Keynes’s General Theory Contains Oddly Few Mentions of “Fiscal Policy”

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Something that has puzzled me for quite a while: Keynes’s General Theory contains remarkably few references to fiscal policy in any form:

  • “Government spending”: no matches…

  • “Government purchases”: no matches…

  • “Fiscal policy”: 6 matches:

    • Four in one paragraph about how fiscal policy is the fifth in an enumerated list of factors affecting the marginal propensity to consume…
    • One about how an estate tax changes the marginal propensity to consume…
    • One about how fiscal policy in ordinary times is “not likely to be important”…
  • “Public works”: 10 matches:
    • Three in a paragraph about how the multiplier amplifies the employment effect from public works…
    • Two in a paragraph warning that multiplier calculations are overoptimistic because of import, interest rate, and confidence crowding-out…
    • Four on how public works have a much bigger effect when unemployment is high and “public works even of doubtful utility may pay for themselves…”
    • One a criticism of Pigou’s logic…

And yet it also contains this one paragraph:

In some other respects the foregoing theory is moderately conservative in its implications. For whilst it indicates the vital importance of establishing certain central controls in matters which are now left in the main to individual initiative, there are wide fields of activity which are unaffected. The State will have to exercise a guiding influence on the propensity to consume partly through its scheme of taxation, partly by fixing the rate of interest, and partly, perhaps, in other ways. Furthermore, it seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative…

Chasing back this “banking policy” that is the alternative to the “somewhat comprehensive socialization of investment”, there are three cites to “banking policy”: this paragraph is one, and the others are:

  • “to every banking policy there corresponds a different long-period level of employment…”
  • and the “it is, I think, arguable that a more advantageous average state of expectation might result from a banking policy which always nipped in the bud an incipient boom by a rate of interest high enough to deter even the most misguided optimists. The disappointment of expectation, characteristic of the slump, may lead to so much loss and waste that the average level of useful investment might be higher if a deterrent is applied…. [But] the austere view, which would employ a high rate of interest to check at once any tendency in the level of employment to rise appreciably above the average of; say, the previous decade, is, however, more usually supported by arguments which have no foundation at all apart from confusion of mind…”

The question of why “it seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself… a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment…” is left hanging. And how “a somewhat comprehensive socialisation of investment” is to be implemented are left hanging as well.

So will somebody please explain to me why “fiscal policy” plays such a small part in the General Theory and yet such a large part in mindshare perceptions of “Keynesianism”?

AUTHORS:

Brad DeLong

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