The Competitiveness of Nations
in a Global Knowledge-Based Economy
H.H. Chartrand
April 2002
G.L.S.Shackle
THE YEARS OF HIGH THEORY
INVENTION
AND TRADITION IN ECONOMIC THOUGHT
1926-1939
Chapter 11
TO THE ‘QJE’ FROM CHAPTER 12 OF
THE ‘GENERAL THEORY’:
KEYNES’S ULTIMATE MEANING
Writers on Keynes’s theory of investment incentive give
all their attention to the concepts of the marginal efficiency of capital and
the interaction of a quantity so named with the interest-rate on loans of money.
To do so is to study the formal
configuration of the engine without asking about its thermal source of power.
The marginal efficiency of capital
is nothing but a formal sum waiting for the insertion of numerical values in
place of its algebraic symbols. The
essential problem of why at any time the investment flow has the size it has is
contained in the question what is the source of these numerical values, by what
psychic alchemy is the list of incongruous ingredients chosen and fused into an
answer to the unanswerable. Keynes’s whole theory of unemployment is
ultimately the simple statement that rational expectation being unattainable, we
substitute for it first one and then another kind of irrational expectation: and
the shift from one arbitrary basis to another gives us from time to time a
moment of truth, when our artificial confidence is for the time being dissolved,
and we, as business men are afraid to invest, and so fail to provide enough
demand to match our society’s desire to produce. Keynes in the General Theory
attempted a rational theory of a field of conduct which by the nature of its
terms could be only semi-rational. But sober economists gravely upholding a
faith in the calculability of human affairs could not bring themselves to
acknowledge that this could be his purpose. They sought to interpret the General
Theory as just one more manual of political arithmetic. In so far as it failed this test, they
found it wrong, or obscure, or perverse. The same fate had overtaken his Treatise
on Probability.
The General Theory of Employment, Interest and Money
has for this reason two entirely different natures or modes of being. It
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is for the most part a description of how society in its
economic parts and functions fits together. This account, however heterodox its
content, was in purpose quite orthodox.
It was a piece of balance-sheet work, a piece of accountancy, an
establishment of the detailed coherence of society’s economic anatomy and
physiology. It tells us what is
composed of what; what adds up to what; what values are dependent on or to be
compared with what. But at the
heart of this system, which was itself only superficially strange, lay something
totally different. Chapter 11 shows
us the arithmetic of the marginal efficiency of capital and its relation with
interest-rates, a matter for actuaries and slide-rules. Chapter 12 reveals the hollowness
of all this. The material for the
slide-rules is absent, or arbitrary.
Investment is an irrational activity, or a non-rational one. Surmise and assumption about what is
happening or about to happen are themselves the source of these
happenings, men make history in seeking to apprehend it. This is the message of the General
Theory, and that is the only part of it which Keynes troubled to reproduce
when in the Quarterly,Journal of Economics for February 1937 he brushed
aside the painstaking detail of his critics’ incomprehension and attempted a
final penetration of their minds:
If the simple basic ideas can become familiar and acceptable, time and experience and the collaboration of a number of minds will discover the best way of expressing them. I would, therefore, prefer to occupy such further space, as the Editor of this Journal can allow me, in trying to re-express some of these ideas, than in detailed controversy which might prove barren.
[Ricardo. Marshall, Edgeworth, Pigou and more recent
writers],were dealing with a system in which the amount of the factors employed
was given and the other relevant facts were known more or less for
certain. This does not mean that they were dealing with a system in which change was ruled out, or even one in
which the disappointment of expectation was ruled out. But at any given time facts and
expectations were assumed to be given in a definite and calculable form; and
risks, of which, though admitted, not much notice was taken, were supposed to be
capable of an exact actuarial computation. The calculus of probability, though
mention of it was kept in the background, was supposed to be capable of reducing
uncertainty to the same calculable status as that of certainty
itself.
Actually. however, we have, as a rule, only the vaguest
idea of any
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but the most direct consequences of our acts. Now the whole object of the accumulation
of wealth is to produce results, or potential results, at a comparatively
distant, and sometimes at an indefinitely distant, date. Thus the fact that our knowledge of the
future is vague and uncertain renders wealth a peculiarly unsuitable subject
for the methods of the classical economic
theory.
By ‘uncertain’ knowledge, let me explain, I do not mean
merely to distinguish what is known for certain from what is
merely probable. The
game of roulette is not subject, in this sense, to uncertainty. Or, again, the expectation of life is
only slightly uncertain. The sense
in which I am using the term is that in which the price of copper and the rate
of interest twenty years hence, or the obsolescence of a new invention
are uncertain. About these matters
there is no scientific basis on which to form any calculable probability
whatever. We simply do not know.
Nevertheless, the necessity for
action and for decision compels us as practical men to overlook this awkward
fact and to behave exactly as we should if we had behind us a good
Benthamite calculation of a series of prospective advantages and disadvantages,
each multiplied by its appropriate probability, waiting to be
summed.
How do we manage in such circumstances to behave in a
manner which saves our faces as rational economic men? We have devised for the purpose a variety
of techniques of which much the most important are the three
following:
(i) We assume that the present is a much more
serviceable guide to future than a candid examination of past exnerience would
show to have been hitherto. In other words we largely ignore the respect of
future changes about the actual character of which we know
nothing.
(2) We assume that the existing state of opinion
as expressed in prices
and the character of existing output is based on a correct summing up of future prospects, so that
we can accept it as such unless and until something new and relevant comes into
the picture.
(3) Knowing that our own individual judgement is worthless,
we endeavour to fall back on the judgement of the rest of the world, which is
perhaps better informed. That is,
we endeavour to conform with the behaviour of the majority or the average. The psychology of’ individuals each of
whom is endeavouring to copy the others to what we may strictly term a
conventional judgement.
Now a practical theory of the future based on these
three principles has certain marked characteristics. In particular, being based on so flimsy
a foundation, it is
subject to sudden and violent changes. The practice of calmness and immobility,
of certainty and security, suddenly breaks down. New fears and hopes will, without
warning,
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take charge of human
conduct. The forces of disillusion may suddenly impose a new
conventional basis of valuation.
All these pretty, polite
techniques, made for a well-panelled board room and a nicely regulated market,
are liable to collapse. At all
times the vague panic fears and equally vague and unreasoned hopes are not
really lulled and lie but a little way below the surface.
The climax of contemptuous impatience to which this
passage rises may have made some readers understand that Keynes was concerned
only superficially with details of mechanism and institutions, but really with
the nature of things. They could
not have been expected to draw that message from chapter 12 of the book itself; where
the scattered bones of the thesis which we have quoted lie waiting for life to
be breathed into them. Chapter
12 is a curiously
unsatisfying chapter. It loses
sight of what in the end Keynes saw as its profoundly important meaning, and
spends many pages discussing the possible advantages of abolishing the
joint-stock company or at any rate of greatly reducing the marketability of its
shares. A chapter called ‘The State
of Long Term Expectation’ turns out to assert that there is virtually no such
thing. This is confusing for the
first-time reader. In the
General Theory of Employment, Interest and Money Keynes was still
exploring. In ‘The General Theory
of Employment’ he had arrived.
The deliberate self-deception of business, in supposing
its investment decisions to be founded on knowledge and to be rationally justifiable; the
insecurity of its faith in its own judgements, which the awareness of this
self-deception engenders; the paralysis of decision and enterprise which can
result when the structure of pretended knowledge is violently overthrown by
events; this central core of the General Theory is to be found in chapter
12. but expressed with a
relative diffuseness and buried in an exposition of the nature of Stock Exchange
speculation and its consequences for the inducement to invest in newly ordered
and yet-to-be-constructed equipment. This latter aspect is doubtless
important. Low Stock Exchange
prices of ordinary shares in existing concerns may be a symptom rather than an
original source of despondency about the profitability of contemplated
enterprise; but it is also a signal, widely and conspicuously spreading the
suggestion that such despondency is general amongst business men, and thus
giving it a specious
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plausibility. Nonetheless, Keynes may be thought, in
his book itself, to have given this Stock Exchange influence excessive weight;
it seems to unbalance the emphasis of chapter 12, which can in consequence
appear at a first reading as a strange intruder into the main current of
thought.
It is not only business men, but economists themselves,
who ardently subscribe to the rationality, the objectivity, the scientific
well-conductedness of business reasoning. Economic theory is the theory of an
orderly and reasonable world, a world of a concerted interchange of knowledge, a
world where actions are pre-reconciled by the great market computer and a world
where what we intend is what will happen. Such a conception of economic society had
a measure of plausibility in the modern Antonine age, the second Victorian
generation and its Edwardian sequel, where, after 1870, western Europe seemed to
have turned its steps towards the liberal vision of free internal and
international competition, of political liberty and of peace. General equilibrium is a state of
general agreed consistency and public availability of knowledge of the economic
situation, as it is being shaped by the actions of individuals and itself bears
upon each individual’s choice of his own action. General equilibrium consists in and
depends upon the coherence and universal diffusion of relevant knowledge by
means of a system of prices publicly determined and announced. If the ends which are being pursued by
the participants in such an equilibrium consist in altering the existing
measurable economic configuration of society; if these ends consist, that
is to say in what is nowadays comprehensively known as ‘growth’: this makes no
difference to the ultimate conception itself of the equilibrium as a mutual
conformity of simultaneously prevailing plans. Economics is about
order.
But unemployment is the consequence and reflection of
disorder. A theory of unemployment
is, necessarily, inescapably, a theory of disorder. The disorder in question is the basic
disorder of uncertain expectation, the essential disorder of the real, as
contrasted with the conventionally pretended, human condition. It is the disorder of adventurous
decision, of ‘enterprise’. The
world in which enterprise is necessary and possible is a world of
uncertainty. The notion of
enterprise, so central in Marshall, the realist, had no proper or legitimate
place in the
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conception of a general equilibrium, the equivalent of a general agreement on what is to be done and on the meaning of what is being done.
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