The General Theory Ch.23

Why Cranks Are Good, and How, Although Mercantilism Can Be Useful, We Can Do Better Now -- Just Not Through Dogmatic Ricardianism Please No

Persons attempting to find a political motive in this post will be prosecuted; persons attempting to find a definitive moral about free trade in it will be banished; persons attempting to find a social conclusion in it will be shot.

BY ORDER OF THE AUTHOR

Per G. G., CHIEF OF ORDNANCE.

What Happens In The Chapter

This is one of the more complicated chapters to follow. Not because the logic is difficult, but rather because Keynes is placing his theory in the history of economic thinking. We are discussing “economics” rather than “the economy”. That necessarily involves a lot of context that we have mostly shied away from. Paul Krugman called this chapter “a delightful desert” rather than the “tough meat” of the earlier chapters. But really it’s more like an aperitif, in the sense that it’s the time when backroom deals get made.

Keynes disclaims the priority of identification of any of the parts of the system he presented. Keynes claims rather he was just the first to tie all the parts together. By tying them together as a logical whole, he could make sure that the causal linkages close and the dimensional analysis checks out. Keynes predecessors who stumbled on bits of this system also usually happened to be of two kinds: 

1. extremely practical statesmen and 

2. baffling cranks. 

This is a new point of view for a long established fact. So-called “deviant” or “heretical” economic viewpoints throughout history have happened to line up with the practical advice of the folks running the state.

‘Cranks’ are the far side of another famous Keynes quote: “the hard part is getting out from under old ideas” not coming up with new ideas. The Crank is, to put it mildly, someone who is already out from under old ideas. They are in fact so far out from under so many old ideas that they become either wildly wrong, stubbornly difficult to communicate with, or both at once.

Despite this, Keynes fucking loves Cranks. That’s an extremely good thing about him! Keynes likes Cranks because they are a source of Random Variation in intellectual evolution. And if used right, that Random Variation can help a body of thought trying to advance rapidly. Through Random Variation, large jumps of logic get produced, and then either whittled down by selection, or identified as features mis-perceived or mis-argued in the existing framework.

But who are the Cranks? A Crank is just the “organic intellectual” of any kind of person sufficiently practical or impractical that they find themselves at odds with the “mainline scholarship” of their era. “Organic intellectual” is Gramsci’s term, a way to talk honestly and fairly about the scribbling portion of every social class and stratum– even as a peasant, “One becomes a priest or a bandit.”. When the mainline scholarship gets too obviously wrong — or recommends too impracticable policy — Cranks have their chance to shine. They start being able to score points off of the mainliners, and eventually there’s a crackdown or a social crisis within or about the discipline.

There is, though, a parallel between the process of Cranks and the best truth discovery process that predates modern science: dialectic. For Socrates, figures like Euthyphro and Thrasmychus are Cranks, social science cranks. They argue that evil is good and everything is evil, respectively. But it is exactly because Socrates was forced into an extreme position by tangling with Thrasmychus that Πολιτεία [the original Greek at Trombley’s insistence] has bite. In Due nuove scienze, Galileo uses both engineering folklore and Aristotlean reasoning as his Cranks. Today we see who Keynes uses.

The ability to distinguish the wildly wrong Crank from the insightful but stubbornly difficult to communicate with Crank is the highest mark of taste in a scientific — and especially social scientific — context. To figure out if there’s anything to a Crank’s point, you have to 1.actually dig in and follow their system and 2. have a sufficiently strong grasp on one’s own system that you can identify what is living and what is dead in the other’s.

In my opinion, bothering to give credit to cranks as someone at the forefront of your field is the absolute height of good taste. Whatever issues their systems had, the best cranks really do put in the hours. If one is swinging for the fences and playing for the ages, and if your gambit works!, then those cranks will get to hang a harmless jersey up in the rafters of the literature too, forever. Too many people fail to give cranks their due. It is true that Cranks do, often, inspire irritating and monomaniacal followers, but so do most things worth paying attention to. Keynes in this chapter is here to celebrate reason, not social forms.

But Keynes also loves to reconcile the less-than-fully-formed doctrines of “practical folks” with the economic literature, in order to show the obvious faults in the latter. This violates a traditional code among historians of economic thought: Never Admit That The Practically Right Could Also Be The Theoretically Right. Ricardo’s theory that replacement cost of gold is the sole and invariable stabilizer of currency value is not practically right, but you’re not supposed to admit this entails that his critics had a theoretical point.

In today’s chapter, Keynes takes on the question of why, historically, maintaining a surplus in the balance of payments — for technical reasons relating to international settlement, that meant accumulating gold bullion — was seen as critical to effective statecraft, despite economists historically warning against it in favor of free trade.

Since Keynes’ theory claims to explain all of the underlying dynamics that each of the more crank theories identify that are at variance with Ricardo and them, he needs to be able to explain where he agrees and where he disagrees with all of the relevant cranks.

Keynes’ system is simple once identified, but complicated to demonstrate: since employment comes from demand and demand comes from consumption and investment, the main risks to employment and growth are insufficient consumption or insufficient investment. Getting to sufficient consumption is a question of gross labor income weighted by propensity to consume that income. Getting to sufficient investment is a question of keeping the Schedule of Marginal Efficiency of Capital (the expected yield on new capital goods) above the Rate of Interest (the expected yield on debts).

The thing is, the Keynesian system works so well that it’s actually empirically relatively easy to stumble on certain successful descriptions of the economy’s working. The thing is though, it’s hard to stumble on all of them at once. In the absence of a network of good-faith scholars to build a real research program around, these cranks then fill in the gaps in their own knowledge different ways, but rarely with the best arguments or equipment.

So who are the Cranks here who have seen through to parts of Keynes’ system throughout history? And what parts of it did they get?

1. The Ancient Statesmen got that when interest rates were too high, it made everyone poor and slowed the economy, so they enacted usury laws.

2. The Mercantilists got two weird parts: first, lower interest rates lead to higher investment and second that businesses have “liquidity preference” type issues around producing and holding inventories of goods. They then knitted these two facts together — one problem of the inducement to invest and another of the business cycle — into a common policy prescription: sell domestic wares for foreign gold so that financial conditions will loosen. We will have a lot more to say about them below though.

3. Silvio Gesell got that a tax on liquid wealth was essentially the same as a negative interest rate, and could be employed with the same effect as lowering interest rates, either in stimulating household consumption or dissuading firms from the maintenance of large sinking funds.

4. Mandeville got that if elites spent more money throwing better parties, then the jobs and demand involved would produce enough effective demand keep the domestic economy moving and all its workers employed, much to the chagrin of bourgeois or religious notions of personal morality.

5. Malthus got that a major cause of depression was jobs disappearing because people were too broke to buy things, which then made more people too broke to buy things, which then led to more jobs disappearing.

6. Hobson got that “excessive” domestic saving could easily hamstring consumption without creating domestic investment, thereby leading to apparent “overproduction” which is really under-consumption. He also got that this got worse as the distribution of income gets more skewed. He also got the sort-of unrelated point that if you do too much outbound FDI relative to domestic investment, you can effectively artificially tighten domestic financial conditions.

The problem is, relying on these prior theories involves relying on a lot of assertions that either aren’t true, or are neither desirable nor necessary for the limits to explanatory fidelity the ill-formed parts of crank theories enforce. So Keynes’ goal is to show how his theory subsumes, extends, situates, and corrects all of these approaches.

This is a hugely important thing to do for philosophy of science reasons: a new General Theory needs to show how it can plausibly re-derive successful descriptions from previous paradigms while showing how the limits of those past paradigms are sublated by the description from higher generality. This is what Keynes does.