Review: [untitled] Author(s): Joseph A. Schumpeter Source: Journal of the American Statistical Association, Vol. 31, No.

196 (Dec., 1936), pp. 791795 Published by: American Statistical Association Stable URL: http://www.jstor.org/stable/2278703 Accessed: 11/09/2010 19:29
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to his is where attempts substantiate thesisthatimmigration ofan "essenDavie is fullyaware of the tiallymiddle-class nature."Indeed, Professor to of fact that immigration Americahas been mainlya movement the classes (pp. 253if.,p. 244 particularly). Europeanpeasantry and laboring to Davie states(page 238): Withreference theperiodsince1880,Professor from laborers the peasantsand farm "Recentimmigrants beenlargely have of are less industrialized countries Europe. About four-fifths unskilled in without and yet laborers experience mining manufacturing they previous find workmainly theseindustries." in Professor Davie failsto do fulljusticeto the questionof the Secondly, of that reversal ourcentury-long circumstances led,in 1924,to thecomplete of irrecafter century apparently a immigration policy.How did it happen, between capitaland laborin the matteroffreeimmioncilable opposition to apparently, capitulated labor's historic gration, that capital suddenly, of demand for restriction? What were the historicmoments the time? this Professor Davie missedfirehere. Undoubtedly, is due to his failure labor organito perceivethe essentially selfish role played by the earlier in in zationsofskilledcrafts thiscountry theiralmostovertcollaboration in of labor. withtheir employers theharshtreatment ourimmigrant study,not Admittedly, these are questionsthat requireconsiderable in Immias withso muchother material is World possible a volumereplete
gration.Perhaps ProfessorDavie was aware of this fact. Let us hope that in

Davie's mettle, possessing a of thenotverydistant future scholar Professor of such a study.In these the facility and felicity his pen, will undertake questions the essenceof worldimmigration. lies D. Washington, C.
JOSEPH M. GILLMAN

The General Theoryof Employment, Interestand Money, by John Maynard Keynes. London: Macmillan and Company. 1936. xii, 403 pp. $2.00. A book by Mr. Keynes on fundamental questions which are rightat the heart of the practical discussions of the day is no doubt an event. Those who had the opportunityto witness the expectations of the best of our students, the impatience they displayed at the delay in gettinghold of their copies, the eagerness with which they devoured them, and the interestmanifested by all sectors of Anglo-Americancommunitiesthat are up to this kind of reading (and some that are not) must first all congratulatethe author on of a signal personal success, a success not in the least smaller in the cases of negative reaction than in those in which the book elicited ferventadmiration. The unfavorable reviews in a sense but testifyto the reality of that success, and I for one, being about to write another of those unfavorable reviews, heartily rejoice in this implication and wish it to be understood that what I am going to say is, in its own unconventionalway, a tributeto one of the most brilliantmen who ever bent theirenergiesto economic problems. Expression of a teacher's gratitude should be added for the gift of

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what is, in its vigorous exposition and extreme simplicity,an invaluable starterof discussions.Speaking to us fromthe vantage groundof Cambridge and from its author's unique personal position, defended by a group of ardent and able disciples, the book will undoubtedly dominate talk and thoughtforsome time. of In his preface Mr. Keynes underlinesthe significance the words "General Theory" in his title. He professesto address it primarilyto his fellow economists and seems to invite purely theoreticaldiscussion. But it is not quite easy to accept that invitation,for everywherehe really pleads for a definitepolicy, and on every page the ghost of that policy looks over the shoulderof the analyst,frameshis assumptions,guides his pen. In this sense, implicitlyand as in another,it is Ricardo all over again. The advice offered the social vision unfolded explicitly,do not concern us here. That advice (everybody knows what it is Mr. Keynes advises) may be good. For the England of today it possibly is. That vision may be entitled to the comthe attitude of a decaying civilization. pliment that it expresses forcefully in In these respects,this book invitessociologicalinterpretation the Marxian sense, and nothing is more certain than that such interpretationwill be administeredto it beforelong. It is, however,vital to renounce communionwith any attempt to revive in the Ricardian practice of offering, the garb of general scientifictruth, advice which-whether good or bad-carries meaning only with references to the practical exigenciesof the unique historicalsituation of a given time and country. This sublimates practical issues into scientificones, divides economists-as in fact we can see already fromany discussion about this produces popular successes book-according to lines of political preference, at the moment,and reactionsafter-witness the fate of Ricardian economics -neither of which have anythingto do with science. Economics will never have nor meritany authorityuntil that unholy alliance is dissolved. There is happily some tendency towards such dissolution. But this book throws are rightin us back again. Once more, socialists as well as institutionalists judging economic theoryas they do. Ricardian as the book is in spirit and intent, so it is in workmanship. definitions There is the same technique of skirtingproblems by artificial1 which, tied up with highly specialized assumptions, produce paradoxicalspecial cases which in the author's looking tautologies, and of constructing own mind and in his exposition are invested with a treacherousgenerality. In one fundamentalpoint it actually falls short of the line already reached by those writerswho in the sixties of the past centurycriticizedsome of the tenets of what to themwas "classical" doctrine,2 notably Longe and Thorn1 The definition involuntary unemployment, page 15, may serveas an example.Taken literally of (whichofcourseit wouldbe unfairto do) it wouldmean that thereis no practicallyconceivablecase in whichworkmen not partiallyunemployedby definition. are For if prices of wage goods rise a little, otherthings and thesupplyof,laborwillincreaseunder beingequal, it is clear thatboth thedemandfor, of competitive conditions, latterat least as long as the flexibility the marginalutilityofincometo the the workmen what presentstatisticslead us to believe. is 2 Mr. Keynes' definition the word 'classical," whichis made to include Professor Pigou, who of

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ton. These knew perfectly that the old supply and demand apparatus renders its very limited service only if applied to individual commodities,strictly speaking to individual commoditiesof relativelysmall importance,and that it either loses or changes its meaning if applied to comprehensive social aggregates. This was in fact their foremostobjection to the wage fund theory.Mr. Keynes' fundamentalconstruction(which is all we can consider here) rests on a contraposition of expected3 net "proceeds," equal to expected profitsplus expected currentpayments to factors (for definition see page 24), and thoseproceeds the expectation of which would be sufficient to to and not more than sufficient induce entrepreneurs decide on producing the corresponding output. Two schedules or functionsare imagined in order to describe the behavior and the relation to one another of these two fundamental variables. The analogy of the firstwith the ordinary Marshallian demand curve and the analogy of the second with the ordinaryMarshallian supply curve are obvious. In fact, Mr. Keynes speaks of AggregateDemand in the one case and Aggregate Supply in the other and makes them yield a unique "point of intersection." There is as little justificationfor this extension of the "Marshallian cross" as there is forits application to the case of money, which has remained a besetting sin of the Cambridge group to this day. Transition to the central theme of the book is effected relating those by two fundamental variables not to output but to employment,and not to employmentof resourcesin general but to employmentoflabor. Mr. Keynes is as careful to point out that number of workmenemployed is not proprotional to output as Ricardo was to point out that value cannot be proportionalto quantity of labor. But exactly as Ricardo reasoned as if it were,so Mr. Keynes assumes that employmentof labor is an 'adequate" index of the output resultingfromit. The argumentsoffered both authors, by in support of what is a procedure obviously inadmissible in anything that pretends to be a "general" theory,are curiously alike. In particular both display a desire to banish the variations of output-or, in Ricardo's case, of "riches"-from the realm of theory.
cannotbe countedamongclassicsby virtueofany criterion excepttheone ofoutstanding achievement, reminds ofa littleexperience had in a groupofstudents.I observedthat one of the members me I kept on referring a highlyunconventional I asked him whyhe did so, seeing to proposition "orthodox." as that the proposition was no part of receiveddoctrine.His answerwas, 'I simplycall orthodox everyBut thingI don't like.' Protestshould be filedin passing against Mr. Keynes' methodsof criticism. beyondthat it is regrettable thatso brillianta leader shouldset so bad an exampleof utterabsence of verecundia. am no Marxian. Yet I sufficiently I at recognizethe greatnessof Marx to be offended seeing him classed withSilvio Gesell and Major Douglas. Mr. Keynes is unjust even to Major Douglas forthereis no warrantwhateverforthinking littleof that writer once one has accepted the views of thisbook. CertainlyMarx and the classics (in thepropersense of the word) weregrievously faultin at as shouldbe. Yet theyare right against Mr. Keynes. His verymanypointsas it is naturalthatpioneers attitudetowardMarshall's teachingis forMarshalliansto judge. But expecta8 The emphasison expected against actualvalues is in line withmodern as tendencies. tionsare not linkedby Mr. Keynes to the cyclicalsituationsthat give rise to themand hencebecome independent variablesand ultimatedeterminants economicaction. Such analysis can at best yield of An value onlyif purelyformal results and nevergo below thesurface. expectation acquiresexplanatory we are made to understand is why people expectwhattheyexpect.Otherwise expectation a meredeusex machinathatconcealsproblems insteadofsolvingthem.

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It should be clearly realized what that means Readers of this Journal will shrug their shoulders at a theory which deserts the statistician in his strugglewiththe momentousproblemssurrounding Index ofProduction. the But disregarding this,reasoningon the assumptionthat variations in output are uniquely related to variations in employmentimposes the furtherassumptionthat all productionfunctionsremaininvariant. Now the outstanding featureof capitalism is that they do not but that, on the contrary,they are being incessantly revolutionized.The capitalist process is essentially a process of change of the type whichis being assumed away in this book, and all its characteristicphenomena and problems arise fromthe fact that it is such a process. A theorythat postulates invariance of productionfunctions may, if correct in itself,be still of some use to the theorist. But it is the theoryof another world and out of all contact with modernindustrialfact, unemployment included. No interpretation modernvicissitudes,"poverty of in plenty" and the rest, can be derived fromit. The central thesis that under-employment can exist in a state of stable equilibriumand that saving is responsibleforit is then made to followfrom two additional hypotheses.The one-embodied in the concept of Propensity to Consume-is that "when aggregate real income is increased aggregate consumptionis increased, but not by so much as income" (page 27). This Mr. Keynes dignifies, the worst style of a bygone age, into a "Psychoin logical Law." The question of fact apart-statistics of installmentselling and other formsof consumers' credit obviously suggest the possibility of doubt-such a "propensity"is again nothingbut a deus ex machina,valueless if we do not understand the mechanism of the changing situations, in which consumers' expenditure alternatively increases and contracts, and redundant if we do. Postulating, however, an independent and systematic Mr. Keynes findsa "gap" in expenditureresulting tendency to that effect, fromit which may or may not be filledby investmentand tends to widen as communities grow more wealthy. This amounts to introducing another hypothesis: the hypothesis of failing "Inducement to Invest." Since Mr. Keynes eliminates the most powerfulpropellerof investment, the financingof changes in productionfunctions,the investmentprocess in his theoreticalworld has hardly anythingto do with the investmentprocess in the actual world, and any proof,even if successful,that (absolutely or relatively) falling "Inducement to Invest" will produce under-employment would have no greater practical importance than a proof that motor cars cannot run in the absence offuel.But that proof,even underits own assumptions and grantingthat in Mr. Keynes' world there would be a systematic tendency for Inducement to Invest to grow weaker,4meets the obvious objection that Propensity to Consume and Inducement to Invest are not independent of each other. In some passages (for example, page 30) Mr.
4 To manypeople statement such a tendency of is due willsound 'realistic." Tlhis however entirely to recentexperience and wouldhave equally been thecase after, say, 1720 or 1825 or 1873. No support ofthetheory questioncan be derivedfrom in of this,sinceit restsexclusively observation thesurface on mechanism a deep depression of alreadyin progress, explanationofwhichmustbe workedout indethe of pendently it.

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Keynes seems indeed to hold that they are. We can absolve him, however, fromthe grave errorthis would spell, because each time (forexample, page 31) he in fact admits the existence of an equilibratingmechanism.But then the whole theoretical case, that is, the case in termsof fundamentalfeatures left with friction, of the economic process, collapses, and we are practically or "stickiness," institutionalinhibitions,and the like, which in particular may preventthe rate of interestfromreactingpromptlyor, in general,prevent the whole of that equilibrating mechanism from functioningadequately. Space forbidsour enteringinto a discussion of the Multiplier,its relation to the Propensityto Consume, the system of Wage Units, and other tools by means of which Mr. Keynes worksout his basic ideas. I wish howeverto welcome his purelymonetarytheoryof interestwhichis, as far as I can see, I the firstto follow upon my own. Unfortunately, must add that the similarity stops there and that I do not think my argumentopen to the objecwould vanish, if the tions which this one is sure to meet. Some differences concepts of a demand for money stocks and of "liquidity preference"which is another deus ex machina; there is a whole Olympus of them-were replaced by concepts drawn fromthe economic processes that lie behind the surface phenomena denoted by those two. But then many of the striking would also vanish. The whole vision ofthe capitalist processwould inferences change. Interest would lose the pivotal position which it holds in Mr. Keynes' analysis by virtue of the same technique which made it possible for Ricardo to hold that profitsdepend upon the price of wheat. And a comwould follow. diagnosis of modern difficulties pletely different The less said about the last book the better. Let him who accepts the in message there expounded rewritethe historyof the French ancien regime some such termsas these: Louis XV was a most enlightenedmonarch. Feeling the necessity of stimulatingexpenditurehe secured the services of such expert spenders as Madame de Pompadour and Madame du Barry. They went to work with unsurpassable efficiency. Full employment,a maximum of resultingoutput, and general well-beingought to have been the consequence. It is true that instead we findmisery,shame and, at the end of it all, a stream of blood. But that was a chance coincidence. JOSEPH A. SCHUMPETER Harvard University The EconomicsofInflation,The Basis of ContemporaryAmerican Monetary Policy, by H. Parker Willis and JohnM. Chapman. New York: Columbia UniversityPress. 1935. xi, 443 pp. $4.50. This book puts into printedformthe proceedingsof the Banking Seminar of the School of Business of Columbia University,apparently principally in the academic year 1933-34. Part I was prepared by ProfessorsWillis and Chapman, in charge of the course; Part II, the contributionof the 13 student membersof the seminar,is made up of various shortstatistical,histori-