The General Theory Chapter 4 (part one of three parts)
Our Guest Blogger BF continues with The General Theory
We’ve said before that part of the reason GT makes for difficult reading today is because Keynes was groping to come up with definitions and measures for aggregate, or macro-economic concepts of the sort we take for granted today. In Chapter Four he takes on what he regards as key measurement issues – the measurement of aggregate output, capital and labour. Basically, this chapter justifies the units he bases his analysis on.
He starts with the question of defining real national income. Here a lot of the terminology is unfamiliar today: he talks about the concept of the national dividend, as Marshall and Pigou define it. As JMK puts it, the national dividend is a measure of the volume of output or real income, and not the value of output or money income. We would convert between the two by dividing aggregate nominal income by an aggregate price index, but JMK regards even the idea of a general price level as to vague to be of much use, and he’s definitely not a fan of efforts to measure it.
The measurement of the volume (quantity) as opposed to the value of national output becomes even more complicated when we try for a measure of net national income, allowing for, as he puts it, “wastage of the stock of real capital existing at the commencement of the period”. JMK’s fundamental objection here is that “the community’s output of goods and services is a non-homogeneous complex which cannot be measured, strictly speaking, except in special cases…”. So the way JMK set up the exposition in GT was driven by what he thought was, in some meaningful and practical way, measurable. There’s another tinge of irony here when you think that much of the development of national income accounting which came along after GT was aimed at making Keynesian economics practicable. (Not all of it – work on national income accounting was already underway when Keynes was writing, and we generally date serious efforts to measure national income and national wealth – two distinct though related concepts – in a systematic manner to the work of Sir William Petty back in the 17th century.)
Keynes goes on to talk about the difficulties of measuring capital in the aggregate. That’s the question which drove the Cambridge Capital Debates of the 1960s and 70s, Cambridge referring to Joan Robinson and her Keynesians at Cambridge UK and, on the other side, Paul Samuelson and the neoclassicals at Cambridge Massachusetts. The question was whether any kind of sensible measure of aggregate capital existed and whether the aggregate quantity of capital could be measured independent of the price of various types of capital. If there’s no sensible concept of the aggregate quantity of a thing called capital, aggregate production functions make no sense and neoclassical growth theory is pretty much meaningless. Ultimately the consensus of the profession was that Cambridge UK won the logical argument but that it turned out that it didn’t really matter after all. The best statement of the Cambridge UK position as it was then is probably Geoff Harcourt’s book Some Cambridge Controversies in the Theory of Capital. JMK also talks about the problem of measuring depreciation and of what we’d refer to as the problem of combining different vintages of capital in a single aggregate. But the upshot is that JMK is very skeptical of aggregate concepts.
“The proper place for such things as net real output and the general level of prices lies within the field of historical and statistical description, and their purpose should be to satisfy historical or social curiosity” for which perfect precision is unnecessary, unlike the case of JMK’s causal analysis, where precision is required. Elsewhere, JMK also expressed considerable skepticism about the value of the emerging discipline of econometrics (as Adam Smith expressed skepticism about Sir William Petty’s political arithmetic). If an aggregate concept’s going to be part of the General Theory it has to be meaningful and measurable.