Now that it’s been over a year since starting the Keynes series, I’ve come to realize that the way it’s set up is actually probably pretty irritating to follow for someone just starting now. Since I think this should be as accessible as possible, I’m writing up a Table of Contents for The Story So Far for the paid pieces on Keynes’ General Theory of Employment, Interest and Money that have been published so far.
The way I see it, every 26 episode anime series has a recap episode 13.5 most of the time. Since the General Theory is almost 26 chapters, it would have made sense to have it a little earlier than now, but in my defense I hadn’t thought of it then. I also don’t particularly like how Substack organizes large volumes of posts, and I think there should be a way for readers to quickly check what was going on in the book, and in my post, for each chapter.
Since I’m running this interpretation from a strongly post-keynesian stance (at least, as I conceive of and am pitching it), I think it’s probably most worthwhile to start with this free post. It lays out how I see the basic project here: Keynes General Theory is a tool for understanding knowledge and financial markets while also being a technical program for establishing inclusive economic growth. Doing this right means delving deeply into epistemology, and then translating those deep dives into the recognizable moves of businesspeople, hedge funds, and retail randos. Each essay on each chapter addresses a different piece of this puzzle, while also hopefully providing a guideline for thinking while reading the chapter. An ideal reader would first read the chapter in the General Theory, then read the substack post for that chapter, then read the chapter a second time.
So, for your perusal (and to entice free subscribers to sign up), The Journey of our Heroes So Far:
At the beginning, Keynes lays out the goals of the book and the methodological stakes of the argument. In our treatment, we take apart a single sentence of his: “A monetary economy, we shall find, is essentially one in which changing views about the future are capable of influencing the quantity of employment and not merely its direction.” In doing so, we talk through bits of Ricardo and Marx, Marshall and Sraffa, and Thomas Kuhn.
In this chapter, Keynes walks through three assumptions made by prior economists about the working of a monetary economy and takes them apart in turn. At the end, it turns out all three of these bad assumptions presuppose one another, and that taking one apart sunders the other two, no matter which one you pick. In our commentary, we talk about the difference between “discounting” and “debunking” as rhetorical frames. Discounting is ultimately pragmatic: weight all models by their tendency towards success, even if that weight is zero. Debunking is ultimately absolute: set up an exact standard that models must meet to be used, and reject all that don’t meet that standard while convincing people to use the proposed standard.
In this chapter, Keynes introduces the idea of “Effective Demand.” To do this, he introduces an “Aggregate Supply Function” and an “Aggregate Demand Function” that behave meaningfully differently from the AS-AD diagrams familiar to economics students and policy analysts. Keynes’ specification is shown to be more closely empirical, and to rely on fewer unobservable variables and invalid aggregations. In our commentary, we talk about the difference between the mechanisms that produce economic stagnation in Marx and in Keynes, as well as the policy implications of shifting from a mainstream AS-AD macro to a Keynesian ASF-ADF macro.
In this chapter, Keynes sets out to do dimensional analysis on the quantities and aggregates used by economists. It turns out that “total output” and “the price level” and things like that require one to add together a bunch of different quantities with different units. This leads to an “economic science” that measures things in units roughly analogous to “foot-pounds per square degree celsius.” In place of those, Keynes suggests we use a standard wage unit and nominal output as our lodestars, with everything ultimately measured in dollars. Not constant dollars mind you–present dollars. In our discussion, we touch on problems of “mathiness” in macroeconomics, the legacy of the Cambridge Capital Controversy, problems in Marx’s labor theory of value, and a bit of epistemology.
In this chapter, Keynes lays out what exactly he means when he talks about “the state of expectation” in markets. “Expectation” is extremely weird, because most of the time, the world is happening for the first time, so we can’t just do the statistics 101 trick of defining the average value as the “expected” value. Instead, Keynes sets up a system - based on his earlier Treatise on Probability - whereby actors hold expectations under uncertainty by assigning likelihoods to different outcomes without presuming that those outcomes or likelihoods span the space of possible outcomes. This is like “bounded rationality” but cleverer. My commentary explains how Keynes’ account of “the state of expectation” looks a lot like an order book on the stock market. It also sets up the Great Mysteries that come to the fore in Chapter 12.
In this chapter, Keynes does some national income accounting. Depreciation turns out to be extremely confusing, and most of what is known about it even today is from an accounting, rather than a physical or economic perspective. It’s a pretty dry chapter, and much of my commentary is organized around making the chapter legible, since national accounting is taught in a much more straightforward way now. My commentary also points out that the appendix to chapter 6 is very important, but liable to be pretty unclear until after we’ve finished reading Chapter 17.
In chapter 7, Keynes runs through some proofs about how investment in aggregate must equal savings in aggregate, but that investment is the causal first mover. This is well-trod territory at this point, but it still confuses people today, so it makes sense that Keynes spends so much time on it. After that, I do a bit of philosophical exegesis of Keynes’ overall project. I argue that Keynes’ real project is modeling action under uncertainty, and that he really only “got good” at economics so as to be able to have sufficiently usable material for his theory of action under uncertainty to have real stakes. I pitch this against the arguments in the literature about whether the General Theory represents a radical break with, or a direct continuation of, his earlier work.
Chapter 8 opens Book 3, on consumption. Keynes gives some basic principles underlying the psychology of a micro-level “consumption function,” but the manner in which he does it doesn’t look much like the kind you find in textbooks today. He then walks through how the manner in which consumption functions act creates problems on both the demand side and supply side in the long run. For my commentary, I walk everyone through the fundamental Harrodian dynamical model. It’s a very neat model, and I talked about it on Bloomberg. Basically, because of the way aggregate income dynamics work, if everyone invests too much collectively, every individual investor will feel underinvested, and if everyone invests too little collectively, every individual investor will feel overinvested. This creates self-reinforcing oscillations, but in a way that is much weirder than the accelerator-multiplier models later built off of Harrod’s ideas.
This chapter is extremely short, and covers a lot of simple psychological dynamics that are more or less covered in the previous chapter. As such, most of my engagement is commentary, rather than explication. First, I argue that economics is a basically artistic-literary tradition, rather than a basically scientific tradition. I then argue that models are guides to inferential thinking, rather than representations of reality. From there, I give a history of the “Lucas Critique” in this inferential-artistic-literary mode, and trace the life-path of different “Keynesian” approaches after the death of the man himself. This gives a clear demonstration of the difference between “Keynesian methodology” and “Keynesian policy,” and shows how acceptance and rejection of those two sides create an intricate dialectic in the history of anglo-american economic thought. In the end I come back to say that maybe microfoundations don’t have to be as bad as Lucas made them, but that it’s going to be a lot of work to do that.
This chapter is on one of Keynes’ most beloved concepts: the multiplier. The idea is that, depending on the underlying income dynamics and capital structure of an economy, injecting an additional quantity of demand will create a larger amount of income, thanks to the circular flow of the economy. I talk about his examples about gold-mining and hole-digging and house-building, and then give a verbal derivation for the value of the multiplier in a given economy. I talk a little about a problem that I’ve identified at work, which is that “multipliers” in common policy parlance are used differently from Keynes’ parlance, and the way the term is used in policy often obscures the benefits to economic growth of redistributive social policy.
With chapter 11, we start what is probably the most important Book of the General Theory: Book 4 on investment. In this chapter, Keynes lays out the “schedule of the marginal efficiency of capital,” which is a complicated way of saying “the likely returns over all time-periods from all possible investment goods in all possibly actual markets.” This is a mouthful, so, to explain it, I unpack different parts through both capital theory and corporate finance and accounting. I set up Keynes’ model of investment as a network of actors deciding whether the Weighted Average Cost of Capital justifies the Return On Invested Capital. There’s also a bit of editorializing about how the capital theory propounded by different models imply different things about how the world works and what kinds of objects are in it. At the end, I talk a little bit about Minsky and about a paper I love.
This chapter is the Big Kahuna, and is also extremely fun to read, so I talk very briefly about how nobody knows what’s going to happen in the future. From there, my commentary looks at a bunch of different kinds of questions raised by Keynes’ ideas in this chapter. The first is the relation of Keynes’ work to process philosophy–Whitehead and Keynes were in the same department for a time. I then give a possible “financial” account of primitive accumulation that what Keynes writes could possibly imply. Now, I don’t hold this out as an actual historical story, just as a model you could read into Keynes against Marx. I then talk about Bill Janeway, and how hard it is to distinguish speculation, investment, and fraud from one another as they’re happening. Lastly, I complain about the fact that the “Socialist Calculation Controversy” will never die, despite being a deeply mis-specified problem. The hard part of doing socialism isn’t making sure everybody gets stuff, it’s addressing the ineluctable uncertainty of nature without using capital markets.
In chapter 11, I talked about how the schedule of the marginal efficiency of capital is one side of Keynes’ system for determining investment. Here, he presents the other side: the complex of rates of interest of various maturities. He also explains the idea of “liquidity preference” for the first time, as well as how the action of changing liquidity preference in an uncertain world ensures that interest rates will change, which reinforces the need for liquidity preference. I then talk about how Keynes collapses this whole manifold of interest rates into a specific benchmark interest rate, and walk through the important thinkers on various parts of the yield curve of that interest rate. There’s something about the fact that Keynes’ model of investment is about relating two giant matrices to one another that is both intuitively obvious, and extremely different to formalize in a small number of words.
In this chapter, I start with a long polemic against “loanable funds”-based models of interest rates. These are bad and wrong for most purposes when thinking about the domestic US banking system or government spending constraints. There are some times when they are right, but that is usually when you are dealing with balance sheet issues for FX-constrained firms or countries, and that’s a bit of a niche case for “economics.” I then walk through Keynes looking at a bunch of earlier theories of the rate of interest and asking each one, “what the hell is wrong with you, why are you like this” in turn. At the end I talk about how for all his flaws, Marshall’s approach to partial equilibrium modeling is actually kind of a good way to think of models as aids to inferential thought.
Much of what Keynes writes in this chapter is ostensibly about how interest rates move around, but as I argue in my commentary, is a pretty good primer on doing Central Banking under duress. In the first half of the piece, I talk about the history of IS-LM and monetarism as approaches to modeling, and land on “IS-LM is a model of the General Theory, which is a model of the economy.” Monetarism is then what happens when you read IS-LM backwards. In order to explain what’s going on, I give a primer on bond markets and yield curves as well, to make sure that everyone is aware of the level of sophistication required to figure out what Keynes is really doing in this chapter. I then talk about some of the cool stuff central banks do in crises - that some of them are still doing today - and how Keynes was thinking about it almost a hundred years ago.