[A background search on] A letter by Keynes to Ralph Hawtrey

자료 1: Maynard Keynes: An Economist's Biography (2nd edn. D.E. Moggridge, Psychology Press, 1995)

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Although 1930 and 1931 were dominated by the slump, the ensuing financial crisis and Keynes's attempts to shape events through the Macmillan Committee, the Economic Advisory Council and other private and public persuasin, they were also the years during which professional economists absorbed and reacted to ^A Treatise on Money^. The reactions were such that on 1 November 1931, an week before he signed the Preface to ^Essays in Persuasion^, he wrote to J.A. Hobson, the heretic economists whose books Keynes had regarded with orthodox disdain [f] in the years before 1914:

In due course, I must be at pains to expound the whole matter again from the bottom upward in a manner better calculated to catch the attention of minds habituated to other channels of thought. [32]

A month later, he was even more explicit to Nicholas Kaldor, then a research student at LSE:

Well, I must be more lucid next time. I am now endeavouing to express the whole thing over again more clearly ^and from a different angle;^ and in two years' time I may feel able to publish a revised and completer version.(Italics added) [33]

Over the ensuing months he would make similar statements to Japanese readers of the ^Treatise^ and to Ralph Hawtrey. [34] Keynes was remarkably quick in abandoning much of his ^magnum opus^, the product of six years. Why had he done so?

When Keynes had finished the ^Treatise^ in Sepmtember 1930, he had not been completely happy with it. As he told his mother: 'Artistically it is a failureㅡI have changed my mind too much in the course of it for it to be a proper unity'. He told his readers much the same thing:

I could do it better and much shorter if I were to start again. I feel like someone who has been forcing his way through a confused jungle. Now that I have emerged from it, I see that I might have taken a more direct route. [35]

It was a large step, however, from saying that one might express the same ideas more straightforwardly, or even to say, as he did to Hobson, that he might take more account of his readers' preconceptions, than to say that he was working it out '^from a different angle^' that would take a matter of years to develop. That he had decided to do so reflected the reception of the ^Treatise^ by his professional colleagues.

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(... ...) invitation, with undergraduates wishing to receive invitatios having to satisfy an interviewing board of Richard Kahn, Austin Robinson and Piero Sraffa. The discussions in Kahn's rooms and the 'seminar' in Trinity took on the name of 'the Circus', presumably not because it was a travelling show of performing animals, acrobats and clowns but because it met the alternative dictionary definition of a scene of lively action and a group of people engaged in common activityㅡin this case trying to understand and, later, to criticise the ^Treatise^. Keynes did not take part. Rather, Richard Kahn played in Margaret Meade's words, descrbing a later occasion, the role of messenger angel 'who brought messages and problems from Keynes to the "Circus" and who went back to heaven with the results of our deliberations'. [39] The theoretical overtones seem to have been there from the beginning: in autumn of 1930 Keynes began referring to Richard Kahn in his letters to Lydia as 'the little priest'.[40]

The comments and criticisms that Keynes received from these different sources varied. In many cases, however, they reinforced each other. However, if they came from outside, and they were taken up or echoed by members of the Circus or merely by Richard Kahn, who from this time forward was Keynes's intellectual confessor on economic-theoretical issues, they were more likely to strike home. Kahn's role in the process was critical, for he could as a fellow of Kings nag Keynes constantly over the points at issues until the latter saw where the problem lay.[8] From Circus-induced dissatisfaction to the beginnings of creation, where Kahn played an important role, was but a short step.

To be effective, the comments had to create dissatisfaction with the theoretical sections of the ^Treatise^. It was on those sections that Keynes's practical analysis of contemporary events had come to depend, as he had emphasised and reemphasised during 1930-31. Even before publication, in the comments that Keynes did not have time to consider fully, Ralph Hawtrey had pointed out that 'Mr Keynes' formula, the fundamental equations' was a tautology. Keynes could not use the equations to suggest that an excess of investment over savings ^caused^ a rise in prices relative to costs, since he had defined savings and investment in such a way that the existence of such an excess meant that prices had risen.[41] Hawtrey also argued that the analysis of the ^Treatise^ assumed that changes in prices relative to costs occurred without any change in output.[42] Such a rigid assumption, which was challenged by the Circus with its discovery of the 'widow's cruse fallacy', [h] was well within the conventions of traditional monetary theory, but hardly seemed suitable for explaining the events of 1929-31. Keynes reflected the tradition as he he took Hawtrey's point: 

The question of ^how much^ reduction of output is caused by a realised fall of price or an anticipated fall of prices, is important, but not strictly a monetary problem.

  I repeat that I am not dealing with the complete set of causes which determine [the] volume of output. For this would have led me an endlessly long journey into the theory of short-period supply and a long way from monetary theory;ㅡthough I agree that it will probably be difficult in future to prevent monetary theory and the theory of short-period supply from running together. If I were to write the book again I should probably attempt to probe further into the difficulties of the latter, but I have already probed far enough to know what a complicated affair it is. [43]

[h] The reference is to ^JMK^, V, 125; 'Thus profits, as a source of capital increment for entrepreneurs, are a widow's cruse which remains undepleted however much of them may be devoted to riotous living'.

Hawtrey did not make all the running. Dennis Robertson, who was having growing difficulties with the book in 1931, also had an impact. It was he, along with Richard Kahn, who picked up the dependence of the divergence between the behaviour of the prices of investment goods and the prices of consumption goods on Keynes's assumption that profits were not consumed. [i] If that assumption went, then if investment rose, consumption would also rise, with markedly different results. Finally Hayek, as well as echoing definitional problems raised by Robertson and Pigou and the tautological issues raised by Hawtrey, pointed out that Keynes's book lacked a theory of capital and interest. Unlike Wicksell's classic  ^Interest and Prices^(1898) Keynes never explained the determination of the natural rate of interest on which so much rested. Hayek noted that Keynes had tried to remedy this defect ^after^ developing his basic theory, but had put it badly. As Hayek asked,

Would not Mr Keynes have made his task easier if he had not only accepted one of the descendants of Boehm-Bawerk's theory, but had also made himself acquainte withe the substance of the theory itself? [44]

All of this criticism, and I have touched only on the most important points, was disappointing. In some cases, as with Hawtrey over output or with Hayek over capital theory, Keynes accepted the criticism. [45] On other points, however, he vigorously defended his positin before giving way or before the discussion bogged down in terminological controversy as he and his critic talked past each other asking in a Moorite way 'Exactly what do you ^mean by that?^'. On one occasion he unfairly counterattacked, turning his reply into a review of Hayek's recent book ^Prices and Production^(1931) [j] :

The reader will perceive that I have been drifting into a review of Dr Hayek's ^Prices and Production^. And this being so, I should like, if the editor will allow me, to consider this book a little further. The book, as it stands, seems to me to be one of the most frightful muddles I have ever read, with scarcely a sound proposition in it beginning with page 45, and yet it remains a book of some interest which is likely to leave its mark on the mind of the reader. It is an extraordinary example of how, starting with a mistake, a remorseless logician can end up in Bedlam. Yet Dr Hayek has seen a vision, and though when he woke up he has made nonsense of his story by giving the wrong names to the objects which occur in it, his Hubla Khan is not without inspiration and must set the reade thinking with the germs of an idea in his head.[46]

{{
Perhaps it was a reaction to Keynes's belief, noted on his copy of Hayek's review:

Hayek has not read my book with that measure of 'good will' which an author is entitled to expect of a reader. Until he can do so, he will not see what I mean or know whether I am right. [47]

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At the same time as these criticisms came hints of an alternative focus which would successfully take account of movements in output and prices. In August 1930, just before Keynes finished the ^Treatise^, Richard Kahn, puzzled by Chapter 6 of ^Can Llyod George Do It?^ which dealt with the amount of employment that would be provided by the Liberal proposals, developed a framework for for analysing the ultimate impact on aggregate employment of government expenditure on a public works project (now known as the employment multiplier). As noted above, he presented his early results to the Committee of Economists. In the months that followed, in conjunction with Colin Clark of the EAC and James Meade, Kahn worked out their implications more fully before publishing them in the ^Economic Journal^ for June 1931 under the title 'The Relation of Home Investment to Employment'. Kahn's article had two implications for Keynes's later work. Focusing on the supply curves for output as a whole, Kahn realised that the ^Treatise^s fundamental equations represented a limiting case: Keynes had assumed that output as a whole was inelastic to changes in demand. Relaxing that assumption would, as Hawtrey had also realised markedly affect the analysis and be [']very much closer to the actual conditions that prevail today [1931]', although neither Hawtrey in 1930 nor Kahn in 1931 perceived how much that difference would be. [49] Kahn also, inspired by James Meade, provided in 'Mr Meade's Relation' an outline statement of the resources available for this additional investment when the supply of output less than completely elastic to demand changes. The complete argument ad its corollaries were not yet clear to Kahnㅡmuch less to Keynesㅡand would not be for some time.

Kahn was not the only to discover the multiplier and not to understand its implications. Away from the discussions we are concerned with, L.F. Giblin, Ritchie Research Professor in the University of Melbourne, had sketched out the notion in his May 1930 inaugural lecture, ^Australia 1930^, but neither he nor his colleagues appreciated the importance of his contribution. Closer to Cambridge, Ralph Hawtrey had stumbled on the multiplier in an unpublished discussion of the transfer problem that could have helped Keynes in his 1929 discussions with Ohlin. [50] In his comments on the proof sheets of the ^Treatise^ Hawtrey had provided a numerical example of the multiplier, with leakages into savings and income adjusting to equilibrate saving with a new level of investment. He elaborated his example in a January 1931 paper for the Macmillan Committee, but then removed crucial elements of the analysis in his published paper on the ^Treatise in The Art of Central Banking^ (1932). Yet whether Hawtrey's papers influenced Keynes, as Eric Davis has strongly claimed,[51] or even proved seggestive, is, as Peter Clark argues, unascertainable. Hawtrey did, however, earn a place in the history of economics, 'notably as the man who, having stumbled upon it[the multiplier], painstakingly suppressed news of its discovery in his subsequent publications', which were completely uninfluenced by yhr notion.[52]

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자료 2: The Making of Keynes' General Theory (R.F. Kahn, Cambridge University Press, 1984)

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The astonishing thing about the ' "widow's cruse" fallacy' is that a considerable section of the two volumes of the Treatise are devoted to fluctuations in the rate of investment and the credit cycle. For example, Chapter 20 is 'An Exercise in the Pure Theory of the Credit Cycle'ㅡ

an essay in the internal mechanics of the price-wage-employment structure during the course of a cycle which represents a recovery in the volume of employment from a preceding slump which has reached an equilibrium between prices and costs of production, but is still characterised by unemployment.[1: Keynes, vol. v, p. 274]

(This chapter comprises an elaborate sequence analysis. It explains why some economists regard the ^Treatise^ as ㅡin some respectsㅡsuperior to the ^General Theory^.)

I do not see how weㅡmembers of the Circusㅡcould have attributed to Keynes the assumption of inelastic supply, and I am completely mystified by the questions:

a) why we did not see this for ourselves;

b) why it did not come out in the course of the discussions between Keynes and me, on one of the occasions when I reported on difficulties which had arisen in discussions at the Circusㅡthe upshot of which I would have reported back to the other members of the Circus.

The mystery is enhanced by Moggridge's discovery of a memorandum enclosed in a letter from Keynes to Ralph G. Hawtrey dated 28 November 1930, ten weeks after Keynes had completed the ^Treatise^ and less than a month after publication.[2] Keynes was dealing in the form of a nine-page memorandum with a large number of criticisms by Hawtrey of the proofs which Keynes had not had time to deal with before publication.

The question ^how much^ reduction of output is caused [...] is important, but not strictly a monetary problem. I have not attempted to deal with it in my book, though I have done a good deal of work at it. I am primarily concerned with what governs ^prices^.[3: ^Letter^ to Ralph G. Hawtrey, 26 November 1930; published in KEYNES, vol. XIII, pp. 139-49 (quotation on p. 145) ]

And finally the following even more astonishing passage:

I repeat that I am not dealing with the complete set of causes which determine [the] volume of output. For this would have led me an endlessly long journey into the theory of short-period supply and a long way from monetary theory;ㅡthough I agree that it will probably be difficult in future to prevent monetary theory and the theory of short-period supply from running together. If I were to write the book again I should probably attempt to probe further into the difficulties of the latter, but I have already probed far enough to know what a complicated affair it is. [1: ibid., pp. 145-6] 

Of course the members of the Circus were completely unaware of this memorandum.

There is wide-spread agreementㅡthough not universalㅡas to the importance of the Circus in helping Keynes to make the transition from the ^Treatise^ to the ^General Theory^.

The Circus dissolved in May 1931ㅡthe examination priod. In June, Keynes attended in Chicago a Conference organised by the Harris Foundation and delivered three lectures on 'An Economic Analysis of Unemployment'.[2] The members of Circus were entitled to feel that Keynes was responding to their criticisms with remarkable speed and lucidity. A few quotations will make this clear, although the main inspiration was, as described by Keynes in his opening sentence, the fact that they were to-day "in the middle of the greatest economic catastropheㅡthe greatest catastrophe due almost entirely to economic causesㅡof the modern world'[3]ㅡa situation designed to give full play to Keynes' eloquence.

Keynes emphasised the unprecedently high level of the rate of investment through the worldㅡin the United States 'something prodigious and incredible' which had prevailed in 1928.

It seems an extraordinary imbecility that this wonderful outburst of productive energy should be the prelude to impoverishment and depression [...].
I see no hope of a recovery except in a revival of the high level of investment.[1]
[...] nothing, obviously can restore employment which does not first restore business profits. Yet nothing, in my judgment, can restore business profits which does not first restore the volume of investment, that is to say (in other words) the volume of orders for new capital goods [...].[2]
There can [...], I argue, be no secure basis for a return to an equilibrium of prosperity except a recovery of fixed investment to a level commensurate with that of the national savings in prosperous times [...].[3]
If our object is to remedy unemployment it is obvious that we must first of all make business more profitable. In other words, the problem is to cause business receipts to rise relatively to business costs [...].
The cumulative argrment for wishing prices to rise appears to me, therefore, to be overwhelming, as I hope it does to you. Fortunately many if not most people agree with this view.[4]

[1] KEYNES, vol. XIII, p. 349. [2] Ibid., p. 355. [3] Ibid., p. 358. [4] Ibid., p. 362. [5] Ibid. p. 364.

Keynes proceeded to advocate constructive 'programmes under the direct auspieces of the government or other public authorities'; and 'a reduction in the long-term rate of interest'.[5]

The drafting of these Harris Foundation lectures, delivered in June 1931, must of course have started while the Circus was operating. I repeat that the members of the Circus could claim that their influence was beginning to be revealed. As Moggridge has put it, 'the lectures saw Keynes giving much more attention to changes in output, rather than price levels, and giving hints of the idea of less than full employment equilibrium'.:[6] I would have written a much stronger word than 'hints'.

More than that, the lectures revealed a sense of mastery and confidenceㅡinferior however, to that achieved in March 1933 in ^The Means to Prosperity^.[7]

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(During the Circus period Keynes, apart from his normal heavy load, and apart from coping with a host of critics of the ^Treatise^, with the Circus and with preparing the Harris Foundation lectures, was helping to draft the Macmillan Report, including Addendum I, which was signed on 23 June 1931.)

In conclusion, there is a point of interest which Moggridge brings to light.[1] During the summer of 1931 Joan Robinson was working on her 'Parable on Saving and Investment', in which she dealt with some of the problems which had arisen at the Circus.[2] In the article she recorded that, as to the widow's cruse, Keynes had admitted the case against him. The proofs were not available to enable her to submit them to Keynes until 9 April 1932. Keynes encouraged her to publish without amendment. On the ‘“widow's cruse” fallacy’, he wrote on 14 April 1932:

I think you are a little hard on me as regards the assumption of constant output. It is quite true that I have not followed out the consequences of changes of output in the earlier theoretical part [...] I shall be doing it in my lectures; though that does not absolve me from being criticised for not having done it in my Treatise. But in my Treatise itself, I have long discussion with [?of] the effects of changes in output [...] Surely one must be allowed at a particular stage of one's argument to make simplifying assumptions of this kind.[3]

[3] ^Letter^ to Joan Robinson, 14 April 1932; published in KEYNES, vol. XIII, pp. 269-70 (the quotations on p. 270).

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