Commentary on Keynes' General Theory, part 2: Book I (Introduction): Chapter 1 (The General Theory)

Book I : Introduction

• Chapter 1: The General Theory
• Chapter 2: The Postulates of the Classical Economics
• Chapter 3: The Principle of Effective Demand

Chapter 1 ("The General Theory") is extremely short (a single page), so we can quote it in full:

I have called this book the General Theory of Employment, Interest and Money, placing the emphasis on the prefix general. The object of such a title is to contrast the character of my arguments and conclusions with those of the classical¹ theory of the subject, upon which I was brought up and which dominates the economic thought, both practical and theoretical, of the governing and academic classes of this generation, as it has for a hundred years past. I shall argue that the postulates of the classical theory are applicable to a special case only and not to the general case, the situation which it assumes being a limiting point of the possible positions of equilibrium. Moreover, the characteristics of the special case assumed by the classical theory happen not to be those of the economic society in which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience.

Footnotes (in the original text)

1. “The classical economists” was a name invented by Marx to cover Ricardo and James Mill and their predecessors, that is to say for the founders of the theory which culminated in the Ricardian economics. I have become accustomed, perhaps perpetrating a solecism, to include in “the classical school” the followers of Ricardo, those, that is to say, who adopted and perfected the theory of the Ricardian economics, including (for example) J. S. Mill, Marshall, Edgeworth and Prof. Pigou.

We make the following two comments:

• The "general" in The General Theory serves to contrast Keynes' theory with what he calls the classical theory. According to Keynes, the classical theory is only applicable to a special case and not to the general case.
• Keynes argues that the characteristics of the special case assumed by the classical theory are not applicable to the prevailing economic situation (circa the 1935).

Three questions must be borne in mind constantly as we go through The General Theory:

• Does Keynes accurately describe the alternative, or indeed alternatives, to his General Theory?
• Do the postulates of the alternative, be it the so-called classical theory or some other alternative, indeed apply only to a special case?
• Do the characteristics of the alternative differ from those of the prevailing economy (circa 1935, OR circa 2008 for that matter)?

At all times we must closely examine the premisses and basic assumptions of both Keynes' theory and other alternatives.

A final comment. It's not clear to me what Keynes means when he says: "I shall argue that the postulates of the classical theory are applicable to a special case only and not to the general case, the situation which it assumes being a limiting point of the possible positions of equilibrium." Specifically the second part of the sentence: "...the situation which it assumes being a limiting point of the possible positions of equilibrium." What is "it": The "classical theory"? The "special case"? Or the "general case"? And what is "a limiting point of the possible positions of equilibrium"? Presumably this will be clarified as we read on. We shall see. We shall certainly come back to this sentence.