Pigou - Keynes General Theory

The Suntory and Toyota International Centres for Economics and Related Disciplines
Mr. J. M. Keynes' General Theory of Employment, Interest and Money

Author(s): A. C. Pigou
Source: Economica, New Series, Vol. 3, No. 10 (May, 1936), pp. 115-132
Published by: Wiley on behalf of The London School of Economics and Political Science and
The Suntory and Toyota International Centres for Economics and Related Disciplines
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Mr. J. M. Keynes' General Theory of
Employment, Interest and Money1
By A. C. PIGOU
WHEN, in I919, he wrote The Economic Consequences of

the Peace, Mr. Keynes did a good day's work for the world,
in helping it back towards sanity. But he did a bad day's
work for himself as an economist. For he discovered then,
and his sub-conscious mind has not been able to forget since,
that the best way to win attention for one's own ideas is
to present them in a matrix of sarcastic comment upon
other people. This method has long been a routine one
among political pamphleteers. It is less appropriate, and
fortunately less common, in scientific discussion. Einstein
actually did for Physics what Mr. Keynes believes himself
to have done for Economics. He developed a far-reaching
generalisation, under which Newton's results can be sub-
sumed as a special case. But he did-not, in announcing
his discovery, insinuate, through carefully barbed sentences,
that Newton and those who had hitherto followed his lead
were a gang of incompetent bunglers. The example is
illustrious: but Mr. Keynes has not followed it. The general
tone de haut en bas and the patronage extended to his old
master Marshall2 are particularly to be regretted. It is
not by this manner of writing that his desire to convince
his fellow economists (p. vi) is best promoted.
II
The group of persons whom, on this occasion, he parades

as a foil, are the "classical economists," with, as particular
examples, " Ricardo, Marshall, Edgeworth and Professor
Pigou." The device of lumping all these persons together
1 The General Theory of Employment, Interest and Money, by J. M. Keynes (Macmillan
and Co., pp. 403, 5s.).
2 Cf. the sarcasm-quite irrelevant to the argument-on p. 184.
I"
II 6 -ECONOMICA [MAY
is an ingenious one; for it enables the shortcomings of one

to be attributed to all. For example, Professor Pigou, in
a book on Unemployment, which is " the only detailed
account of the classical theory of employment which exists,"
(p. 7) has committed a variety of sins. Professor Pigou is
a classical economist ; therefore the classical economists
have committed these sins! Moreover, when one of the
arraigned persons has palpably not made a particular mistake,
the method of lumping enables Mr. Keynes to say that he
ought to have made it, and that, in not making it, he has
been false to the "logic" of his own school-has allowed
his " good common sense to overbear his bad theory,"
(p. 277). Finally, this device has, for anyone adopting it,
the great advantage that it renders any complete reply
impossible.1 When a man goes on a sniping expedition
in a large village, nobody will have the patience to track
down the course of his every bullet. The best that can
be done is to illustrate his methods by selected examples and
to enquire in a broad way into his total accomplishment.
It is convenient to begin with a relatively small matter.
On p. 20 Mr. Keynes quotes a sentence from The Economics
of Industry written by Mr. and Mrs. Marshall in I879. The
sentence runs :-" It is not good for trade to have dresses
made of material that wears out quickly. For, if people did
not spend their means on buying new dresses, they would
spend them on giving employment to labour in some other
way." This sentence is cited by Mr. Keynes as a proof that
Marshall at that time, though in later life he became " very
cautious and evasive "-the second epithet is characteristic
-believed that " an act of individual saving inevitably
leads to a parallel act of investment" (p. 21). Now, it must
be conceded that the sentence quoted is, as it stands, taken
in isolation, inexact. But that Marshall was speaking in
a limited context, and did not mean that a man inevitably
expends on something the whole of his income, is apparent
to anyone who will read the book to the end. For, in con-
nection with general industrial fluctuations, which, after
all, is the proper place for these considerations, it is explicitly
stated :-" Though men have the power to purchase, they
may not choose to use it."2 Mr. Keynes had himself quoted
I On pp. I38 and 148 Mr. Keynes goes one better and brings charges of ignoring, or not
analyzing carefully, what the present writer had imagined to be familiar commonplaces,
against - " most discussions " and against " economists " without further specification I
2 The Economics of Industry, znd Edition (I have no copy of the ist Edition), p. i54.
1936] THEORY OF EMPLOYMENT, INTEREST & MONEY 117
this sentence in another connection in a footnote on p. I9,

but nevertheless has allowed the statement on p. 2I, cited
above, to stand.
Here is a second charge against Marshall, this time much
more important. The classical economists, speaking through
him, discuss the money rate of interest on the basis of an
analysis of distribution conducted exclusively in real terms.
Now it is obvious that the money rate of interest cannot
be determined by real factors alone. There is one equation
short. The classical economists, again in the person of
Marshall, failed to perceive this. Consequently their whole
analysis breaks down. "The perplexity which I find in
Marshall's account of the matter [Interest Theory] is funda-
mentally due, I think, to the incursion of the concept
'interest,' which belongs to a monetary economy, into a
treatise which takes no account of money. Interest has
no business to turn up in Marshall's Principles of Economics
-it belongs to another branch of the subject " (p. i89).'
Now read Marshall: "Throughout the present volume we
are supposing, in the absence of any statement to the con-
trary, that all values are expressed in terms of money of
fixed purchasing power, just as astronomers have taught
us to determine the beginning or the ending of the day
with reference, not to the actual sun, but to a mean sun,
which is supposed to move uniformly throughout the
heaven."2 Thus Marshall has deliberately and in express
terms introduced a specific condition about money-i.e.
provided the missing equation-the necessity for which
Mr. Keynes accuses him of failing to perceive.
Misrepresentation of a like character is directed against
the classical school in the person of Professor Pigou. In
reading chapters by that writer in the Theory of Unemployme
about the elasticity of the real demand schedule for labour,
Mr. Keynes fails to find any reference to the consequences
for unemployment of changes in the position of that schedule,
1 In the course of this discussion of Marshall's Interest Theory there is a curious minor
lapse. Marshall had written: " An extensive increase in the demand for capital will, there-
fore, be met for a time, not so much by an increase of supply, as by a rise in the rate of
interest." Mr. Keynes comments: "Why not by a rise in the supply price of capital goods ?
Suppose, for example, that the extensive increase in the demand for capital in general is due
to a fall in the rate of interest " (p. I87). Is it not evident that this is just the thing which
in the context must not be supposed ? Marshall was speaking of a rise of the demand curve
for capital. Mr. Keynes retorts by speaking of a movement along a stationary demand
curve.
2 Pritnciples of Lconomnics, p. 593. There are similar passages on pp. 69 and I5o of Mr. and
Mrs. Marshall's Economics of Industry referred to above.
II8 ECONOMICA [MAY
and comments: " It is, indeed, strange that Professor

Pigou should have supposed that he could furnish a theory
of unemployment whiclh involves no reference " to such
changes (p. 275). Had Professor Pigou really done this,
" strange " would have been much too weak a word. In
fact in later parts of the book these matters are discussed
(particularly in Part V, Chapter 9, and Part III, Chapt
and in the Preface it is explained that further discussion
is dispensed with because it is already provided at length
in the writer's Industrial Fluctuations.
There remains Mr. Keynes' fundamental charge against
the classical school as a whole. This may be set out thus.
According to that school the aggregate quantity of labour
employed at any time is, subject to agreed qualifications,
determined at such a level that the real wage rate offered
by employers is equal to the real wage rate which work-
people ask for as a condition of that quantity of labour being
supplied; broadly it is determined at the intersection of
the real demand curve and the real supply curve of labour.
Now " involuntary employment," as defined by Mr. Keynes
(p. IS), prevails if a rise in money prices relatively to money
wages would bring about an increase in the volume of
employment. " So long as the classical postulates hold
good, unemployment, which is in the above sense involuntary,
cannot occur " (p. i6). For the classical school must hold
that, the real supply schedule being given, a rise in money
prices, unaccompanied by an equivalent rise in money
wages, implying, as it does, a fall in the real wage-rate offered,
will cause the amount of labour coming forward to decrease.
" This strange supposition apparently underlies Professor
Pigou's Theory of Unemployment, and it is what all members
of the orthodox school are tacitly assuming " (p. 13). Again:
" It is important to emphasise that the whole of Professor
Pigou's book is written on the assumption (Mr. Keynes'
italics) that any rise in the cost of living, however modest,
relatively to the money wage will cause the withdrawal from
the labour market of a number of workers greater than that of
all the existing unemployed" (p. 277). The hiatus here is
glaring. In order to demonstrate the futility of the classical
economists, Mr. Keynes needs to father on them a second
postulate; namely, that monetary happenings are incapable
of affecting the real supply schedule of labour. For, of
course, if they can affect it, they are competent to modify
1936] THEORY OF EMPLOYMENT, MONEY & INTEREST II9
the volume of employment in spite of the real demand price

and the real supply price of labour standing always in
equilibrium. Mr. Keynes completely fails to see the need
for fathering this postulate on them in order to validate
his charge. If he had seen this need, he could not, of course,
have met it. One " classical economist " at least, in a book
which he particularly criticises, has been at pains, not indeed
to refute that postulate, for it never occurred to him that
anyone would assert it, but to enquire how-in the short
period-monetary happenings do alter the real supply
schedule of labour.'
In my first draft a paragraph stood here characterizing in
frank terms this macedoine of misrepresentations, from
which I have extracted sample prints. The temptation to
let that paragraph remain has been strong. But
Why comes temptation but that man should mount,
And master, and make crouch beneath his feet,
And so stand pinnacled in triumph ?
The reader has been given the facts. It is for him to pass
judgment upon them.
III
The positive parts of Mr. Keynes' discussion do not depend
on the negative parts. Any bias that a reading of those
parts may have generated in our minds must be firmly put
aside, and the positive parts studied on tlleir own merits.
But here at once a serious obstacle is encountered. His
argument is in places so obscure that the reader cannot be
certain what precisely it is that he is intending to convey.
That there should be this difficulty about Mr. Keynes'
scientific writings about economics-it was present also in
a less degree in the more theoretical parts of his Treatise
on Money-is very curious. How is it that an author,
whose powers of exposition enabled him to write on the
philosophy of Probability in a way that amateurs could
follow-not to say one whose vividness of phrase has made
him a valued contributor to the Daily Mail,2 when he comes
to the subject to which he has devoted most attention, is
barely intelligible to many-for I am not alone in this-of
his own professional colleagues ?
A part of the explanation is, beyond doubt, his loose
1 Cf. Pigou, The Theory of Unemployment, Part V, ch. 9.
2 This poisoned dart is discharged-the skeleton must face the light-by one who himself
on one occasion yielded to the blandishments of the Sunday Express !
120 ECONOMICA [MAY
and inconsistent use of terms. Thus on page 5 (footnote)

" involuntary unemployment " is used in a different sense
from tllat in which it is defined on p. 15. On p. 5 " mar
product of labour " is used for what, two lines lower down,
becomes a value, and on p. 6 is called " value of the product
attributable to its marginal productivity." On the same
page we have " the utility of the marginal product," when
what is meant is the utility of the money wage. Again,
on p. 5 the classical economists are said to maintain that
the utility of the wage is equal to the disutility of the marginal
employment, whereas on pp. I4 and I5 it is the real wage
itself, not its utility, that is set over against the disutility
of marginal employment. Again, on p. z8 there suddenly
appears " the propensity to consume," a new entity which
is not defined till p. 90, while no forward reference to the
definition is given. But much more serious examples of
loose language occur in connection with " liquidity prefer-
ence " in Chapter XIII. At the beginning of that chapter
income means real income, and the demand for money the
real value that people choose to hold in money form; but,
later on, income means money income and the demand for
money some relation between the quantity of money and
the rate of money interest. Thus on p. i66 we read: " An
individual's liquidity preference is given by a schedule of
the amounts of his resources, valued in terms of money or
of wage units, which he will wish to retain in the form of
money in a given set of conditions "; and on p. I67 the rate
of interest is " the ' price ' which equilibrates the desire to
hold wealth in the form of cash with the available quantity
of cash." Here liquidity preference is, in effect, the
Marshallian k, which, when real income is given, depends,
ceteris paribus, on the rate of interest. But on p. i68
" liquidity preference is a potentiality or functional tendency,
which fixes the quantity of money [no longer the real value
held in the form of money], which the public will hold when
the rate of interest is given " ; and on p. 171 we have " the
sclhedule of liquidity preference relating the quantity of
money to the rate of interest."'l When the Marshallian
I It is possible that " quantity of money " is an extremely loose expression for " prop
of money stock to money income." If this is so, the confusion is merely verbal; for, of
this proportion is identical with the proportion of real value held in money form to real
income. But in a later passage Mr. Keynes writes: " Men cannot be employed when the
object of desire (i.e. money) is something which cannot be produced and the demand for which
cannot be readily choked off " (p. 235). Here it seems clear that it is money itself, not merely
a certain real value in the fornm of money, that, in Mr. Keynes' view, people desire to hold.
I936] THEORY OF EMPLOYMENT, INTEREST & MONEY 121
rabbit k has in this way become transmuted into a Keynsian

fox, the hunter, faint but pursuing, suddenly sees it multiply
itself by fission ! On p. II9 he sees, flying before him over
the greensward, two liquidity functions, one relating one
portion of the quantity of money to quantity of income,
the other relating a second portion to the rate of interest.
What can any hunter feel but a wholly bewildered and half
amused exasperation ?
As was the lot of the singer Apollo,

So hath the lot of his follower been,
Beauty and youth througlh the valley to follow,
Winning no mead but a chaplet of green !
And even Apollo's nymph did not turn into two trees!
A second partial explanation of Mr. Keynes's obscurity
is to be found, I think, in his desire to reach a stage of
generality so high that everything must be discussed at
the same time. For example, in his chapters on " the
propensity to consume " he wishes to consider what will
happen in certain circumstances (i) if the money rate of
wages is fixed, (ii) if it varies. The natural procedure
would be to work out the problem first on the simpler
hypothesis, and then to enquire how far the results reached
need to be modified if the more complicated one is sub-
stituted for it. Mr. Keynes rolls the two enquiries together
by asking, in effect, what will happen in the eventualities
contemplated if money income divided by money wage rate is
constant.' Since in fact different things will happen, or
-not to beg the question-since it is far from obvious that
different things will not happen, when this quotient is con-
stant because both money income and money wage rate
are constant, and when it is constant because both are
varying in the same proportion, the reader inevitably feels
perplexed and insecure. There are many other examples
of this method. Mr. Keynes' preference for attacking
complex problems as wholes, instead of breaking them up
and organising a methodical approach, makes the task of
following hiis argument and disentangling his various
assumptions exceedingly exacting.
1 It is, of couirse, obvious that to halve money wage-rates and to leave the sum spent o
wages unchanged has the same effect on employment as to leave money wage-rates unchanged
and to douible this stumn. But to douible money income only implies doubling this sum in very
special cases, i.e. if it has no effect on the quantity of employment or if the function describing
labour's productivity (with the help of the given equipment) has one particular form.
122 ECONOMICA [MAY
A third partial explanation is the existence of a serious

internal inconsistency among the premises with which he
works. Thus on p. II4 he writes: "The fluctuations in
real income under consideration in this book are those
which result from applying different quantities of employ-
ment (i.e. labour units) to a given capital equipment," and
on p. 245 he says again that the quantity and quality of
available equipment and existing technique are taken as
given. But throughout the main part of his book he sup-
poses that some new investment is being undertaken every
year. It is evident that, if this is happening, capital equip-
ment cannot be unchanged. He is assuming in fact a
stationary state and at the same time a moving one. More-
over, on p. 335 he is found applying an analysis built up
on the assumption of stable technique to a progressive
state that is " growing in wealth somewhat rapidly." Nobody
could make use of mutually inconsistent hypotheses in this
way if he had achieved complete coherence among his
ideas. The lack of clarity in Mr. Keynes' explanation
is mainly due, I suggest, to a lack of clarity in his
thought, a lack of clarity which he now himself recognises
to have been present when he wrote the Treatise on Money
but, naturally enough, now believes himself to have
overcome.
In any event, whether this explanation is right or wrong,
the fact of, and the difficulty resulting from, his obscurity
remains. I am not confident of having fully grasped his
meaning, and may, therefore, in attempting to evaluate
his book, do injustice to it by neglecting or relegating to a
subordinate place some element which he himself considers
to be essential. I may even have missed, as has happened
before now to critics of new work, some vital and path-
breaking contribution to thought. None the less, the
attempt must be made. Since, with a book of this character,
a detailed running commentary would be both tedious and
unilluminating, I shall not adopt that method, but shall
build what I have to say round six dominant themes. These
are the ' multiplier,' the rate of interest, the problem of
saving, the relation of money wages to real wages and
employment, what I shall call Mr. Keynes' vision of the
day of judgment, and his view that it is practicable by State
and Bank action to abolish all unemployment other than
what he conveniently calls frictional unemployment.
THE MULTIPLIER
In given conditions people have a propensity to spen

on consumption, not the whole, but only a propor
(generally large) of their income. Since, therefore,
increase in net investment, due, for example, to new pub
works, increases income, it leads indirectly to further
penditure on consumption, and so, even though no fur
investment takes place, to a net increase of employm
substantially larger than that directly due to the origi
net investment. This is, no doubt, in a general way, corre
But the detailed analysis is, in my opinion, defective in
important respect. Mr. Keynes recognises that, if
government invests, say, 1IO Mn. in public works,
ten million of new investment is not all net. There has to
be set off against it a contraction in other forms of invest-
ment, the amount of which depends, in large part, on what
banking policy is being pursued. The more the rate o
interest is raised as an indirect consequence of the govern
ment's call for ten millions, the smaller the net investment
will be. But, while acknowledging this, Mr. Keynes pro-
ceeds as though, bank policy having settled what net invest-
ment is to be, the 'multiplier' then comes in as an inde-
pendent factor to determine how much additional employmen
the given net investment will carry with it. This is surel
a mistake. The larger the multiplier is, the more money
income will need to rise in consequence of a given net invest
ment. In so far as bank policy resists rises in money income
-puts up money interest in the face of them-the larger
the multiplier is, the smaller will be the net investmen
consequent on a given addition to gross investment. I
is only with a banking policy directed to keep the money
rate of interest constant in all circumstances that the addition
to net investment and the multiplier are independent and,
so to speak, additive factors, jointly determining the effect
on the volume of employment.
THE RATE OF INTEREST
Turn now to a matter which plays a large part in Mr

Keynes' general scheme, his view about the way in whi
the money rate of interest is determined. In some passag
he appears to deny that real conditions have anything t
do with the money rate of interest; to assert that this rate
124 ECONOMICA [MAY
while acting on, and setting a limit to, employment, is not

itself acted on from', the real side. For example, on p. 355
he seems to agree with Gesell that " the rate of interest
is a purely monetary phenomenon." If this were in fact
his view, Mr. Keynes' divorce from classical thought would
be complete. But is it in fact his view ? If business men's
expectations improve -in Mr. Keynes' terms, if his schedule
of the marginal efficiencies of capital rises-some forms of
illiquid property will come to be desired more than before
relatively to money. Of course, if banking policy is directed
(successfully) to keeping the money rate of interest constant
in all circumstances, that rate will not change. But, with
any form of banking policy which has ever actually been
pursued, it must inevitably rise, and, as history abundantly
demonstrates, has in fact risen. Despite appearances to
the contrary, I do not think that Mr. Keynes would disagree
with this, and, if I am right, there is so far no conflict.
When, however, we pass, in Chapter I7, to further
developments, this is no longer so. In that Chapter he
sets himself this problem. The money rate of interest, as
he has argued, set a. limit to employment, because " it sets
a standard to which the marginal efficiency of a capital
asset must attain if it is to be newly producedc" (p. 222).
But in equilibrium rates of interest may be different when
expressed in terms of different commodities; there is a
wheat rate of interest as well as a money rate. How then
does it -come about that it is the money rate, and not one
of the others, which sets a limit to employment ? Mr. Keynes
answers: "It is the greatest of the own-rates of interest
(as we call them) which rules the roost." He sums up
the matter, in a prose passage which cries out for quot
thus: " Our conclusion can be stated in the most general
form (taking the propensity to consume as given) as follows:
No further increase in the rate of investment is possible
when the greatest among the own-rates of own-interest of
all available assets is equal to the greatest amongst the
marginal efficiencies of all assets, measured in terms of the
asset whose own-rate of own-interest is greatest " (p. 236).
But for various reasons, developed at length, " it is the money
rate of interest which is often the greatest " (p. 223). There-
fore it is the money rate which rules the roost. The weakness
of the "often " in this sentence-a necessary weakness, for,
obviously, in December,. for example, the strawberry rate
of interest on a six months loan is enormously greater than

the money rate-should have warned Mr. Keynes that he
had unwittingly entered a mare's nest. Unless I have
completely missed the drift of this confused and most con-
fusing chapter, there can be no doubt that that is what he
has in fact done. For suppose that the money rate of
interest is 5 per cent. and the wheat rate 4 per cent., that
a quarter of wheat now costs a L, and that we are deliberatin
whether or not to invest an rtl L. This rtll L if invested,
is expected to yield a series of returns Q1, Q2 . . . expressed
in money, or a series R1, R2 . . . expressed in wheat. To
obviate opportunities for arbitrage profit, the present value
of the Q series at 5 per cent. must be the same as that of
the R series at 4 per cent. Both present values alike must
be fi = i quarter of wheat. It makes no difference whatever
which standard of value is used. Mr. Keynes has forgotten
that, if expected returns are to be discounted at the wheat
rate instead of at the money rate, the returns themselves
must be expressed, not as sums of money, but as sums of
wheat. So soon as this is remembered, his problem, and
with it his solution, vanishes in smoke.
SAVING
Our next topic is the problem of saving. Mr. Keynes'

conclusions on this matter are quite clear cut " Our argu-
ment leads towards the conclusion that in contemporary
conditions the growth of wealth, so far from being dependent
on the abstinence of the rich, as is commonly supposed, is
more likely to be impeded by it " (p. 373). The ground for
this is that a decision not to expend money on consumption
is not a decision to expend it on investment. That nobody
denies. Saving may take the form of hoarding; and, if
it does, provided that the money rate of wages does not
change, not merely will employment on investment goods
not be increased, but employment on consumption and
investment goods together will, through various reper-
cussions, be diminished. Thus saving need not promote the
creation of new capital; and in certain circumstances will
not do so. For example, propaganda in favour of private
" economies " during the down-rush of a slump will simply
make unemployment worse. But Mr. Keynes' conclusion
goes much further than this. He holds that, in contemporary
i z6 ECONOMICA [MAY
conditions, saving, or at all event a predominant part of

saving, will take the form of hoarding. Is this true ? To
reach a conclusion about this two distinct steps have to
be taken.
First, in normal times when a man decides to save, his
decision is not usually a thing complete in itself. It is
part of a wider decision. He saves, not in order to accumu-
late money in a stocking or in a bank balance, but in order
presently to buy a house or a motor car, or to invest in
interest-bearing securities. When the second part of this
wider decision is carried out-in the case of the house or
motor car, obviously and directly, in the case of securities
by a more roundabout process-he causes labour to be
employed in creating new capital. It may well be, indeed,
that the second part of his decision is realised some months
after the first. But, so long as the aggregate rate of saving
and the length of the interval are constant, this does not
matter. The first part of one man's act always synchronises
witlh the second part of another man's, and no net hoarding
takes place. If saving is going on steadily at the rate of
a hundred millions a year, the stock of capital will, in general,
be growing at a corresponding rate; and similarly if saving
is going on steadily at the rate of two hundred millions a
year. While the rate is being increased from one hundred
millions to two hundred millions, the lag of the second
part of the saving-investment act behind the first does,
it is true, entail some net hoarding. But this goes a very
little way towards warranting Mr. Keynes' sweeping
generalisation. The error into which, I conceive, he has
fallen may be illustrated thus: A decision to have one's
teeth extracted is not in itself a decision to buy false ones.
But few people in fact make the first decision without also
making the second. Since false teeth are only wanted
some months after the extraction, an increase in the number
of extractions does not at once entail an addition to the
capital stock of false teeth. But, none the less, a low pro-
pensity to retain one's natural teeth is " conducive to the
growth " of that capital stock.
Secondly, when a decision to save on the part of an
individual does not carry with it a further decision by that
individual presently to invest, the consequences of his
decision are indeterminate until the character of the banking
policy that is being pursued is given. With a policy directed
1936] THEORY OF EMPLOYMENT, INTEREST & MONEY I27
to keeping aggregate money income stable, all individual

hoarding must be associated with equal dishoarding; and
so, since the dishoarding will in practice be directed towards
investment goods, with an equivalent addition to capital.
With each specified other type of bank policy other conse-
quences will follow. Mr. Keynes rightly holds that with
a stable-income banking policy successfully carried out
no savings can become hoarding. His language suggests
that with any other banking policy,-as he puts it, when
conditions of full employment do not prevail-all saving will
become hoarding. He would, however, I think, agree
that in fact, apart from the day of judgment (cf. post,
p. I129), some would become hoarding and some gener
new capital, the proportion depending on the precise type
of banking policy that is being pursued.
MONEY AND REAL WAGE RATES
The accepted view about the relation between money

wage rates on the one hand and real wage rates and employ-
ment on the other is that a reduction of money wage rates
will carry with it some, though not necessarily a propor-
tionate reduction of real wage rates and will, in general,
increase the volume of employment. For all-round reduc-
tions in a closed system Mr. Keynes at first sight seems to
deny this, asserting instead that the fall in money wages
will entail an equi-proportional fall in prices and so leave
real wages and employment unaltered. If this is in fact
his view, there is undoubtedly a sharp conflict between him
and the classical school. But, once more, is it in fact his
view ? Closer consideration leaves a doubt. For he has
not distinguished clearly between the consequences of a
reduction of money wage rates in the face respectively of
(i) falling and (ii) fallen money demand. Certainly he
regards money wage reductions in the former situation as
ineffective; and, since falling money wages may easily
create an expectation of further falls, and so bring about
further reductions in the money demand for labour, there
is much force in his argument (p. 269). But what if the money
demand for labour has fallen and is standing fairly stable
at the new level In that situation he does, indeed, deny
that a reduction in money wage rates can bring about a
reduction in real wage rates, and so in unemployment, in
13
128 ECONOMICA [MAY
the way in which he supposes other people to believe that

it can do these things. But he does not, I think, deny that
in some way, by a process of repercussion, it can in fact do
them. If I am interpreting him correctly, his conclusion,
as distinct from his analysis, does not differ from what is
commonly maintained. He allows that in the long period,
if money wages are permitted to move freely, the various
elements in the economic system tend so to adjust them-
selves that full employment, in his sense, is maintained.'
It does not, of course, follow from this that, in a situation
of maladjustment and consequent heavy unemployment,
such as England experienced from I925 to 1929, and France
is experiencing now, it is better to cut the knot by reducing
money wages rather than by pushing up prices through
bank policy or, maybe, through devaluation. A strong case
can be made for the latter course on the familiar grounds
-mentioned by Mr. Keynes on pp. 267-9--(i) that it is
extremely difficult in a democracy to secure a decisive
and general cut in money wage rates and (ii) that, if this
were accomplished, it would entail a burdensome enhance-
ment in the real value alike of private and of State debts.
Thus on this matter no head-on collision between Mr. Keynes
and other people need occur.2
But it is unfortunately not possible to rest long on this
note of agreement. For, though, if I am right, the results
which Mr. Keynes and I forecast are the same, the processes
by which we respectively look for them to be brought about
are entirely different. He has failed, I think, to see that
the consequences for employment of a given reduction in
money wage rates, like the consequences of a given act of
individual hoarding, are indeterminate until the character
of the banking policy that is being pursued is known. It
is possible to imagine a policy that would cause a fall in
money wage rates to be associated with a rise in real wage
rates and a reduction of employment. But policies which
would have this effect, as also the policy that would keep
1 In the course of his discussion Mr. Keynes suggests that those who hold that a reductio
in money wage rates all round would increase employment all round infer this conclusi
from the fact that a reduction in money wage rates in a single industry, rates elsewhere bei
unchanged, increases employment there (p. 259). But he provides no evidence that anybo
has in fact ever perpetrated this gross fallacy.
2 Paradoxical as it may seem at first sight, what has been said shows that there was
stronger case for reducing money wages in I925 to I929, when most people deprecated i
than in the depression years that followed, when that course was widely advocated and
a measure adopted.
1936] THEORY OF EMPLOYMENT, INTEREST & MONEY I29
real wage rates and employment unchanged, can be shown

on analysis to be fantastically unlike any policy that has
ever in fact been either pursued or advocated. With policies
in any degree resembling actual policies, a fortiori with
policies of income or price stabilisation, cuts in money wage
rates must lower real wage rates and increase employment.
Moreover, contrary to Mr. Keynes' view, the improved
employment seems likely to be associated, ultimately at
all events, if not at the beginning, with an increased, rather
than with a reduced, money rate of interest.
VISION OF THE DAY OF JUDGMENT?
Mr. Keynes' vision of the day of judgment may be

sketched out thus. If sensible policies are adopted, capital
equipment will accumulate so rapidly that, within perhaps
one generation, no openings will be left for investment that
yield any positive net return (p. 220). People with sub-
stantial incomes will, therefore, have no inducement to
invest. But they will not want to use all their incomes
for consumption. Consequently, from sheer lack of oppor-
tunity to do anything else, they will hoard money. Since
it is not feasible for the banks to lend at a negative rate
of interest, they will not be able to induce investment as
an offset to this. Consequently incomes, and with them
employment, will contract in a cumulative manner, the
process only coming to rest when " employment is low
enough and the standard of life sufficiently miserable to
bring savings to zero" (pp. 217-8). Apart from the special
State activities, in which Mr. Keynes sees an effective
prophylactic, is this a veridical vision or is it a nightmare ?
If the immediate future is to resemble at all the recent
past, new objects, the creation of which requires invest-
ment, are likely to be invented. An era that has witnessed
the development of electrical apparatus, motor cars, aircraft,
gramophones and wireless, to say nothing of tanks and
other engines of war, is not one in which we can reasonably
forecast a total disappearance of openings for new invest-
ment. Moreover, even if the situation should become
such that the average of new capital assets yielded nothing,
some capital assets would yield something and many would
be expected to do so. Even if the prospective return
were low, so long as it did not fall to nothing, it would pay
I30 ECONOMICA [MAY
a rich man to invest in these things rather than convert

more and more income into completely sterile hoards. For,
it must be remembered, the situation here contemplated
is not one in which the prospective return from investment
is, say, 2 per cent. now and is expected very shortly to
improve. There is no expectation of improvement and,
therefore, no inducement to hold resources liquid against
a brighter future. For these reasons I am not greatly
afraid of Mr. Keynes' cumulative debacle. Furthermore,
if it did arrive and moved at a moderate speed-to anticipate
catastrophic movement is surely unreasonable-I should
expect reductions in money wage rates to mitigate, though
not to nullify, the associated damage to employment. Since,
ex hypothesi, no investment would be taking place, actual
wage reductions could not, by creating an expectation of
future ones, hold investment up, and so would be more
effective than they would be in ordinary slumps. This
whole matter is highly speculative, but I should not myself
pay a high premium to insure against Mr. Keynes' day of
judgment !
ABOLITION OF UNEMPLOYMENT
There remains the last of the six themes scheduled for

discussion on p. I22. Mr. Keynes holds that, by an appro-
priate interest policy on the part of the banks and an invest-
ment policy on the part of the State designed to defeat
the day of judgment, it should be practicable to stabilise
aggregate employment at the sort of level now considered
appropriate to a boom. This, he thinks, would be accom-
plished if fluctuations about a moderate level of employmen
gave place to stability at the level of full employment as
defined by him (p. 322). Whether or not we consider his
hopes over-optimistic, few economists would deny that it
should be practicable to come very much closer to full
employment than we have recently been. Nor, I think,
would there be any wide or deep disagreement about the
general lines of appropriate short period policy on the part
of the banks and of the State. But there is one important
consideration, to which, concentrating attention, as he
does, upon money, Mr. Keynes has, in my opinion, paid
insufficient regard. His " full employment " means, in
effect, such quantity of employment that no increase in it
can be brought about by additions to effective money
I936] THEORY OF EMPLOYMENT, INTEREST & MONEY 13I
demand. He tacitly assumes that this full employment is

equivalent, allowance being made for frictions and so on,
to maximum possible employment, i.e. to the situation at
the peak of a boom. But this need not be so. Wage earners
may exercise a continuous pressure directed to keep rates
of real wages above what is compatible with maximum
possible employment. So far as they do this, enhancements
in money demand for labour will not be able to raise employ-
ment permanently to the boom level, because they will be
offset by rising money wages. Thus, even if Mr. Keynes'
full employment were established, wage earners would still
have, a choice between policies that promote respectively
higher real wage rates plus less employment and lower
real wage rates plus more employment. It is not necessarily
in their own interest, or even in the general interest,' that
they should prefer the second type of policy. In any event,
the choice belongs, neither to the banks nor to the State,
but to them. If they opt for the first type of policy-and
experience shows that they do opt for it to some extent-
the establishment of full employment in Mr. Keynes' sense
would not prevent the level of employment from being
substantially less than that normal to a boom.
IV
I am painfully conscious that this notice consists almost

entirely of adverse criticism-adverse on the manner and
matter of Mr. Keynes' comments upon other people, adverse
on the form and content of his own major contributions.
It is small atonement, I fear, to have confessed, as I have
done on p. 122, a doubt whether I have fully grasped
meaning, or to add, as I do here, that on many secondary
matters he has, as everybody acquainted with his writings
would expect, made illuminating and suggestive observa-
tions. His discussion of the precise relationship between
wages and prime costs (Chapter VI), his development of
Mr. Hawtrey's point about the consequences of payments
to depreciation account in excess of what is contemporaneously
spent on renewals and repairs (Chapter VIII), his description
of the precarious character of business forecasts and of the
consequences of experts in these matters being chiefly
interested in short-run developments (Chapter XII), are
1 Cf. Rowe, Wages in Practice and Tbeory, Part III.
132 ECONOMICA [MAY
all admirable. "The spectacle of modern investment

markets has sometimes moved me towards the conclusion
that to make the purchase of an investment permanent
and indissoluble, like marriage, except by reason of death
or other grave cause, might be a useful remedy for our
contemporary evils " (p. i6o). Admirable, too, is much of
his " Notes on the Trade Cycle." Yet again, he has done
good service to clarity by substituting new definitions of
income and saving in place of those used in the Treatise
on Money: while, by recognising (on p. 78) that Mr. Robert-
son's Hoarding, or excess of saving over investment, is
equivalent to his own decrease of income, he has made it
plain that in this field the matters still at issue have to
do with verbal convenience rather than with fundamental
principle. Finally, even those parts of his discussion which
least command agreement are a strong stimulus to thought.
We have watched an artist firing arrows at the moon.
Whatever be thought of his marksmanship, we can all
admire his virtuosity.

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The Suntory and Toyota International Centres for Economics and Related Disciplines

Mr. J. M. Keynes' General Theory of Employment, Interest and Money

WHEN, in I919, he wrote The Economic Consequences of

The group of persons whom, on this occasion, he parades

is an ingenious one; for it enables the shortcomings of one

this sentence in another connection in a footnote on p. I9,

and comments: " It is, indeed, strange that Professor

the volume of employment in spite of the real demand price

and inconsistent use of terms. Thus on page 5 (footnote)

rabbit k has in this way become transmuted into a Keynsian

As was the lot of the singer Apollo,

A third partial explanation is the existence of a serious

In given conditions people have a propensity to spen

THE RATE OF INTEREST

Turn now to a matter which plays a large part in Mr

while acting on, and setting a limit to, employment, is not

of interest on a six months loan is enormously greater than

Our next topic is the problem of saving. Mr. Keynes'

conditions, saving, or at all event a predominant part of

to keeping aggregate money income stable, all individual

MONEY AND REAL WAGE RATES

The accepted view about the relation between money

the way in which he supposes other people to believe that

real wage rates and employment unchanged, can be shown

VISION OF THE DAY OF JUDGMENT?

Mr. Keynes' vision of the day of judgment may be

a rich man to invest in these things rather than convert

There remains the last of the six themes scheduled for

demand. He tacitly assumes that this full employment is

I am painfully conscious that this notice consists almost

all admirable. "The spectacle of modern investment

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