To understand what drives economy and society today, we need to look beyond those “pretty, polite techniques which try to deal with the present by abstracting from the fact that we know very little about the future”. In doing so, we can learn from the efforts of some giants of an earlier era. John Maynard Keynes, magnum opus, The General Theory, was his effort to understand the drivers of the Great Depression. It is a difficult book, and rarely read today.
Keynes subsequently published a distillation of his core ideas in an (also rarely read) 1937 article in the Quarterly Journal of Economics. As he put it early in that article, “I am more attached to the comparatively simple fundamental ideas which underlie my theory than to the particular forms in which I have embodied them….” I first read the QJE piece almost a half-century ago. It remains one of the greatest academic articles I have ever read; it speaks directly to our times. Here are some highlights:
“We have as a rule only the vaguest idea of any but the most direct consequences of our acts. Of all human activities which are affected by this remoter pre-occupation it happens that one of the most important is economic in character, namely, Wealth. The whole object of the accumulation of Wealth is to produce results, or potential results, at a [distant] date. Thus the fact that our knowledge of the future is fluctuating vague and uncertain, renders Wealth a peculiarly unsuitable subject for the methods of the classical economic theory.
“By ‘uncertain’ knowledge, I do not mean merely to distinguish what is known for certain from what is only probable. The sense in which I am using the term is that….we simply do not know. Nevertheless, the necessity of action and for decision compels us as practical men to do our best to overlook this awkward fact….”
“[Given the above, our] theory of the future, being based on so flimsy a foundation, is subject to sudden and violent changes. The practice of calmness and immobility, of certainty and security, suddenly breaks down. New fears and hopes will, without warning, take charge of human conduct…..”
“I accuse the classical economic theory of being one of these pretty, polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the future.”
“It is not surprising that the volume of [private] investment should fluctuate widely from time to time. For it depends on judgments about the future which do not rest on an adequate or secure foundation..”
“Given the psychology of the public, the level of output and employment as a whole depends on the amount of investment. I put it in this way, not because this is the only factor on which aggregate output depends, but because it is usual in a complex system to regard as the causa causans that factor which is most prone to sudden and wide fluctuation….. Of the several factors which [influence] aggregate output, it is those which determine the rate of investment which are most unreliable, since it is they which are influenced by our views of the future about which we know so little.”