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CHAPTER 18 OF THE GENERAL THEORY “FURTHER ANALYSED”:
THE THEORY OF ECONOMICS AS A METHOD
Anna M. Carabelli & Mario A. Cedrini
Dipartimento di Scienze Economiche e Metodi Quantitativi Università del Piemonte Orientale “A. Avogadro” – Alessandria, Novara, Vercelli Via Perrone 18, 28100 Novara (Italy) anna.carabelli@eco.unipmn.it - mario.cedrini@eco.unipmn.it
Abstract
This paper revisits chapter 18 of Keynes’s General Theory in the light of A Treatise on Probability. It shows that the notions of cause and independence used to discuss the relationships between the variables of the General Theory are related to the concept of “independence for knowledge”, which concerns logical connections between arguments rather than material connections between events. We demonstrate that such logical connections are rediscussed in chapters 19-21, where Keynes allows for probable repercussions between the factors and removes the simplifying assumptions previously introduced. After stressing the methodological continuity this method provides with the analysis of credit cycles in A Treatise on Money , we argue that chapter 18 is an indispensable tool to decode the text structure of the General Theory , and show that Keynes’s economic theory is in truth an analytical method allowing readers to emulate his efforts to grasp the complexity of the economic material.
Keywords : John Maynard Keynes, The General Theory , complexity, economic methodology JEL codes : B31, B41, A
INTRODUCTION
In a now famous article of 1987, Greenwald and Stiglitz accused Keynes of having relied too much upon the “neoclassical and Marshallian tools” in drawing the summary of the General Theory in chapter 18 of the book. Keynes had “a novel, and markedly non-neoclassical vision of how the economy worked”, they wrote, yet both the codification of Keynesian economics by Hicks, among others, and its presentation “in the form of a simple model as in chapter 18 of the General Theory” (p. 120) offered classical thinking an unhoped-for chance to resurge:
It is a matter for regret that Keynes’ summary of his arguments in chapter 18 of the General Theory, and the formal modelling of Keynes' thinking by many later writers, relied so much upon the neoclassical and Marshallian tools which then, as now, were the style of the day. A much richer picture emerges from the General Theory taken as a whole (p. 127).
Greenwald and Stiglitz even went so far as to define chapter 18 of the General Theory as “an early example” (p. 120) of Keynesian economics as opposed to, according to Leijonhufvud’s (1968) famous distinction, the economics of Keynes. This result may have been produced, they added in a footnote, by Keynes’s (and his expositors’) intention to demonstrate that by removing only a few “basic assumptions” of classical theory it would have been possible to obtain “dramatically different results” (Greenwald and Stiglitz 1987, p. 127). Yet the substance of the arguments remains the same: chapter 18 is a betrayal of the General Theory and of Keynes’s own revolutionary reasoning. A summary of the General Theory made on neoclassical-Marshallian bases is at any rate misleading and obscures the reachness of the General Theory “taken as a whole”. These remarks have particular relevance, since Greenwald and Stiglitz are certainly not hostile to Keynes’s thinking, whereas traditional criticisms of the General Theory have accused Keynes of being too much detached from neoclassical economists. It comes therefore as no surprise that the post-Keynesian strand has immediately tried to challenge Greenwald and Stiglitz’s interpretation. Sardoni can claim the merit of pioneering research in this precise regard: in his 1989-90 article, he showed that drastically different interpretations of chapter 18 were possible and, to some extent, had already been advanced in the literature: Shackle (1967), in Sardoni’s view, had rightly considered chapter 18 as the expression of “a new philosophy of explanation of economic reality” (Sardoni 1989-90, p. 293). The aim of our paper is to throw light on the reasons which have wrongly induced Greenwald and Stiglitz to condemn Keynes’s summary of the General Theory in chapter 18, and to suggest an explanation of the chapter itself as both an indispensable tool offered by the author to its readers to decode the text structure of the General Theory and as a guide to the analysis of a complex economic material. In so doing, great value is assigned to the theoretical continuity between the General Theory and Keynes’s “essay on method”, the Treatise on Probability. After a brief outline of the chapter and a presentation of the taxonomy of given factors, independent variables and dependent variables proposed by Keynes in it (section 1), we examine
employment ( CW 7, pp. 248-249).
“The above is a summary of the General Theory” (p. 249), writes Keynes in chapter 18. A delusory summary, according to Greenwald and Stiglitz, since it closes the General Theory , in their view, in the restricted boundaries of a “simple model”. Before moving to the chapter’s last section, dealing with some “conditions of stability” (p. 250) which help explain why the economic system is not “violently unstable” (p. 249), Keynes adds a relevant part of the story and concerns himself with absolving the schematism of his reconstruction:
An increment (or decrement) of employment is liable, however, to raise (or lower) the schedule of liquidity-preference; there being three ways in which it will tend to increase the demand for money, inasmuch as the value of output will rise when employment increases even if the wage- unit and prices (in terms of the wage-unit) are unchanged, but, in addition, the wage-unit itself will tend to rise as employment improves, and the increase in output will be accompanied by a rise of prices (in terms of the wage-unit) owing to increasing cost in the short period. Thus the position of equilibrium will be influenced by these repercussions; and there are other repercussions also. Moreover, there is not one of the above factors which is not liable to change without much warning, and sometimes substantially. Hence the extreme complexity of the actual course of events. Nevertheless, these seem to be the factors which it is useful and convenient to isolate. If we examine any actual problem along the lines of the above schematism, we shall find it more manageable; and our practical intuition (which can take account of a more detailed complex of facts than can be treated on general principles) will be offered a less intractable material upon which to work (ib.).
As already noted by Hansen (1953), by referring to “other repercussions” exerting their influence on the position of equilibrium, Keynes is straightforwardly – and unsuccessfully, as the early reception of the General Theory would seem to indicate – directing attention to the complexity of the economic system, to the extent that the schematism of the summary can be justified only by the usefulness and convenience to isolate some factors for purpose of offering a “more manageable” problem and a “less intractable material” to the economist. Keynes has already explained how to achieve this result in the first section of the chapter, which relates to the nature of the factors and variables introduced into the analysis and the latter’s resulting schematism. The taxonomy includes:
1. Given factors: “the existing skill and quantity of available labour, the existing quality and quantity of available equipment, the existing technique, the degree of competition, the tastes and habits of the consumer, the disutility of different intensities of labour and of the activities of supervision and organisation, as well as the social structure including the forces, other than our variables set forth below, which
determine the distribution of the national income” ( CW 7, p. 245)
2. Independent variables: “the propensity to consume, the schedule of the marginal efficiency of capital and the rate of interest” (ib.) 3. Dependent variables: “the volume of employment and the national income (or national dividend) measured in wage- units” (ib.).
Yet both “given factors” and “independent variables” deserve further analysis. As to the former, Keynes specifies that he is not assuming them to be constant, “but merely that, in this place and context, we are not considering or taking into account the effects and consequences of changes in them” ( CW 7, p. 245). Moreover, these factors “influence our independent variables”, he stresses, but “do not completely determine them” (pp. 245-46): this is the case of the marginal efficiency of capital, which depends on the existing quantity of equipment (which is a given factor) but also on long-term expectations (which are not). By contrast, all other factors (e.g. “what level of national income measured in terms of the wage-unit will correspond to any given level of employment”, p.
- which are completely determined by the given factors should be considered as being themselves given. As to the independent variables, in chapter 14 Keynes defines the propensity to consume, the marginal efficiency of capital and the rate of interest as the “determinants” (p. 183) of the system. In chapter 18, however, he reminds that the schedule of the marginal efficiency of capital depends also on the prospective yields of capital-assets, while the interest rate depends on both the liquidity-preference and on the quantity of money (measured in wage-units). Therefore, the new taxonomy is as follows:
1a. “Factors which we have taken as given” (but not as constant; p. 245) : Factors outlined in 1. (see above) plus factors completely determined by them
2a. “Ultimate independent variables” (p. 246; but : see below in the text): “(1) the three fundamental psychological factors, namely, the psychological propensity to consume, the psychological attitude to liquidity and the psychological expectation of future yield from capital-assets, (2) the wage-unit as determined by the bargains reached between employers and employed, and (3) the quantity of money as determined by the action of the central bank” (pp. 246- 47);
3a. Dependent variables: the volume of employment.
is not very large (so that fluctuations in one direction tend to reverse themselves in due course). Here too, Keynes specifies that such “‘natural’ tendencies” (ib.) do not determine a “mean position” by “law of necessity”: “the unimpeded rule [these tendencies “are likely to persist, failing measures expressly designed to correct them”] of the above conditions is a fact of observation concerning the world as it is or has been, and not a necessary principle which cannot be changed” (ib.). In sum, chapter 18 raises at least three major issues, roughly corresponding to the three sections in which it is divided: first, a seemingly reductionist summary of the General Theory with respect to the “much richer picture” emerging from the work “as a whole”; second, a flexible or tolerant taxonomy of the given factors, independent elements and dependent variables entering the analysis; third, the role, in particular, of those “psychological propensities” which believed to ensure a certain degree of stability to the economic system.
2. KEYNES’S METHOD AND THE CLASSICAL THEORY
Chapter 18 is a somewhat surprising chapter. As the last of book IV, it should bring to conclusion Keynes’s remarks on “The Inducement to Invest”. Yet the chapter restates the whole General Theory : as seen, the summary of the book is preceded by a description of the independent and dependent variables of the system and the factors Keynes takes as given in the analysis; then, Keynes enumerates a series of “special characteristics” of the three independent variables, which explain why the system tends to oscillate round a position of less than full (but fairly above the minimum value of) employment. Furthermore, there are no evident reasons (exception made for a minor reference included in chapter 20; CW 7, p. 281) to believe that chapter 18 serves as a sort of prolegomena to book V (“Money-wages and Prices”). Chapter 18 seems to enjoy a special status, even in the context of a book which has a complex structure and presents chapters having “the nature of a digression” ( CW 7, p. 37). It is thus reasonable to suppose that the chapter’s position in the volume conforms to specific requirements laid out by the author, although the reader might find it difficult to grasp their essence. An outstanding feature of the chapter is Keynes’s frankness in admitting the limitations of his summary of the General Theory. Nor could his reiterated insistence on the division of the elements of the analysis into the three groups of given factors, independent variables and dependent variables easily go unobserved. In general, and paradoxical as it may seem, the reader is left with the impression that the author felt it necessary to answer in advance to potential criticisms of the same character of those made by Greenwald and Stiglitz; as if Keynes were anxious to remind the readers that there was much more in “the General Theory taken as a whole”. There is – even on a pure linguistic level – a close connection between this latter remark by Greenwald and Stiglitz and Keynes’s intention to write a general theory, aiming at redefining neoclassical theory as one among many of its possible special cases. Suffice it to recall the Preface to the French edition of the General Theory , where Keynes states:
I have called my theory a general theory. I mean by this that I am chiefly concerned with the behaviour of the economic system as a whole ... I argue that important mistakes have been made through extending to the system as a whole conclusions which have been correctly arrived at in respect of a part of it taken in isolation ( CW 7, p. xxxii).
Keynes therefore locates a main flaw of the classical theory in the fallacy of composition which it engenders by wrongly “extending to the system as a whole” conclusions which “have been correctly arrived at in respect of a part of it taken in isolation”. Chapter 19 is a the most vivid illustration of Keynes’s attempt to construct a general theory: in discussing the “supposedly self- adjusting character of the economic system” as seen by the classics, and the “assumed fluidity of money-wages” ( CW 7, p. 257) on which the argument rests, Keynes explicitly refers to “ignoratio elenchi” (p. 259), one of the thirteen types of fallacy of argument listed by Aristotle in Sophistical Refutations (1928). In logic, ignoratio elenchi is regarded as an informal fallacy of relevance, occurring when the premises of an argument are irrelevant to, and incapable of, establishing the truth of the conclusion of the argument. In Keynes’s view, classical economists’ argument on the fluidity of money-wages relied on an unauthorized transposition, “without substantial modification” ( CW 7, p. 259), of demand and supply schedules for different products of a given industry to “industry as a whole” (ib.). Unauthorized, since
the demand schedules for particular industries can only be constructed on some fixed assumption as to the nature of the demand and supply schedules of other industries and as to the amount of the aggregate effective demand. It is invalid, therefore, to transfer the argument to industry as a whole unless we also transfer our assumption that the aggregate effective demand is fixed. Yet this assumption reduces the argument to an ignoratio elenchi (ib.),
for “the precise question at issue is whether the reduction in money-wages will or will not be accompanied by the same aggregate effective demand as before measured in money” (ib.). Keynes bitterly concludes that “if the classical theory is not allowed to extend by analogy its conclusions in respect of a particular industry to industry as a whole, it is wholly unable to answer the question what effect on employment a reduction in money-wages will have. For it has no method of analysis wherewith to tackle the problem” (p. 260; see also Gerrard 1997). It is no coincidence that Keynes uses the term “method” in this passage: the author of the General Theory is also the author of an essay on probability ( A Treatise on Probability , 1921) outlining a general approach to epistemology which he later applied to economics in his economic writings. Chapter 19 is entirely centered on the distinction between the classics’ and Keynes’s “method”: there, Keynes explicitly highlights the “difference of analysis” ( CW 7, p. 257) which separates his work from that of the classical theory; this difference is of a methodological character. Keynes maintains that “it would have been an advantage if the effects of a change in money-wages could
thinking” ( CW 14, p. 296), whose object, Keynes writes in the General Theory , 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 ( CW 7, p. 297).
The use, in such definitions of economics, of terms such as “machine”, “settled conclusions”, “method of blind manipulation”, “infallible answer”, reflect both Keynes’s dislike for Harrod’s analogy between economic behaviour and the mechanical movement of physical bodies but also, and more in general, his rejection of positivism and his full awareness of the difficulty inherent to the attempt to applicate mathematical discourse to a moral science like economics. Economics is for Keynes a branch of logic, an apparatus of probable reasoning. Without logic, economists risk losing themselves in a mathematical wood of “pretentious and unhelpful symbols”. Not “to lose sight of the complexities and interdependencies of the real world” in this labyrinth of symbols, the economist must adopt Malthus’s method, or at least the method of Malthus as revisited by Keynes himself, who praises the former for his “profound economic intuition and an unusual combination of keeping an open mind to the shifting picture of experience and of constantly applying to its interpretation the principle of formal thought” ( CW 10, p. 108). This passage, and particularily the reference to the “shifting picture of experience”, is of the utmost importance to understand what Keynes meant by logic. Keynes was in fact interested in developing a contingent form of non-demonstrative reasoning relative to contexts of shifting reality. In fact, Keynes considered logical relations as objective; yet, believing that both thought and reality were multidimensional, he rejected the basic assumptions of metaphysical realism. In the absence of an absolute, universal theoretical point of view, theoretical categories must be selective, that is related to contingent cognitive circumstances. This transforms, in Keynes’s thought, the strong category of rationality into the weaker one of reasonableness (that is, relative to changing circumstances), and allows Keynes himself to develop a theory of knowledge as probability, based on non-demonstrative and non-conclusive arguments. In defining economics as a “method rather than a doctrine, which helps its possessor to draw correct conclusions”, therefore, Keynes establishes the main task of the General Theory as that of helping economists avoid logical fallacies in reasoning of the kind of those affecting the classical theory. Hence the attempt to contruct, on the same bases on which his early criticism of Bernoulli’s principle of indifference, of induction and statistical inference rested in the Treatise on Probability (see Carabelli 1988), a methodological criticism of the classical theory, consisting in making explicit to the reader the tacit assumptions classical economists had introduced into their analysis. At a first approximation, the classical theory seems to be an “organised and orderly method” helping its possessor to “draw correct conclusions”. “Brought up in the citadel” ( CW 13, p. 489), Keynes explicitly recognizes the strength of the classical theory, despite evidence of a “cleavage between the conclusion of economic theory and those of common sense” ( CW 7, p. 350). But
Keynes believes that this cannot be the (nor the main) argument for rejecting it: the “heretics” ( CW 13, p. 488) of his days mistakenly supposed that “common observation is enough to show that facts do not conform to the orthodox reasoning” (p. 489). On the contrary, for Keynes, observation is theory-laden, that is every act of observation implicitly includes a theoretical hypothesis about the material one is observing (see Carabelli 1988; in the Treatise on Probability , Keynes writes: “our 'observations' are often the result of some manipulation, and the particular shape in which we get them is not necessarily fixed for us”, CW 8, p. 231). This means for him that theory and logic, rather than mere observation, are required to raise doubts on a theory. Consistently, Keynes argues that critics of the classical theory cannot reject the latter’s conclusions without discarding its premises, since the classical theory is, in this regard, perfectly consistent: “if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premisses” ( CW 7, p. xxi). Rather, it is the task of chapter 19 to show that the classical theory is to be criticised exactly on methodological bases (see Carabelli 1991). The fallacy of composition referred to by Keynes as ignoratio elenchi is a logical mistake invalidating the generality of the theory, which extends to the system as a whole “conclusions which have been correctly arrived at in respect of a part of it taken in isolation”. The problem with classical theory is its unwillingness to make explicit those tacit assumptions introduced into the analysis to support the generality and validity of its arguments, and in particular those connected with the notion of independence. Classical economists had in effect relied on the tacit assumption of independence of the real variables of the economic system from changes in the value of money; they had tacitly assumed the system to be always operating to its full capacity; finally, in passing from the individual to the general level, they had tacitly introduced a hypothesis of independence from changes in the level of community income (see Carabelli 1991; Gerrard 1997). Universality of space and time was inherent to these three tacit classical assumptions: “Say was implicitly assuming that the economic system was always operating up to its full capacity, so that a new activity was always in substitution for, and never in addition to, some other activity” ( CW 7, p. xxxv, emphases added); “the view that any increase in the quantity of money is inflationary ... is bound with the underlying assumption of the classical theory that we are always in a condition where a reduction in the real rewards of the factors of production will lead to a curtailment in their supply” (p. 304; emphases added). The General Theory is Keynes’s attempt to demonstrate that the tacit conditions imposed by classical economists have very limited validity. In the Preface to the General Theory , Keynes invites his “fellow economists” to “re-examine critically certain of their basic assumptions” ( CW 7, p. xxi), and, in the “Concluding notes” of the book, he restates his work as an attempt to point out that the classical theory’s “tacit assumptions are seldom or never satisfied” (p. 378). The conclusions of this theory are as limited as their premises in generality and validity; and the generality of the theory irremediably reduced (“Only if the equality held good, as the classical theory assumes, for all levels of output, would it be true that there is nothing to check the increase of employment”, CW 13, p. 427; emphases added).
Keynes discusses the relationship between science and art, and argues that science possesses procedures which are similar to those of art. In particular, scientists make use of creativity and intuition, talents traditionally associated with the artist’s ability to appreciate beauty. In an early undated paper, Keynes (undated, p. 2) condemns the “supposed antagonism between the precise and verbal notions of philosophy and the organic, indivisible perceptions of beauty and feeling, between those things which we perceive piecemeal and those which we perceive as wholes”. Rather, he stresses the need of combining “the analytical and intuitive powers”, the need for a collaboration of reason and intuition, of the piecemeal perception of the scientist-analyst and the synthetic perception of the artist, so that “knowledge and creation may advance together” (ib.). The point is raised again in Keynes’s 1909 essay “Science and Art”, where he maintains that scientists, like artists, manifest a creative attitude in their research, and writes of a “sudden insight” required to see through the obscurity of a scientific argument. Now, as Keynes wrote as early as 1913, in Indian Currency and Finance , when confronted with a coherent economic system, wherein “every part fits into some other part” ( CW 1, p. 181), the economist must keep in mind that
It is impossible to say everything at once, and an author must needs sacrifice from time to time the complexity and interdependence of fact in the interest of the clearness of his exposition. But the complexity and the coherence of the system require the constant attention of anyone who would criticize its parts. This is not a peculiarity of Indian finance. It is the characteristic of all monetary problems (pp. 181-82).
The analysis of monetary problems thus requires a theory and a method able to tackle organic interdependence among the variables at play without theoretically reducing the complexity of the system under investigation. Once organicism is introduced into the analysis, however, it “poses the problem of paralysis: what can one say except that everything depends on everything else?” (Chick 2003, p. 318). In stressing the organic nature of a monetary economy, the economist adopts the synthetic perspective which informs the artist’s ability to perceive things as a whole; but science requires requires a certain degree of decomposability, not to speak of the need to communicate the results of the analysis, at an epoch when the techniques of the modern economics of complexity were yet to be discovered. In line with a tradition established in the Treatise on Probability , also the General Theory restricts the validity of the mathematical formalisation of a system of economic analysis resting on the introduction of assumptions of “strict interdependence”:
It is a great fault of symbolic pseudo-mathematical methods of formalising a system of economic analysis, such as we shall set down in section VI of this chapter, that they expressly assume strict independence between the factors involved and lose all their cogency and authority if this hypothesis is disallowed; whereas, in ordinary discourse, where we are not blindly manipulating but know all the time what we are doing and what the words mean, we
can keep 'at the back of our heads' the necessary reserves and qualifications and the adjustments which we shall have to make later on, in a way in which we cannot keep complicated partial differentials 'at the back' of several pages of algebra which assume that they all vanish. Too large a proportion of recent 'mathematical' economics are merely 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 ( CW 7, pp. 297-98).
For such formalisation to be possible, the economist needs an “atomic hypothesis” which however, as seen, does not hold in a complex, organic system. Yet, it is Keynes himself, in chapter 18, who divides the “determinants” of the system into the two subgroups of “given factors” and “independent variables”, and the literature has stressed the role of the ceteris paribus condition employed by Keynes to make theory possible. The adoption of this Marshallian tool in Keynes’s economics is easy to explain: Marshall too had a conception of economics as fundamentally complex, and the ceteris paribus hypothesis – which consists in “breaking up a complex question, studying one bit at a time, and at last combining ... partial solutions [thus obtained] into a more or less complete solution of the whole riddle” (Marshall 1961, p. 366) – is regarded by Keynes’s teacher as an analytical instrument required to make science with a complex material. In Keynes’s view, Marshall believes that the economic interpretation of “the complex and incompletely known facts of experience” requires the economist to go beyond the “bare bones of economic theory” ( CW 10, p. 86). Abstract reasoning, too rigid in itself, must then be supplemented by “trained common sense”, and by the use of everyday language, which allow for “shades of meaning” which can be interpreted “by the context” (Marshall 1961, p. 51; see Marchionatti 2010). As the complexity of the subject increases, however, the role of abstract reasoning is less important than in the earlier stages of economic analysis, and economic reasoning becomes, in Marshall’s (1898, p. 39) conception, “more biological in tone”. This amounts to recognizing the limited role of mathematics: the mathematician “takes no technical responsibility for the material, and is often unaware how inadequate the material is to bear the strains of his powerful machinery” (Marshall 1961, p. 781). Marshall’s legacy is certainly of the utmost importance for Keynes’s economics, which rejects the blind manipulations of mathematics and gives a prominent role to ordinary language. As seen, moreover, the summary of the General Theory appearing in chapter 18 rests on the identification of “factors which it is useful and convenient to isolate”, offering to the economist a “more manageable” problem and a “less intractable material upon which to work” to his “practical intuition”. Yet, in chapter 19, Keynes gives an account of his own method of economic analysis which neutralizes the use of the ceteris paribus condition as a means to obtain partial equilibrium: the “nature of economic thinking” requires the economist to exceed the limits of the ceteris paribus condition by deliberately repudiating those same “provisional conclusions” reached when assuming, within a purely logical, strictly finite time interval, “all other things” to be equal.
situations in which the arguments have the same conclusions but different evidence. Direct judgements of logical relevance concern the effect that the probabilities of an argument are affected or not by the inclusion in the evidence of certain particular details. It is to be remembered that for Keynes, judgments of logical relevance are not absolute but relative to the “quaesitum”, as well as to the particular circumstances in which the latter is raised. In the Treatise on Probability , Keynes considers a judgement of independence as a judgement of logical irrelevance; judgements of independence lie at the basis of the atomic hypotheses which justify the application of the mathematical probability theory. The same goes for classical theory: the assumption of “independence from” is but a judgement of “logical irrelevance” of changes in the value of money, in the value of output and of income; judgements of independence and (that is) the introduction of atomic hypotheses justify formalisation through “symbolic pseudo-mathematical methods” and inform the use of partial equilibrium analysis. As to the concepts of cause and independence in chapter 18, we have already noted Keynes’s reluctancy to assign to the variables he qualifies as independent the role of “ultimate atomic independent elements” or even that of “ultimate independent variables”. The reader is induced to interpret the continuous refinement proposed by Keynes of the taxonomy given factors- independent variables-dependent variables in terms of the author’s concern for a possible regressio ad infinitum in the analysis of the independent variables of the system. This is not a wrong impression. Yet, more probably, Keynes is trying to distance himself from a rigid interpretation of the notions of “cause” and “independence”. And, more precisely, he is following a procedure he himself had described in the Treatise on Probability , in a three-page note on the use of the term “cause”. In the Treatise , as already observed, he chooses not to focus on the material connection between events, but on the analysis of the cognitive conditions which surround the assertion of a causal connection. The first formulation of such contrast is given by Keynes through distinguishing between causa essendi , or “the cause why a thing is what it is”, and causa cognoscendi , or “the cause of our knowledge of the event” ( CW 8, p. 308); a second formulation is offered by the distinction between “causal dependence”, which concerns material connections, and “dependence for knowledge”, which concerns the cognitive conditions of the connection which is asserted. Keynes does not associate the concept of independence with that of causality (rather, he established a connection, as seen, with that of relevance): this is because he deliberately chooses not to tackle the problem of the relationship between logical and empirical (material) relevance, that is the relation between causa essendi and causa cognoscendi. Yet, just as he perfectly knows that, albeit the two aspects are often confused, the adoption of the hypothesis of atomic uniformity in science should not be interpreted as the acceptance of empirical uniformity, he also clearly distinguishes between objective dependence and “dependence for knowledge”: in the Treatise , he contrasted Cournot’s and Yule’s views of probability to his own, stressing that the latter was based on a form of “independence for knowledge” which “must be different from either of these objective forms of independence” ( CW 8, p. 184). In a vision of economics as a branch of probable
logic, “cause” is threfore a relative cognitive concept, a logical ground for believing, which is relative to particular circumstances. It is no coincidence that Keynes refers to “causal analysis” as “strictly logical” in the 1933 draft of the General Theory ( CW 29, p. 73). Causality is, in Keynes’s analysis, a rule to form propositions, resting on the use of the concept of causa cognoscendi and the attention this latter draws on having reasons for holding probable beliefs. More in general, Keynes’s preference for an organic rather than an atomic approach to economics is connected with the use of ordinary rather than mathematical language. In the Treatise on Probability , Keynes stresses that the logic of probability is an open logic, unlike artificial languages (such as mathematical formalisation) with their members in finite number and their exhaustive alternatives: the idea is developed, for instance, when Keynes compares the logic of probability to the logic of colours and of similarity ( CW 8, pp. 38-39). Only through ordinary language can the economist cope with the complexity of the economic material, Keynes remarks when opposing the “strict independence between the factors involved” assumed by “symbolic pseudo-mathematical methods of formalising a system of economic analysis” to the possibility, offered in the context of an “ordinary discourse” of keeping “'at the back of our heads' the necessary reserves and qualifications and the adjustments which we shall have to make later on” ( CW 7, pp. 297-298; see also Vercelli 1991). Now, when, in chapter 14, Keynes notes that the determinants of the system (the propensity to consume, the schedule of the marginal efficiency of capital and the rate of interest) “are, indeed, themselves complex and each is capable of being affected by prospective changes in the others. But they remain independent in the sense that their values cannot be inferred from one another” ( CW 7, p. 183); when, in chapter 18, Keynes specifies that he does not “assume these factors to be constant; but merely that, in this place and context, we are not considering or taking into account the effects and consequences of changes in them” (p. 245); and when, in that same chapter, he draws the causal connections on which the summary of the General Theory rests, he is in truth using a “strictly logical” causal analysis and applying to the economic material the notions of logical relevance (that the values of independent variables cannot be inferred from one another is another way of saying that the judgment of relevance concerning these variables is unmodified) as well as of direct judgements of dependence or independence “for knowledge”. Variables are always “taken as”, and never shown to be, independent; the distinction itself, within the determinants of the system, between given factors and independent variables is “quite arbitrary from any absolute standpoint” ( CW 7, p. 247, emphasis added); and after revisiting his taxonomy of given factors-independent variables-dependent variables, Keynes specifies that “we can sometimes regard our ultimate independent variables as consisting of ...” (p. 246, emphasis added), only to say, a few lines later, that the three independent variables just outlined “would be capable of being subjected to further analysis, and are not, so to speak, our ultimate atomic independent elements” (p. 247, emphasis added). In short, in assigning the role of independent elements, Keynes is establishing connections between arguments and propositions, rather than between events. “Given”, “independent” and “dependent” are relative to the economist’s
independent variables in chapter 18 is is nothing but, exactly, a hypothesis. “Acquainted with [the author’s] own method” ( CW 7, p. 257) as requested by Keynes himself, we are now in a position to understand the exact meaning of the “roundabout repercussions” analysed in chapter 19. Keynes’s method is directly opposed to the classical analysis, which rests on the tacit introduction of a hypothesis of fixed aggregate demand (“whilst no one would wish to deny the proposition that a reduction in money-wages accompanied by the same aggregate effective demand as before will be associated with an increase in employment, the precise question at issue is whether the reduction in money-wages will or will not be accompanied by the same aggregate effective demand as before measured in money”, p. 259), but also
Let us, then, apply our own method of analysis to answering the problem. It falls into two parts. (i) Does a reduction in money-wages have a direct tendency, cet. par ., to increase employment, ' cet. par .' being taken to mean that the propensity to consume, the schedule of the marginal efficiency of capital and the rate of interest are the same as before for the community as a whole? And (2) does a reduction in money-wages have a certain or probable tendency to affect employment in a particular direction through its certain or probable repercussions on these three factors (p. 260, emphases added)?
In Keynes’s two-stages analysis, the ceteris paribus hypothesis used in part (1) with respect to those variables which can be “sometimes regard[ed as] our ultimate independent variables” (p. 246) immediately leaves room for a study, in part (2), of the repercussions of the reduction in money- wages on the three factors, which is conducted in fully probabilistic (in the sense, recalled above, of the Treatise on Probability ) terms. After answering negatively to question (1) – the volume of employment depends on the volume of effective demand, which in its turn depends on changes in the propensity to consume, in the marginal efficiency of capital and in the rate of interest –, Keynes analyses those “probable repercussions” which are lacking in the classical theory, and enumerates seven of them. The first repercussion is due to the reduction of money-wages inducing a reduction of prices, which leads to a redistribution of real income from wage-earners to other factors of the production, and from entrepreneurs to rentiers. Keynes explicitly admits that this transfer is likely to diminish the propensity to consume. The same for the third repercussion, which, as happens with the second (though the final result is the opposite), is relative to an international system, where the reduction of money-wages relatively to money-wages abroad is likely to induce a raise of investments through the increase of the balance of trade but also, for the same reason, to worsen the terms of trade, with the result that the reduction in real incomes may tend to increase the propensity to consume. The fourth and fifth repercussions concern expectations: the reduction of money wages, by increasing the marginal efficiency of capital, will be favourable to investiment (repercussion number 4), writes Keynes, if it is expected to be a reduction relatively to money-wages in the future, while it will have the opposite effect if the community expects money-wages to further
diminish in prospect. Yet the reduction will reduce in any case the schedule of liquidity-preference for the community as a whole, thus raising investments (repercussion number 5); but here again, expectations play a fundamental role, although their effect will be of an opposite tendency with respect to the dynamics outlined in the fourth repercussion. Repercussions number 6 and 7 deal respectively with the effects of a reduction in money-wages in terms of the general tone of optimism or pessimism they can produce on entrepreneurs (so that, in the most favourable case, they “may break through a vicious cycle of unduly pessimistic estimates of the marginal efficiency of capital and set things moving on a more normal basis of expectation”, CW 7, p. 264) and workers, and the negative influence of a greater burden of debt on the former. Keynes then confirms that nothing positive may derive from the repercussions affecting community’s propensity to consume. Of the utmost importance for our purposes is however not the result of his reasoning, as the implications of the method here adopted. Keynes tells us that a reduction of money-wages cannot alter employment unless it affects effective demand, that is unless there are significant repercussions on the three factors outlined above, namely the propensity to consume, the schedule of the marginal efficiency of capital and the rate of interest. At the end of the analysis, he maintains that “there is ... no ground for the belief that a flexible wage policy is capable of maintaining a state of continuous full employment” ( CW 7, p. 267). In the course of the analysis, however, he implicitly directs attention to the fluid nature of the taxonomy of variables sketched in chapter 18. After defining the three factors recalled above, in opposition to the classics, as the real “determinants” of the system, Keynes clarifies that they are “themselves complex and each is capable of being affected by prospective changes in the others”, and that “they remain independent in the sense that their values cannot be inferred from one another”, which is exactly what he shows in relation to the marginal efficiency of capital and the rate of interest in chapter 19. But he also maintains that a reduction in money-wages negatively affects the community’s propensity to consume, and has psychological repercussions affecting liquidity- preference and expectations of future yield from capital-assets: which means that in what we have here defined as the second stage of the analysis, a change in the value of an independent variable (money-wages) has repercussions on variables which are also defined as “independent” in chapter 18 (the point is noted by Gerrard 1997; see also Asimakopulos 1991; and Togati 2006 for a discussion of the variables taken as independent by Keynes). In the first proof of the General Theory (chapter 18 was sent to the publisher at the end of March 1935: see Hirai 2008), Keynes points out that
in some contexts it will reasonable to take, also, the motives affecting the readiness to consume, which I have distinguished in chapter II under the category “subjective”, as amongst the given factors of the system; since they are of a kind which as a rule (though not invariably) are unlikely to change materially within a short period of time. In this case we are left with two independent variables, the schedule of marginal efficiency of capital and the rate of interest ( CW 14, p. 503).
