From James K. Galbraith
SUBJECT: KEYNES AND EINSTEIN: TWO GENERAL THEORIES
Note to Readers of PKT and other interested parties: This article
is forthcoming in the Winter 1994 issue of THE AMERICAN PROSPECT.
It is Copyright 1994, by The American Prospect. It is transmitted
over the Internet by permission, as a matter of possible interest.
Permission is also granted to make copies for classroom and other
non-commercial use, and to forward electronically to other users,
provided that this notice accompanies all copies. Please let me
have your comments. Thanks. JG.
********************
KEYNES, EINSTEIN AND SCIENTIFIC REVOLUTION
by
James K. Galbraith
One of the most intriguing and little-noted facts about John
Maynard Keynes' masterwork, The General Theory of Employment
Interest and Money, concerns the first three words of its title.
These are evidently cribbed from Albert Einstein.* Alone that would
be only a curiosum; but there is more. The parallels between
Keynes' economics and relativity theory are deep enough, and
evidently intentional enough, to provide a useful framework for
thinking about what Keynes meant to do with his scientific
revolution.
Keynes and Einstein had met. Keynes traveled to Berlin in 1926
to lecture; Einstein attended. Keynes' impressions were not
published until 1972:
Wordsworth, who had not seen him, wrote of Newton's
statue: `The marble index of a mind for ever Voyaging
through strange seas of Thought, alone.' I, who have seen
Einstein, have to record something apparently " perhaps
not really different " that he is 'a naughty boy', a
naughty Jew-boy, covered with ink, pulling a long nose as
the world kicks his bottom; a sweet imp, pure and
giggling. (Collected Writings, Vol. X, p. 382.)
A second reference appears in The New Statesman and Nation of
21 October 1933. For this issue, Keynes prepared a short commentary
to accompany a sketch by the artist Low, of Albert Einstein. The
playful imagery is now gone, Keynes was by this time becoming a
champion of Jewish refugees. Now, to Keynes' eye, Low's drawing
evokes an Einstein under attack. Keynes quotes Einstein in the
German:
Assuredly you too, dear reader, made acquaintance as boy
or girl with the proud edifice of Euclid's geometry "
thus begins the 'Essay on the Special and General Theory
of Relativity' " Assuredly by force of this bit of your
past you would beat with contempt anyone who casts doubts
on even the most out of the way fragment of any of its
propositions." It is so indeed. The boys, who cannot grow
up to adult human nature, are beating the prophets of the
ancient race " Marx, Freud, Einstein..." (Collected
Writings, Vol. XXVIII, p. 21)
The first extant complete table of contents of Keynes' next
book, then titled simply The General Theory of Employment, was
found in a bundle of papers dated December 1933. (Collected
Writings, Vol. XIII, p. 421). In the first proofs of that book
there is a sentence, deleted from later proofs, that occurs exactly
at the point where Keynes declares that the classical theory cannot
be applied to the problem of unemployment, and just before this
passage:
The classical theorists resemble Euclidean geometers in
a non-Euclidean world who, discovering that in experience
straight lines apparently parallel often meet, rebuke the
lines for not keeping straight " as the only remedy for
the unfortunate collisions which are occurring. Yet, in
truth, there is no remedy except to throw over the axiom
of parallels and to work out a non-Euclidean geometry.
Something similar is required in economics.
The deleted sentence reads, "We require, therefore, to work out a
more general theory than the classical theory." (Collected
Writings, Vol XIV, p. 366)
Mark Twain writes somewhere that "some circumstantial evidence
is very strong, as when you find a trout in the milk."
But what, if anything, does it mean?
NEWTON'S PHYSICS AND CLASSICAL ECONOMICS
Albert Einstein came of age in a world where the classical
physics of Sir Isaac Newton still reigned. Two features of Newton's
worldview are pertinent to understanding the classical economics
that Keynes meant to attack.
The first is that Newton's physics presupposes an absolute
separation of space and time. Space is Euclidean: a three-
dimensional void stretching infinitely in all directions. The
position of any particle in space can be defined, by means of a
system of coordinates, with respect to any observer or any fixed
reference point. Motion is the displacement of the particle from
one position to another. Velocity is motion, divided by the number
of ticks on a clock that it takes for the motion to occur. The
clock that is used to measure velocity lies, in a conceptual sense,
outside the universe itself. In other words, all observers of an
event, provided they were equipped with accurate timepieces, no
matter where they might be, would always agree on the exact time
that the event occurred. Newton imagined time as an absolutely
regular phenomenon that could not depend on the location of the
clock or be affected by its movement or any other physical force.
The second feature is reductionism: Newton's universe was
neither more nor less than the sum of its component particles.
Gravity in Newton's system is the basic force exerted by one
massive body on any other. Gravity produces the acceleration of a
particle in space, according to the position and mass of all other
particles in the universe that exert gravitational force. And, in
Newton's view, this interaction of each particle on every other is
all there is. Once you knew the position, mass, direction and
velocity of every particle in the universe, you would not need to
know anything else. Every future event would be fully determined by
the laws of motion.
Without going into great detail, it is possible to trace out
the role of each of the above features in the Classical economics
of Keynes' time and -- in modern neo-Classical economics.
The analog of space is the market. Look at any supply and demand
diagram. The graph itself is a two-dimensional space. Every point
on the graph is a position defined uniquely with respect to the
origin. The relationships between variables are presented as forces
in this space: in the labor market, demand aligns wages and
employment in a downward sloping relation; supply aligns them along
an upward slope. If two curves cross in that space, their point of
intersection is an equilibrium position, where the forces balance
and the market clears.
The analog of Newtonian time, in the classical economics, is
money. Just as time is absolutely separated from space, money is
absolutely separated from the market. Prices and wages may be
measured in money terms, but this is only a convenience. The prices
that count are relative prices -- prices in relation to the prices
of other goods. The wages measured in a proper labor market are
real wages-- an hour's work in terms of the commodities that an
hour of work can purchase. Like time, money is an invariable
standard. And just as it does not matter whether one measures time
in seconds or in hours, or from Andromeda or Cassiopeia, it does
not matter whether one measures prices in dollars or dimes, in
pesos or yen, or in dollars of 1958 or dollars of 1993. The
quantity of money has no effect on the equilibrium of the market;
nothing real depends on money in any important way.
The reductionism of Newton's system is equally fundamental to
the classical economics -- and remains so today. Economists are
taught that societies, like Newton's universe, are nothing more
than the sum of their individual components. Macroeconomic
expressions, though they purport to describe the behavior of
society as a whole, are only a shorthand for the mass of
individual human actions. In principle, therefore, the best
macroeconomics would be built strictly and rigidly from the theory
of individual behavior, or micro-foundations. If there are
operational difficulties with this, they must lie mainly in the
difficulty of acquiring all the information that is necessary about
all of the individuals whose preferences and behavior must be
considered. Fundamental difficulties of theory do not arise.
EINSTEIN AND NEWTON'S MECHANICS.
By the time Keynes came along, the Newtonian view of the
physical universe had crumbled. Einstein's theories of relativity
had done it in.
The absolute separation of time and space collapsed with
Einstein's introduction of a new universal constant, the speed of
light. If light traveled through empty space, everywhere and always
and irrespective of the direction and velocity of the observer (as
Einstein argued and experiments have confirmed) at the same
identical speed (186,000 miles per second), then the absolute
simultaneity of two or more very distant events could no longer be
defined. Clocks in different places will record these events at
different times, and none is more correct than any other. Moreover,
Einstein showed that space and time were interrelated " time itself
advances more slowly near massive bodies than it does in empty
space.
Furthermore, this newly unified concept, space-time, also
destroyed the Euclidean concept of emptiness extending forever in
all directions. Space-time is curved, and Einstein's relativity is
the extension of the Riemannian geometry of curved spaces to the
physical universe. Near any massive body the shortest distance
between two points curves around it (as does the path of a ray of
light, a point verified by experiment). For this reason, parallel
lines may meet if extended far enough. (Keynes' reference to
overthrowing Euclid's axiom of parallels is an unmistakeable
allusion to this feature of Einstein's theory.)
But if space-time is curved by the presence of matter, then
the shortest distance between two points is no longer defined
independently of the distribution of matter in space. And then the
system is no longer reducible to its elements; you can no longer
get to the whole merely by adding up the parts. The universe is,
instead, more easily and more correctly understood by looking at
the whole and placing the parts within it. The whole can impose
rules on the parts: in a famous phrase "space tells matter how to
move; matter tells space how to curve."
RELATIVITY THEORY AND MONETARY PRODUCTION ECONOMICS
When Keynes wrote his General Theory, he had in his gunsights
-- I shall argue -- both Newton's reductionism and his space-time
dichotomy, as both were reflected in the Classical economics.
First, Keynes sought to disestablish the absolute space of
classical markets, and to end the separation of markets from the
world of money. Keynes characterized his theory as a monetary
theory of production, giving lectures on this subject in the fall
of 1933 as the General Theory of Employment (the preliminary title)
was taking shape. Keynes contrasted monetary-production economics
with what he called the real-exchange economics of the classical
view. In so doing, he broke down the traditional non-monetary
concepts of a labor market and a capital market, suffusing both
of these subjects with ideas -- effective demand and liquidity
preference -- that cannot be conceived of properly except in
monetary terms.
Monetary-production is Keynes' space-time: the marriage of
conceptual domains previously held to be distinct. In the classical
theory of the labor market, for example, Keynes found a first
postulatewhich held that the demand for labor would rise when real
wages fell, and vice versa. This was a consequence of the principle
of diminishing returns, and an idea that Keynes did not choose (at
that time) to dispute. But the idea that demand for labor rises as
wages fall cannot, by itself, establish either the actual level of
employment or the value of the real wage.
The Classics had closed their model with a second postulate,
which held that work-time offered would increase when real wages
rose. This second postulate was precisely that part of the
classical vision that reduced unemployment to a matter of
individual decision. If a person was apparently unemployed, it
should always be possible for him or her either to find work, or
else to eliminate the desire to work and therefore the appearance
of unemployment, by sufficiently cutting the wage.
For Keynes, this second postulate, the upward-sloping supply
curve of labor, was akin to the axiom of parallels in Euclid's
geometry. It should likewise be rejected. In doing so, Keynes threw
over not only the supply curve of labor but also the whole idea of
a self-contained labor market in the normal supply-and-demand
sense, a construct in which real wages and employment could be
modeled together as though one depended directly on the other. In
its place, Keynes offered the now-familiar, but then revolutionary,
idea that employment was determined by effective monetary demand
for output. Since there was no reason why the total demand for
output would necessarily correspond to high or full employment,
involuntary unemployment in the strict sensewould now be possible
in economics.
But what would determine effective demand? Such demand could
be divided into two major elements: the consumption demand of
households, and the investment demands of business. Here Keynes'
reasoning led him to dismantle the second metaphorical classical,
supply-and-demand market, namely the capital market. In the
classical theory, the supply of and demand for capital jointly
determined a quantity, namely the total volume of savings and
investment, and a price, namely the rate of interest.
Investment was demanded by firms, with more being demanded at low
interest rates than at high. Savings was supplied by individuals,
with more being supplied at high interest than at low. Thus a
market for capital determined how much of current output would be
consumed, and how much saved and invested. This market, it should
be noted, operated wholly apart from the determination of output.
Investment and savings did not affect employment and output, but
only the division of output between current consumption and capital
formation.
Here again, Keynes' attacked the supply curve. Savings, he
proposed, had nothing to do with the interest rate. They were,
instead, merely the leftovers after consumption out of income.
Investment, he believed, did depend on the interest rate. But a
curve of investment demand alone could not determine both the
volume of investment and the rate of interest. Keynes now needed an
independent theory of the interest rate.
To get an interest rate, Keynes brought in a new market, up to
that point largely ignored in economics: the market for debt
instruments and, in particular, for money. Interest, he proposed,
was not a reward for saving, but the reward for giving up the
liquidity, the easy access to immediate purchasing power, that
could be had by holding money. As anyone who has bought a bond or
a CD knows, the longer the term (the greater the liquidity
foregone), the higher the rate of interest. Keynes argued that the
interest rate thus reconciled the supply of liquidity (quantity of
money) with the demand for it. And in Keynes' new sequence, the
interest rate determined in the money market in turn determined the
volume of investment.
To complete his theory, Keynes tied these elements together.
The market for money determined interest. Interest (together with
the state of business confidence) determined investment.
Investment, alongside consumption, determined effective demand for
output. Demand for output determined output and employment.
Consumption out of incomes determined savings. Employment
determined the real wage.
In this world, a change in monetary policy, such as a cut in
interest rates leading to an increase in bank credit, now had
fundamental real consequences. The classical dichotomy, in
economics as in physics, had been broken. And with the
deconstruction of labor and capital markets, the reductionist idea
of microfoundations had also necessarily to be abandoned. Workers,
Keynes pointed out, bargain for money wages, not real wages. The
act of dropping money wages would generate feedbacks through
previously unrecognized -- monetary -- channels in the system. In
particular, prices would fall, and real wages (the ratio of wages
to prices) would therefore not necessarily change. Falling prices
might, however, depress business profit expectations and so cut
into demand for investment. This would actually reduce the demand
for workers and prevent total employment from rising. The system
interacts with itself, and an equilibrium of full employment cannot
be achieved within the labor market. Economic space-time is curved.
CONSEQUENCES
In the long run, Keynes did not achieve what he hoped. His
parallel to Einstein went virtually unnoticed. Lawrence Klein,
writing an early interpretation in his 1947 work, The Keynesian
Revolution, did emphasize Keynes' attacks on microeconomic supply
curves. But in the United States the prevailing view became that of
Paul Samuelson, who transposed Keynes' unemployment theory into the
proposition that wages are "sticky." In this interpretation,
unemployment occurs simply because labor markets, characterized by
supply and demand curves just as in the good old days, do not
clear. What Samuelson did -- and he is, I think, too good a student
of physics not to have known it -- was to push the daemon of
Keynesian relativity back into its box. And modern American
Keynesians, even down to the New Keynesians presently in fashion
around Harvard, MIT, Princeton and the Council of Economic
Advisers, are Newtonian and Samuelsonian to the core (though with
a touch of Von Neumann thrown in nowadays). As such, they have
denied themselves the high ground of principle Keynes sought to
claim, conceding an enormous advantage to classical free market
conservatives on every important policy matter.
Too bad. For one cannot say, as one can with Newtonian
physics, that Newtonian economics is good enough for practical
situations. The scale of the whole, in the economic case, is not
that of the universe or the solar system; it is merely that of the
nation state or the global region. Interdependence afflicts us all.
The global irrationality of wage cutting, American budget
balancing, zero-inflation Federal Reserve targets and Third World
austerity programs is an everyday occurrence. The failure of
Keynesian macroeconomics to establish full theoretical independence
from the classical labor market and the classical neutrality of
money means that we are, in effect, now denied fair discussion of
Keynesian solutions to policy problems. The end result is that we
cannot cope now, any more than could the classics in their day,
with stagnation and involuntary unemployment.
*****************
FOOTNOTE TO PAGE ONE
* This point was first made to me in private conversation by Robert
Skidelsky. The economists Ching-Yao Hsieh and Meng-Hua Ye devote a
short chapter in their excellent book to relativity and economics,
stating it would not be an exaggeration to assert that Keynes's
theory of involuntaryunemployment was inspired by Einstein. They do
not, however, explore the parallelism between space-time and
monetary production. Nor does Skidelsky, who discusses the Einstein
link in his second volume on Keynes. Philip Mirowski, whose 1989
book More Heat that Light is a fundamental treatment of the
relationship between physics and economics, also leaves out the
Keynes-Einstein tale.
******************
REFERENCES
Ching-Yao Hsieh and Meng-Hua Ye, Economics, Philosophy and Physics,
Armonk, ME Sharpe 1991.
Lawrence Klein, The Keynesian Revolution, New York: MacMillan,
1947.
Axel Leijonhufvud, On Keynesian Economics and the Economics of
Keynes, New York: Oxford University Press, 1968.
Philip Mirowski, More Heat Than Light: Economics as Social Physics,
Physics as Nature's Economics, Cambridge: Cambridge University
Press, 1989.
Robert Skidelsky, John Maynard Keynes: The Economist as Saviour,
1920-1937, London: MacMillan, 1993.
*****************
James K. Galbraith is co-author with William Darity, jr. of
Macroeconomics, a new textbook from Houghton-Mifflin. This article
will be published in the Winter 1994 issue of The American
Prospect. Comments are welcome, and may be sent directly to the
author at [EMAIL PROTECTED]
