keynes tried to recant.