These brief notes are preliminary and may be subject to later elaboration (in a new post). The referenced text is a short excerpt from The Collected Writings of John Maynard Keynes (Robinson and Moggridge, eds.), Vol. XXIX, Chapter 3. Thank you to Nathan Tankus for sending me the text, and for having several very helpful discussions in relation to it.
In this (draft) chapter fragment, Keynes explicates certain aspects of the “classical theory, as exemplified in the tradition from Ricardo to Marshall.” More than just prefatory to his discussion of ‘economy-wide’ conditions and dynamics, his argument goes to the basic suppositions of the classical and neoclassical theory of markets. In fact, the argument goes to the question whether–as the ‘classical theory’ generally claims–we can expect markets in the ordinary course to produce “the volume of output which will yield the maximum value of product in excess of real cost.” (67) Keynes concludes that we cannot.
The reason for this is not that real world markets contains various discrete “frictions,” “distortions,” or “imperfections,” but that the fundamental character of our “monetary economy,” according to Keynes, directly undermines the basis for the expectation of efficient outcomes. He explains that while in a “cooperative economy” (which he also calls a “barter economy”) we can expect this sort of real efficiency–in the sense that only “miscalculation or stupid obstinacy can stand in the way of production” (67) whose expected real yield exceeds its expected real cost, precisely the same production in our actual economy may be “unprofitable” (and thus will not be undertaken).
To see this, consider first why we would expect this alignment of motivations and efficient production in the “cooperative economy” in the first place. Keynes’ “cooperative economy” is actually, in the first instance, household production–i.e., where the production unit corresponds to the consumption unit, or in other words the production unit consumes (only) everything it produces. In this simple case, the unit will undertake production as long it values the yield more than it values whatever it loses in production — or equivalently, each factor of production will be willing to contribute to the joint effort so long as its own share of the yield exceeds whatever it loses through contributing. Keynes further generalizes from this simple case because “barter” or even money payment is still consistent with the expected outcome, so long as each factor of production receives a value that is equivalent to his or her “share” of the directly produced output (which s/he could exchange for the same).
The problem, he suggests, is that this is only a “limiting case” of a monetary economy; it is frequently true, in reality, that “the volume of employment, the marginal disutility of which is equal to the utility of its marginal product, is ‘unprofitable’ in terms of money” (79). In short, “money profit” diverges from technical efficiencies (themselves ultimately defined in subjective utility terms) while action predicated directly upon the existence or nonexistence of that technical efficiency (subject only to “miscalculation” or “stupid obstinacy”) does not.
While this then leads into a discussion of effective demand, the central monetary authority, and business cycles, the fundamental point and the reason for the basic divergence between profitability and real efficiency does not rely on any of these ideas and is prior to them. That basic divergence simply has to do with the difficulty of translating the underlying subjective utility assignments (which motivate the actors to produce/not produce in the simple case) across persons and goods in a complex system of production and consumption involving exchange. We should not, in other words, be at all surprised that such systems will fail to generate, absent conscious planning, the sorts of productive activity that people would, all told, collectively prefer. There may of course be all kinds of specific reasons and ways that things fall apart, but detailing those really isn’t the aim of Keynes’ argument here: instead, this argument is that the very specific reason why we would expect the correspondence (between efficient production & incentive to produce) in the first place is only present in settings where production and consumption are quite directly and organically linked. We simply cannot expect that correspondence to then be transmitted across the many overlapping social and operational chains and links that make up a complex economy.
The argument isn’t about money as such; in fact, this problem could arise in “barter” systems too … Keynes just defines his particular “barter economy” so that the value received by each factor corresponds to what he would receive in the simple, household production case where share of output is directly consumed. And while it may certainly be the case that a ‘central authority’ can take various actions bringing prouction and employment up to a socially desirable level, these actions do not somehow magically restore the (supposed) production decisions that would obtain in the “limting case.”
While Keynes also uses the term “entrepreneur economy” as a synonym for “monetary economy,” the key again is not the present of an “entrepreneur” (or enterprise coordinator, who “rents” both capital and labor). The role and motivations of the entreprenur just make the divergence of profitability and real efficiency easier to see — but the same point would apply in a complex system of exchange between cooperative enterprises, however internally organized. (The issue, at least on this account, is not that the entrepreneur extracts additional value, throwing off the comparison between yield and expenditure that would otherwise obtain.)
In short, Keynes argues that in normal conditions of economic exchange, we cannot expect apparently uncoordinated production and exchange to yield “efficient” outcomes–in the sense of encouraging production generally when it yields as much as it takes, and not otherwise. This would also imply that we should have no general expectation that production and exchange that has been consciously socially planned would be any less efficient (than apparently uncoordinated production and exchange) in real terms. (This whole discussion of course puts aside the point that production and exchange is always socially planned and channeled in various ways, even if this planning is not always acknowledged.)
Sanjukta Paul 