Tuesday, December 16, 2008

Keynes' General Theory As A Long Period Theory

The following paragraph appears in Chapter 5 of The General Theory of Employment Interest and Money:
"If we suppose a state of expectation to continue for a sufficient length of time for the effect on employment to have worked itself out so completely that there is, broadly speaking, no piece of employment going on which would not have taken place if the new expectation had always existed, the steady level of employment thus attained may be called the long-period employment corresponding to that state of expectation. It follows that, although expectations may change so frequently that the actual level of employment has never had time to reach the long-period employment corresponding to the existing state of expectation, nevertheless every state of expectation has its definite corresponding level of long-period employment."
It seems to me that this passage is important in an interpretation of Keynes as claiming that his theory applies in both the long and short periods. Even if the capital equipment in the economy were adjusted to effective demand, Keynes claims, the labor force need not be fully employed.

I think this reading is strengthened by a couple of considerations. One should distinguish between the full utilization of capital equipment and full employment. Distinguishing between these concepts makes most sense if one has dropped the idea of substitution between capital and labor. Likewise, one should drop the idea that the (long run) interest rate equilibrates savings and investment. But the dropping of these ideas is one result of the Cambridge Capital Controversies. On the other hand, it is not clear that Sraffa accepted Keynes' Chapter 17, another important locus for a long period interpretation of Keynes' General Theory.

I conclude with a couple of important Sraffian references on this issue. I could probably find some more recent. But I think Milgate (1982) and Eatwell and Milgate (1983) are key texts in this controversial area (even though I haven't read them in years).

  • John Eatwell and Murray Milgate (editors) (1983) Keynes's Economics and the Theory of Value and Distribution, Duckworth
  • Murray Milgate (1982) Capital and Employment: A Study of Keynes's Economics, Academic Press


BruceMcF said...

Indeed, this ties in with both Polyani's idea of fictitious commodities and the knotty category of commodities not produced with commodities in Sraffa's theory.

In this hypothetical long period state of employment (unlike the short period state of employment, note that this long period state of employment is not an observable), genuine commodities used to produce commodities ... capital equipment ... will be fully employed, but fictitious commodities used to produce commodities ... labor and natural resources ... need not be, since the fictitious commodities are not, in fact, produced in order to serve as products for sale in markets.

Robert Vienneau said...

An interesting observation. Certainly the prices of produced and non-produced commodities play different roles in Sraffa's book. I gather Bruce is referring to Karl Polanyi's The Great Transformation: The Political and Economic Origins of Our Time, for example, in Chapter 6.