Keynes: Economics = Psychology

Having recently acquired (through work) an iPad, I've downloaded a lot of free or inexpensive e-books, and made some attempt at reading a few of them on the system. It's not quite like a physical book, but it's not a bad experience. There have been some formatting or editing issues (presumably because the originals were scanned and turned into text via OCR) - but sometimes you see copy-editing errors in a physical book as well. It means it's slightly less ideal than the "real thing", but I don't think I've running into anything that prevents communication of the author's intent.

Among the books are many that I've long had some desire to read, but never got around to looking up in a store or library - it's easier (or perhaps just implies less commitment) to download them than to go out searching. One of these was the original 1935 book by economist John Maynard Keynes, "The General Theory of Employment, Interest and Money", which led to the so-called Keynesian philosophy in US monetary and economic policy in the mid 20th century. Keynes wrote in the context of the Great Depression, which the world was experiencing at that time, and while much of what he says can be hard to understand, it surely has some relevance to the modern "Great Recession" the world has been going through for the last few years. Below I'll quote some parts of the text I found particularly enlightening, without a lot of comment from me on the matter since to say anything knowledgeable on this would require more familiarity with other economic schools of thought than I possess.

I do want to make a couple of comments first though, just from my perhaps naive perspective and experience. One of the central themes of Keynes seems to be a certain contrarianism - arguing that "saving" is not necessarily good for an economy, while "consumption" (the "propensity to consume") is better. At face value this seems to imply "thrift" is bad, and "waste" is good, and that consumerist philosophy really has been absorbed deeply into the American psyche since Keynes' time. I think what Keynes was arguing was that, given a collection of resources and capital assets (people, factories, land, etc.) the economic numbers are definitely better if all the resources are as fully employed as possible, even with some waste, then if some are left idle from some puritan sense of self-negation among the people who do have money to spend. Keynes' goal - a worthy one in the context of the Great Depression - was full employment of the people. But I think a better goal that might bring all economic philosophies into better agreement is full *worthwhile* employment, not just full employment.

That is, there are surely many different solutions to the problems of economics in the differing systems of markets, laws, customs, taxes and so forth that exist from one country to another, and some that have never been tried. Full employment may be just as possible in a system of great waste and (on the subject I write about most often) fueled by fossil resources, as in a system of great efficiency fueled by the sun and wind. One of these choices is better than the other for reasons that have nothing to do with the size of the economy. As Keynes notes repeatedly in his text, the essential parameters of economics are governed by *psychology*, the choices of the people, and not by any immutable laws.

The second comment I want to make is that much of what Keynes writes about seems (to me as a physicist) dreadfully "ad hoc". His definition of "money", for instance, includes some things and excludes others seemingly arbitrarily, and yet determines important quantities such as the rate of interest. He starts to delve into the fundamentals of what these particular quantities really mean in chapter 17, "The essential properties of interest and money", looking at alternative "house-rate of interest" or "wheat-rate of interest" values, and what it would take for a commodity to be a "standard of value" (like money). But fundamentally it still feels like there's some pieces missing in getting a full description of what, in the physical real world, the components of an economy really represent and how they are constrained. Maybe some other economist has written the treatise I'm looking for; in general Keynes, while very interesting, did not satisfy my desire to understand what economics is all about.

Now for some selected quotes...

(from the Preface)

It is astonishing what foolish things one can temporarily believe if one thinks too long alone, particularly in economics

(Chapter 10, part VI)

For a man who has been long unemployed some measure of labor, instead of involving disutility, may have a positive utility. [...]
"wasteful" loan expenditure may nevertheless enrich the community on balance. Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better.

(Chapter 10, part VI)

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.
The analogy between this expedient and the goldmines of the real world is complete. At periods when gold is available at suitable depths experience shows that the real wealth of the world increases rapidly; and when but little of it is so available, our wealth suffers stagnation and decline. Thus gold-mines are of the greatest value and importance to civilization, just as wars have been the only form of large-scale loan expenditure which statesmen have thought justifiable, so gold-mining is the only pretext for digging holes in the ground which has recommended itself to bankers as sound finance; and each of these activities has played its part in progress-failing something better.

(Chapter 12, part V)

Thus the professional investor is forced to concern himself with the anticipation of impending changes, in the news or in the atmosphere, of the kind by which experience shows that the mass psychology of the market is most influenced. This is the inevitable result of investment markets organized with a view to so-called "liquidity". Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of "liquid" securities. It forgets that there is no such thing as liquidity of investment for the community as a whole. The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment to-day is "to beat the gun", as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow.

(Chapter 12, part VI)

These tendencies are a scarcely avoidable outcome of our having successfully organized "liquid" investment markets. It is usually agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of Stock Exchanges. [...] The introduction of a substantial Government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise in the United States.

(Chapter 18, part I)

Thus we can sometimes regard our ultimate independent variables as consisting of (1) the three fundamental psychological factors, namely the psychological propensity to consume, the psychological attitude to liquidity and the psychological expectation of future yield from capital-assets, (2) the wage-unit as determined by the bargains reached between employers and employed, and (3) the quantity of money as determined by the action of the central bank; so that, if we take as given the factors specified above, these variables determine the national income (or dividend) and the quantity of employment.

(Chapter 21, end of part III)

Too large a proportion of recent "mathematical" economics are mere concoctions, as imprecise as the initial assumptions they rest on, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols.

(Chapter 23, part VII)

The text of the Fable of the Bees is an allegorical poem - "The Grumbling Hive, or Knaves turned honest", in which is set forth the appalling plight of a prosperous community in which all the citizens suddenly take it into their heads to abandon luxurious living, and the State to cut down armaments, in the interests of Saving

(Chapter 23, part VII)

Mandeville concludes:

The great art to make a nation happy, and what we call flourishing, consists in giving everybody an opportunity of being employed; which to compass, let a Government's first care be to promote as great a variety of Manufactures, Arts and Handicrafts as human wit can invent; and the second to encourage Agriculture and Fishery in all their branches, that the whole Earth may be forced to exert itself as well as Man. It is from this Policy and not from the trifling regulations of Lavishness and Frugality that the greatness and felicity of Nations must be expected; for let the value of Gold and Silver rise or fall, the enjoyment of all Societies will ever depend upon the Fruits of the Earth and the Labor of the People; both which joined together are a more certain, a more inexhaustible and a more real Treasure than the Gold of Brazil or the Silver of Potosi.

(Chapter 24, part I)

The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.

(Chapter 24, part I)

I believe that there is social and psychological justification for significant inequalities of incomes and wealth, but not for such large disparities as exist today. There are valuable human activities which require the motive of money-making and the environment of private wealth-ownership for their full fruition. Moreover, dangerous human proclivities can be canalised into comparatively harmless channels by the existence of opportunities for money-making and private wealth, which if they cannot be satisfied in this way, may find their outlet in cruelty, the reckless pursuit of personal power and authority, and other forms of self-aggrandizement. It is better that a man should tyrannize over his bank balance than over his fellow-citizens; and whilst the former is sometimes denounced as being but a means to the latter, sometimes at least it is an alternative. But it is not necessary for the stimulation of these activities and the satisfaction of these proclivities that the game should be played for such high stakes as at present. Much lower stakes will serve the purpose equally well, as soon as the players are accustomed to them. The task of transmuting human nature must not be confused with the task of managing it. Though in the ideal commonwealth men may have been taught or inspired or bred to take no interest in the stakes, it may still be wise and prudent statesmanship to allow the game to be played, subject to rules and limitations, so long as the average man, or even a significant section of the community, is in fact strongly addicted to the money-making passion.

(Chapter 24, part V)

Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.


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Hi Arthur, Have you read "The

Hi Arthur,
Have you read "The Ecology of Commerce" by Paul Hawken? Having an economy humming along at full tilt may increase the wealth of the community, but it has profound costs. I wonder if anyone has attempted to construct an economic theory where full employment and sustainability were both possible. And if so, what would the society look like?

I believe I've heard of Paul

I believe I've heard of Paul Hawken, but I haven't read that. Thanks for the reference, I'll probably look it up.

It seems to me if sustainability is possible at all, and if full employment is also possible, they shouldn't be incompatible. But I certainly don't know how economic theory would deal with it.