PREFACE TO THE FRENCH EDITION
For a hundred years or longer, English Political Economy has
been dominated by an orthodoxy. That is not to say that an
unchanging doctrine has prevailed. On the contrary. There has
been a progressive evolution of the doctrine. But its
presuppositions, its atmosphere, its method have remained
surprisingly the same, and a remarkable continuity has been
observable through all the changes. In that orthodoxy, in that
continuous transition, I was brought up. I learnt it, I taught
it, I wrote it. To those looking from outside I probably still
belong to it. Subsequent historians of doctrine will regard this
book as in essentially the same tradition. But I myself in
writing it, and in other recent work which has led up to it, have
felt myself to be breaking away from this orthodoxy, to be in
strong reaction against it, to be escaping from something, to be
gaining an emancipation. And this state of mind on my part is the
explanation of certain faults in the book, in particular its
controversial note in some passages, and its air of being
addressed too much to the holders of a particular point of view
and too little ad urbem et orbem. I was wanting to convince my
own environment and did not address myself with sufficient
directness to outside opinion. Now three years later, having
grown accustomed to my new skin and having almost forgotten the
smell of my old one, I should, if I were writing afresh,
endeavour to free myself from this fault and state my own
position in a more clear-cut manner.
I say all this, partly to explain and partly to excuse, myself
to French readers. For in France there has been no orthodox
tradition with the same authority over contemporary opinion as in
my own country. In the United States the position has been much
the same as in England. But in France, as in the rest of Europe,
there has been no such dominant school since the expiry of the
school of French Liberal economists who were in their prime
twenty years ago (though they lived to so great an age, long
after their influence had passed away, that it fell to my duty, when I first became a youthful editor
of the Economic Journal to write the obituaries of many of
themセLevasseur, Molinari,
Leroy-Beaulieu). If Charles Gide had attained to the same
influence and authority as Alfred Marshall, your position would
have borne more resemblance to ours. As it is, your economists
are eclectic, too much (we sometimes think) without deep roots in
systematic thought. Perhaps this may make them more easily
accessible to what I have to say. But it may also have the result
that my readers will sometimes wonder what I am talking about
when I speak, with what some of my English critics consider a
misuse of language, of the 'classical' school of thought and
'classical' economists. It may, therefore, be helpful to my
French readers if I attempt to indicate very briefly what I
regard as the main differentiae of my approach.
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,セwith
aggregate incomes, aggregate profits, aggregate output, aggregate
employment, aggregate investment, aggregate saving rather than
with the incomes, profits, output, employment, investment and
saving of particular industries, firms or individuals. And 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.
Let me give examples of what I mean. My contention that for
the system as a whole the amount of income which is saved, in the
sense that it is not spent on current consumption, is and must
necessarily be exactly equal to the amount of net new investment
has been considered a paradox and has been the occasion of
widespread controversy. The explanation of this is undoubtedly to
be found in the fact that this relationship of equality between
saving and investment, which necessarily holds good for the
system as a whole, does not hold good at all for a particular
individual. There is no reason whatever why the new investment
for which I am responsible should bear any relation whatever to
the amount of my own savings. Qute legitimately we regard an
individual's income as independent of what he himself consumes and
invests. But this, I have to point out, should not have led us to
overlook the fact that the demand arising out of the consumption
and investment of one individual is the source of the incomes of
other individuals, so that incomes in general are not
independent, quite the contrary, of the disposition of
individuals to spend and invest; and since in turn the readiness
of individuals to spend and invest depends on their incomes, a
relationship is set up between aggregate savings and aggregate
investment which can be very easily shown, beyond any possibility
of reasonable dispute, to be one of exact and necessary equality.
Rightly regarded this is a banale conclusion. But it sets in
motion a train of thought from which more substantial matters
follow. It is shown that, generally speaking, the actual level of
output and employment depends, not on the capacity to produce or
on the pre-existing level of incomes, but on the current
decisions to produce which depend in turn on current decisions to
invest and on present expectations of current and prospective
consumption. Moreover, as soon as we know the propensity to
consume and to save (as I call it), that is to say the result for
the community as a whole of the individual psychological
inclinations as to how to dispose of given incomes, we can
calculate what level of incomes, and therefore what level of
output and employment, is in profit-equilibrium with a given
level of new investment; out of which develops the doctrine of
the Multiplier. Or again, it becomes evident that an increased
propensity to save will ceteris paribus contract incomes
and output; whilst an increased inducement to invest will expand
them. We are thus able to analyse the factors which determine the
income and output of the system as a whole;セwe
have, in the most exact sense, a theory of employment.
Conclusions emerge from this reasoning which are particularly
relevant to the problems of public finance and public policy
generally and of the trade cycle.
Another feature, specially characteristic of this book, is the
theory of the rate of interest. In recent times it has been held
by many economists that the rate of current saving determined the supply of free capital, that the rate of current
investment governed the demand for it, and that the rate of
interest was, so to speak, the equilibrating price-factor
determined by the point of intersection of the supply curve of
savings and the demand curve of investment. But if aggregate
saving is necessarily and in all circumstances exactly equal to
aggregate investment, it is evident that this explanation
collapses. We have to search elsewhere for the solution. I find
it in the idea that it is the function of the rate of interest to
preserve equilibrium, not between the demand and the supply of
new capital goods, but between the demand and the supply of
money, that is to say between the demand for liquidity and the
means of satisfying this demand. I am here returning to the
doctrine of the older, pre-nineteenth century economists.
Montesquieu, for example, saw this truth with considerable
clarity,セMontesquieu who was the real French
equivalent of Adam Smith, the greatest of your economists, head
and shoulders above the physiocrats in penetration,
clear-headedness and good sense (which are the qualities an
economist should have). But I must leave it to the text of this
book to show how in detail all this works out.
I have called this book the General Theory of Employment,
Interest and Money; and the third feature to which I may call
attention is the treatment of money and prices. The following
analysis registers my final escape from the confusions of the
Quantity Theory, which once entangled me. I regard the price
level as a whole as being determined in precisely the same way as
individual prices; that is to say, under the influence of supply
and demand. Technical conditions, the level of wages, the extent
of unused capacity of plant and labour, and the state of markets
and competition determine the supply conditions of individual
products and of products as a whole. The decisions of
entrepreneurs, which provide the incomes of individual producers
and the decisions of those individuals as to the disposition of
such incomes determine the demand conditions. And pricesセboth individual prices and the price-levelセemerge as the resultant of these two factors. Money, and the quantity of money, are not direct
influences at this stage of the proceedings. They have done their
work at an earlier stage of the analysis. The quantity of money
determines the supply of liquid resources, and hence the rate of
interest, and in conjunction with other factors (particularly
that of confidence) the inducement to invest, which in turn fixes
the equilibrium level of incomes, output and employment and (at
each stage in conjunction with other factors) the price-level as
a whole through the influences of supply and demand thus
established.
I believe that economics everywhere up to recent times has
been dominated, much more than has been understood, by the
doctrines associated with the name of J.-B. Say. It is true that
his 'law of markets' has been long abandoned by most economists;
but they have not extricated themselves from his basic
assumptions and particularly from his fallacy that demand is
created by supply. 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. Nearly all subsequent economic
theory has depended on, in the sense that it has required, this
same assumption. Yet a theory so based is clearly incompetent to
tackle the problems of unemployment and of the trade cycle.
Perhaps I can best express to French readers what I claim for
this book by saying that in the theory of production it is a
final break-away from the doctrines of J.-B. Say and that in the
theory of interest it is a return to the doctrines of
Montesquieu.
J. M. KEYNES
20 February 1939
King's College
Cambridge