Sunday, March 27, 2011

Tyler Cowen on Keynes' General Theory: Chapter Four

I have been following Professor Cowen's discussion of Keynes' General Theory with some interest, and found his post on chapter 4 particularly provocative. Cowen claims that this chapter attempts to address the problems raised by Hayek concerning capital theory. A few thoughts:

(1) I am not sure how this chapter destroys Austrian capital theory; Keynes' more immediate concerns appear to me to be quite different.

(2) Keynes is concerned in this chapter rather with the volume of current output, and not its money value. This is important because in chapter 6 (Income, Saving, Investment) Keynes shows that value is not difficult to measure; only volume is. (Thus the equation A + G - A1. G measures the value of equipment.)

(3) With volume thus occupying a predominant position, Keynes next concerns himself with the question of net output (viz. physical additions to the capital stock). This of course is difficult to calculate because capital is heterogeneous. Thus Keynes proposes that we deal with this "as for example when all the items of one output are included in the same proportions in another output."

(4) The measures proposed by Keynes concerning the problem of net output are "quantities of money-value" and "quantities of employment." For Keynes, money-value is "strictly homogeneous," and labor "can be made so."

(5) Now in trying to understand how Keynes attempts to make labor homogeneous, it is important to refer back to his chapter 2 (postulates of classical economics). It will be recalled that Keynes abandoned only one of the postulates, namely, "the utility of the wage when a given volume of labour is employed is equal to the marginal disutility of that amount of employment." Keynes shows this to be false. However, Keynes retained the presumed validity of the first postulate, namely, "the wage is equal to the marginal product of labour." We can see now why he chose to do this. Keynes' unwillingness to abandon postulate 1 in the classical theory can be traced to his need to measure changes in output, and he could do this only by assuming that labor is homogeneous. In support of this view, please consider this passage:

"This assumption of homogeneity in the supply of labour is not upset by the obvious fact of great differences in teh specialised skill of individual workers and in their suitability for different occupations. For, if the remuneration of the workers is proportional to their efficiency, the differences are dealt with by our having regarded individuals as contributing to the supply of labour in proportion to their remuneration. ... We subsume, so to speak, the non-homogeneity of equally remunerated labour units in the equipment, which we regard as less and less adapted to employ the available labour units as output increases, instead of regarding the available labour units as less and less adapted to use a homogeneous capital equipment" (pages 41-42, emphasis mine).

However, I follow Shackle in his abandonment of both of the postulates of classical economics, and I think Keynes was wrong in retaining the first postulate. But we can see why Keynes chose to do so; it was essential for chapter 4.

I think Tyler Cowen missed the whole point of this chapter. But this is just my reading. I would urge Professor Cowen to try to tie in the various arguments from different chapters into the one he is currently considering; you cannot read chapter 4 in isolation. It is very important to know how it relates to chapters 2 and 6, and possibly many others.

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