Is the Market a Test of Truth and Beauty?

Ȁȅȁ Partʺ: Economics

long-term expectations were bedevilled by uncertainty (non-quantifiable

contingencies, not mere risks that might be estimated). Because expecta-

tions were poorly rooted in objective, measurable circumstances, changes

in investors’ “animal spirits” tended to be contagious. Because investment

thus fluctuated around a sub-optimal level, so did total output and employ-

ment. Some sort of government planning of large segments of investment

seemed advisable as a remedy.

For Keynes, as also interpreted by Meltzer, then, macroeconomic dif-

ficulties were more real than monetary ones. Potted versions of Keynesian

theory understandably came to focus on those of its aspects that are rela-

tively easy to build into models—the consumption function, the savings

gap to be filled by investment, the multiplier, and various interest elastic-

ities or inelasticities—rather than on the shapeless topic of hesitant and

changeable expectations.

Alan Coddington (ȀȈȆȅ, in WoodȀȈȇȂ, vol.ŕŢ: p.ȁȁȆ) commented

aptly on Clower’s suggestion that Keynes must have had the dual-decision

hypothesis, in particular, “at the back of his mind”:

Ļe picture here seems to be one of Keynes with a mind full of ideas,

someof which he got onto the pages of theGeneral Ļeory, the task being

to work out what the remainder must have been. Ļis is a problem of

reading not so much between the lines as off the edge of the page.

Early reviews and anniversary reviews of theGeneral Ļeorycollected
in the volumes edited by Wood, especially volumeŕŕ, provide little or
no support for the Clower-Leijonhufvud interpretation. More recent dis-
senters from that interpretation, in articles also collected in Wood’s vol-
umes, include Ivan Johnson, Robin Jackman, and Victoria Chick.
Ļe distinctive feature of theGeneral Ļeory, says Don Patinkin,
is not simply its ... concern with changes in output, but the crucial role
that it assigns to such changes as anequilibrating forcewith respect to
aggregate demand and supply—or, equivalently, with respect to saving
and investment.

Ļis is “what Keynes’s theory of effective demand is all about” and
what lends crucial significance to his “fundamental psychological law” of
a marginal propensity to consume less than one (PatinkinȀȈȆȄ, in Wood
ȀȈȇȂ, vol.ŕ: p.ȃȈȂ). In letters to economists who had written major review
articles on the book, Keynes not only failed to reject the interpretation that
gave rise to the standardIS-LMapparatus but even criticised reviewers