Must-read: John Maynard Keynes (1936): General Theory, chapter 23: “Notes on Mercantilism, the Usury Laws, Stamped Money and Theories of Under-consumption”

Must-Read: John Maynard Keynes (1936): General Theory, chapter 23: “Notes on Mercantilism, the Usury Laws, Stamped Money and Theories of Under-consumption”: “It is impossible to study the notions to which the mercantilists were led by their actual experiences…

…without perceiving that there has been a chronic tendency throughout human history for the propensity to save to be stronger than the inducement to invest. The weakness of the inducement to invest has been at all times the key to the economic problem. To-day the explanation of the weakness of this inducement may chiefly lie in the extent of existing accumulations; whereas, formerly, risks and hazards of all kinds may have played a larger part. But the result is the same. The desire of the individual to augment his personal wealth by abstaining from consumption has usually been stronger than the inducement to the entrepreneur to augment the national wealth by employing labor on the construction of durable assets….

For in an economy subject to money contracts and customs more or less fixed over an appreciable period of time, where the quantity of the domestic circulation and the domestic rate of interest are primarily determined by the balance of payments, as they were in Great Britain before the war, there is no orthodox means open to the authorities for countering unemployment at home except by struggling for an export surplus…. Never in history was there a method devised of such efficacy for setting each country’s advantage at variance with its neighbors’ as the international gold (or, formerly, silver) standard….

It is the policy of an autonomous rate of interest, unimpeded by international preoccupations, and of a national investment programme directed to an optimum level of domestic employment which is twice blessed in the sense that it helps ourselves and our neighbours at the same time. And it is the simultaneous pursuit of these policies by all countries together which is capable of restoring economic health and strength internationally, whether we measure it by the level of domestic employment or by the volume of international trade. The mercantilists perceived the existence of the problem without being able to push their analysis to the point of solving it. But the classical school ignored the problem, as a consequence of introducing into their premisses conditions which involved its non-existence; with the result of creating a cleavage between the conclusions of economic theory and those of common sense. The extraordinary achievement of the classical theory was to overcome the beliefs of the “natural man” and, at the same time, to be wrong….

I remember Bonar Law’s mingled rage and perplexity in face of the economists, because they were denying what was obvious. He was deeply troubled for an explanation. One recurs to the analogy between the sway of the classical school of economic theory and that of certain religions. For it is a far greater exercise of the potency of an idea to exorcise the obvious than to introduce into men’s common notions the recondite and the remote…