How Flaws in the General Theory Render It Irrelevant to the Real World

Ezra Davar

Independent Researcher, Amnon VeTamar 4/12, Netanya, Israel.

DOI: 10.4236/me.2014.51011                

Abstract

This paper shows how flaws in Keynes’s General Theory render it irrelevant and inapplicable to real world. First of all, Keynes’s macro model is an incomplete and imprecise. Second, Keynes’s definitions of full employment, voluntary unemployment and involuntary unemployment are extremely vague and unfinished. Third, the Keynesian multiplier is based on the substitution of the cause (the national income) for the effect (investment); yet, the rate of the multiplier depends on the marginal propensity to invest; therefore, its genuine meaning is that requirement. Finally, and most importantly, Keynes’s money theory is incomplete and even incorrect.

Keywords

General Theory; Microeconomics; Macroeconomics; Effective Demand; Involuntary Unemployment; Multiplier; Money Theory

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1]	M. Blaug, “Second Thoughts on the Keynesian Revolution,” In: B. J, Caldwell, The Philosophy and Methodology of Economics III, Edward Elgar, 1993.
[2]	L. R. Klein, “The Keynesian Revolution,” Macmillan & Co LTD, London, 1952.
[3]	P. A. Samuelson, “The General Theory,” In: R. Lekachman, Ed., Keynes’ General Theory Reports of Three Decades, ST Martin’s Press Macmillan & CO LTD, New York, 1964.
[4]	R. Skidelski, “John Maynard Keynes,” Macmillan, London, 1996.
[5]	V. Chick, “Macroeconomics after Keynes: A Reconsideration of the General Theory,” The MIT Press, Cambridge, 1983.
[6]	R. W. Clower, “The Keynesian Counterrevolution: A Theoretical Appraisal,” In: F. H. Hahn and F. P. R. Brechling, Eds., The Theory of Interest Rate, Macmillan, London, 1965.
[7]	P. Davidson, “Interpreting Keynes for the 21st Century,” Palgrave Macmillan, New York, 2007. http://dx.doi.org/10.1057/9780230286559
[8]	G. C. Harcourt and P. A. Riach, “A ‘Second Edition’ of the General Theory,” Routledge, London, 1997.
[9]	J. R. Hicks, “Mr. Keynes and the “Classics”: A Suggested Interpretation,” Econometrica, Vol. 5, No. 2, pp. 147-159.
[10]	A. Leijonhufvud, “On Keynesian Economics and the Economics of Keynes,” Oxford University Press, New York, 1968.
[11]	J. C. W. Ahiakpor, “Classical Macroeconomics Some Modern Variations and Distortions,” Routledge, London, 2003.
[12]	F. A. Hayek, “Contra Keynes and Cambridge: Essays, Correspondence, Vol. IX, The Collected Works of F.”
[13]	H. Hazlitt, “The Failure of the ‘New Economics’,” Van Nostrand, Princeton, 1937.
[14]	B. W. Bateman, T. Hirai and M. C. Marcuzzo, “The Return to Keynes,” Harvard College, Harvard, 2010.
[15]	P. Davidson, “The Keynes Solution,” Palgrave Macmillan, New York, 2009.
[16]	P. Krugman, “How Did Economists Get It So Wrong?” The New York Times, 2009.
[17]	J. Stiglitz, “The Triumphant Return of John Maynard Keynes,” Project Syndicate, 2008. http://www.project-syndicate.org/commentary/stiglitz107
[18]	M. Hayes, “The Economics of Keynes: A New Guide to the General Theory,” 2010.
[19]	D. Patinkin, “Money, Interest, and Prices,” 2nd Edition, MIT Press, Cambridge, 1989.
[20]	P. Davidson, “A Keynesian View of Patinkin’s Theory, of Employment,” The Economic Journal, Vol. 77, No. 307, 1967, pp. 559-578.
[21]	F. H. Hahn, “On Involuntary Unemployment,” The Economic Journal, Vol. 97, 1987, pp. 1-16.
[22]	J. Robinson, “Economic Philosophy,” Anchor Books, New York, 1964.
[23]	A. H. Meltzer, “On Keynes and Monetarism,” Worswik & Trewithick, 1983.
[24]	T. Negishi, “History of Economic Theory,” North-Holland, New York, 1989.
[25]	J. M. Keynes, “The General Theory of Employment Interest and Money,” Macmillan, London, 1936-1960.
[26]	T. Negishi, “Microeconomic Foundations of Keynesian Macroeconomics,” North-Holland, New York, 1979.
[27]	E. R. Weintraub, “Microfoundations: The Compatibility of Microeconomics and Macroeconomics,” Cambridge University Press, New York, 1979. http://dx.doi.org/10.1017/CBO9780511559570
[28]	J. M. Keynes, “The Collective Writings of John Maynard Keynes,” In: D. Moggridge and S. T. Macmillan, Eds., The General Theory and After, Part II, Defense and Development, Martin’s Press, New York, 1973.
[29]	M. Blaug, “Economic Theory in Retrospect,” 5th Edition, Cambridge University Press, Cambridge, 1996.
[30]	L. Walras, “Elements of Pure Economics,” Allen and Unwin, London, 1954.
[31]	E. J. Amadeo, “Keynes’s Principle of Effective Demand,” Edward Elgar Publisher, Aldershot, 1989.
[32]	V. Chick, “The Nature of Keynesian Revolution: A Reassessment,” Australian Economic Papers, Vol. 17, No. 30, 1978, pp. 1-20. http://dx.doi.org/10.1111/j.1467-8454.1978.tb00607.x
[33]	E. Davar, “Unemployment: Voluntary and Involuntary,” ASSA 2001 Conference, Atlanta, pp. 1-21.
[34]	E. Davar, “The Genuine Meaning of Keynes’s Multiplier,” UK HET 2003 Conference, Leeds, 3-5 September 2003, pp. 1-25.
[35]	M. De Vroey, “The History of Macroeconomics Viewed against the Background of the Marshall-Walras Divide,” The 2003 HOPE Conference, 2003, pp. 1-32.
[36]	M. Morishima, “Walras’ Economics,” Cambridge University Press, Cambridge, 1977.
[37]	R. Layard, S. Nickell and R. Jackman, “Unemployment, Macroeconomics Performance and the Labour Market,” Oxford University Press, Oxford, 1994.
[38]	R. E. Lucas Jr., “Unemployment Policy,” The American Economic Review, Vol. 68, No. 2, 1978, pp. 353-357.
[39]	C. A. Pissarides, “Equilibrium Unemployment Theory,” Basil Blackwell, Cambridge, 1990.
[40]	J. B. Taylor, “Involuntary Unemployment,” In: J. Eatwell, M. Milgate and P. Newman, Eds., The New Palgrave Dictionary of Economics, Macmillan, Basingstoke, 1987, pp. 999-1001.
[41]	C. Shapiro and J. E. Stiglitz, “Equilibrium Unemployment as a Worker-Discipline Device,” In: N. G. Mankiw and D. Romer, Eds., New Keynesian Economics, The MIT Press, Cambridge, 1991, pp. 123-141.
[42]	J. D. Sachs and F. B. Larrain, “Macroeconomics in the Global Economy,” Prentice Hall, Englewood Cliffs, 1993.
[43]	O. Lange, “Price Flexibility and Employment,” The Principia Press, Bloomington, 1944.
[44]	N. G. Mankiw, “Macroeconomics,” 3rd Edition, Worth Publishers, New York, 1997.
[45]	L. L. Pasinetti, “Growth and Income Distribution: Essays in Economic Theory,” Cambridge University Press, Cambridge, 1974.
[46]	W. H. Stoddard, “The Algebra of John Maynard Keynes,” 2010. http://www.troynovant.com/Stoddard/Essays/Keynesian-Algebra.html
[47]	E. Davar, “Flaws of Modern Economic Theory: The Origins of the Contemporary Financial-Economic Crisis,” Modern Economy, Vol. 2, No. 1, 2011, pp. 25-30. http://dx.doi.org/10.4236/me.2011.21004
[48]	E. Davar, “Government Spending and Economic Growth,” The Finance and Business, No. 2, 2013, pp. 4-19.
[49]	J. C. W. Ahiakpor, “Classical Macroeconomics: Some Modern Variations and Distortions,” Routledge, London, 2003.
[50]	R. G. Hawtrey, “Capital and Employment,” Longmans, Green and Co., London, 1937.
[51]	E. Davar, “Input-Output Analysis and Contemporary Economics,” Lambert Academic Publishing, Saarbrücken, 2013.
[52]	K. D. Hoover, et al., “John Maynard Keynes of Bloomsbury: Four Short Talks,” Department of Economics, Duke University, Duke, 2009.
[53]	J. R. Hicks, “The Crisis in Keynesian Economics,” Basil Blackwell, Oxford, 1974.
[54]	R. Kahn, “The Relation of Home Investment to Unemployment,” Economic Journal, Vol. 41, No. 162, 1931, pp. 173-198. http://dx.doi.org/10.2307/2223697
[55]	D. Laidler, “Fabricating the Keynesian Revolution,” Cambridge University Press, Cambridge, 1999.
[56]	E. Davar, “The Renewal of Classical General Equilibrium Theory and Complete Input-Output System Models,” Avebury, Aldershot, Brookfield, Hong Kong, Singapore, Sydney, 1994.
[57]	J. R. Hicks, “IS-LM: An Explanation,” Journal of Post Keynesian Economics, Vol. 3, No. 2, 1980-1981, pp. 139154.
[58]	J. C. W. Ahiakpor, “Keynes and the Classics Reconsidered,” Kluwer, London, 1998.
[59]	M. Boianovsky and H. M. Trautwein, “Wicksell, Cassel, and Idea of Involuntary Unemployment,” History of Political Economy, Vol. 35, No. 3, 2003, pp. 385-436.
[60]	R. G. Lipsey, P. O. Steiner, D. P. Douglas and P. N. Courant, “Economics,” 9th Edition, 1990.
[61]	W. A. Darity Jr. and B. L. Horn, “Involuntary Unemployment Reconsidered,” Southern Economic Journal, Vol. 49, No. 3, 1983, pp. 717-733. http://dx.doi.org/10.2307/1058712
[62]	J. Viner, “Mr. Keynes on the Causes of Unemployment 1936, Comment on My 1936 Review of Keynes General Theory,” In: R. Lekachman, Ed., Keynes’ General Theory, Reports of Three Decades, St Martin’s Press, Macmillan & Co Ltd, London, 1964.
[63]	B. Sheehan, “Understanding Keynes’s General Theory,” Palgrave Macmillan, New York, 2009. http://dx.doi.org/10.1057/9780230232853
[64]	A. Leijonhufvud, “Macroeconomic Instability and Coordination,” Edward Elgar, Northampton, 2000.
[65]	W. Young, “Interpreting Mr. Keynes,” Westview Press, Boulder, 1987.
[66]	D. Worswik and J. Trevithick, “Keynes and the Modern World,” Cambridge University Press, London, New York, 1983.