post-autistic economics review
Issue no. 25, 21 March 2005
article 4



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Is it All in Keynes’s General Theory?

Geoffrey M. Hodgson   (University of Hertfordshire, UK)

© Copyright 2004 Geoffrey M. Hodgson


In two preceding issues of this Review, John King (2004) and Paul Davidson (2004) raised some of the arguments that I put forward in my 2001 book How Economics Forgot History. Here I take the opportunity here to engage with Davidson’s discussion of Keynes’s General Theory and Davidson’s claim that it is not only a true general theory, but also the single true alternative to neoclassical orthodoxy.

In his contribution, Davidson wrote: ‘If one wishes to explain (describe) the production, exchange and financial features and operations of a market-oriented, money using, entrepreneurial economy, then Keynes’s “General Theory” is the sole “correct” alternative to neoclassical economics. Neoclassical theory is, as Keynes specifically noted (on page 3 of his 1936 book) merely a “special case” of his general theory.’

What Davidson fails to notice is that even if this extraordinary claim of exclusive veracity were correct, then there would be strong arguments for supporting a pluralism of theoretical approaches in departments of economics. This is because even correct theories have to be visibly tested by counter-arguments and alternatives. Even the medieval Catholic Church recognized this, with its institution of the ‘Devil’s Advocate’. A priest was employed to make the strongest possible arguments against Catholic doctrine, in order to test and demonstrate its strength. Even today, if a single theory were correct, it would become stronger through its demonstration of superiority against its rivals. If it contained flaws or blemishes, such dialogue could assist in its clarification and refinement. This is the case for pluralism that Davidson neglects.

There is another aspect of Davidson’s argument that I shall discuss at greater length here. This is his defence of Keynes’s claim that the General Theory was just that. I am an enthusiast of Keynes and I do not wish to pick other flaws in his detailed analysis. I simply wish to show that the title of his book was misconceived. The demonstration of one significant imperfection is enough to show that even Keynes was fallible. Hence there is a case for dialogue, criticism and for the existence of a plurality of approaches within the academic discipline of economics.

In How Economics Forgot History I argued that the General Theory was not truly a general theory. Joseph Schumpeter (1946) made this claim long before. Schumpeter rightly pointed out that the General Theory was not truly general, and that instead of attempting to derive specific policies solely from a theory that claimed to be general, Keynes should have analysed a historically specific situation. But, unlike Schumpeter, I do not believe that Walrasian-type general equilibrium theory is truly general either, because, as Frank Hahn (1980) and others have admitted, it excludes money and other key phenomena. Also, unlike Schumpeter, I do not uphold that a more general theory is necessarily a better theory.

Davidson (2004) alleges that I ‘have confused the concept of a general theory with that of … general equilibrium as the mother of all economic theory!’ Clearly he has not read my book, where I argue that general equilibrium theory in the tradition of Léon Walras, Gerard Debreu and others is also not a general theory, because such models exclude money, production and other crucial factors (Hodgson, 2001, pp. 16, 225). Davidson makes reference to a passage in the General Theory where Keynes attempts to explain the sense in which his theory is general. Keynes (1936, p. 3) wrote:

I have called this book the General Theory of Employment, Interest and Money, placing the emphasis on the prefix general. … I shall argue that the postulates of the classical theory are applicable to a special case only and not to the general case, the situation which it assumes being a limiting point of the possible positions of equilibrium. Moreover, the characteristics of the special case assumed by the classical theory happen not to be those of the economic society in which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience.

Unfortunately, Keynes does not make it sufficiently clear what he means by ‘the general case’. Later passages of this work suggest that what Keynes meant by the term ‘general theory’ is one that would apply to a diverse range of phenomena, including other forms of economy. Keynes claimed that his theory had sufficient generality to apply to several different types of ‘economic society’, by virtue of its supposed foundation on universal ‘psychological laws’.

Keynes was concerned to criticise those ‘classical’ theories that claimed to show that markets would clear and the economy would automatically reach a full-employment equilibrium. But the fact that Keynes clearly considered disequilibria, and other equilibria below full employment, was not enough to make his theory truly general. There were other types of system – such as economies without money – that in fact had no place in Keynes’s theory. The classical theory is not general, in part because it assumes price flexibility, excludes radical uncertainty and underestimates the role of money as a store of value and means of dealing with an uncertain future. Neither, for different reasons, is the General Theory. While Keynes dropped several of the classical assumptions, he imposed other restrictive conditions. For instance he assumed a monetary economy, without extensive barter, where money plays a special role, with hegemonic and well-developed capital markets. While Keynes made his theory more general with one move, he made it less general with another. Overall, it is difficult to say whether the classical or the Keynesian theory is more general. And if one theory is more general that would not necessarily mean that it is a better theory.

Keynes did little to ground his theory upon historically specific economic institutions. Although institutions, such as the joint stock company and the stock exchange, inevitably protrude into his narrative, he did not start from the specific institutions of capitalist society and then develop a theory that illuminated their principal causal processes and relations. Instead, Keynes (1936, pp. 246-7) appealed repeatedly to ‘fundamental psychological factors’ as the foundation for his theory. His invocation of supposed psychological factors in his discussion of economic processes is more prominent than any discussion of historically specific institutions. Specific institutions appear casually in the General Theory as the mechanisms through which seemingly ahistorical psychological forces express their power. Keynes attempted to develop a ‘general theory’ that would apply to a number of different types of socio-economic system. He conceived of this general theory as having a universal and psychological foundation.

A striking piece of further evidence confirms this interpretation. Davidson (1996) himself has translated the key passage from Keynes’s 1936 Preface to the German edition of the General Theory:

This is one of the reasons which justify my calling my theory a General theory. Since it is based on fewer restrictive assumptions than the orthodox theory, it is also more easily applied to a large area of different circumstances.

Davidson (2004) emphatically endorses Keynes’s claim that his analysis ‘required fewer restrictive axioms than any other economic theory.’ According to Keynes in this Preface, his General Theory applied not only to the ‘Anglo-Saxon countries … where laissez-faire still prevails’ but also to countries with strong ‘national leadership’ such as Nazi Germany. He made this statement on the basis that his analysis was based on ‘the theory of psychological laws relating consumption and saving’. Hence Keynes clearly claimed that his theory was not based on historically specific institutions but on general ‘psychological laws’. But he gave little guidance on the psychological literature from which these supposed laws were derived. Neither does Davidson, and it is unclear whether he endorses Keynes’s specific claim that the generality of the General Theory is grounded on ubiquitous ‘psychological laws’.

Keynes did not in fact deliver what he had promised: a general theory. Keynes did make some universal statements, such as when he stressed aspects of human psychology. But he could not show how psychological propensities worked out in practice except by introducing an explicit or implicit institutional framework. Human psychology had to play out its part on some specific institutional stage. It had to be applied to quite specific institutional structures, such as to financial markets, state-issued money and legal contracts. Hence the famous discussion of the psychology of speculation in chapter 12 of the General Theory requires a specific type of institutional framework, principally the stock market. Other parts of the book, such as Keynes’s theory of money or interest have a greater degree of generality, although these are not universal to all types of human society. Again they refer to historically specific phenomena.

The General Theory of Employment, Interest and Money did not provide a general theory of the nature and level of employment in all past, present or possible human societies. What Keynes analysed was the quite specific relationships in modern capitalism between employment, expectations and effective demand. Rather than providing a truly general theory of interest or money, Keynes (1936, p. 173) explored the quite specific, capitalist type of system in which ‘money is the drink which stimulates the system to activity.’ Money has existed for thousands of years but it did not become such an elixir of production until the rise of modern capitalism. Keynes favoured the ‘general theory’ rhetoric but always ended up exploring the particular circumstances of the contemporary capitalist system. Absent in the General Theory is a truly general theory of employment, interest or money. Keynes’s book applies to modern capitalism, and not to all forms of economic society. Davidson (2004) negotiates this question in the following passage:

Keynes’s General Theory is meant to explain a modern, money using, market economy. If one wishes to analyze (explain, discuss) feudalism, or the economies of biblical times, one must add additional restrictive axioms to Keynes’s general theory to obtain a special case theory of feudalism, or of biblical economics, etc. Nevertheless, a common general theory will underlay all these specific cases of historical economies.

Again, Davidson is insufficiently clear what this ‘common general theory’ is, and whether (as with Keynes) it is based on ‘psychological laws’ or not. He is also unclear as to what ‘additional restrictive axioms’ must be added to Keynes’s theory to make it adequate for the analysis of feudalism or earlier socio-economic systems.

Keynes’s General Theory depicts a socio-economic system in which there are well-developed capital and labour markets. Such markets were insignificant under classical feudalism, such as in England and France from the eleventh to the fifteenth centuries, where serf labour prevailed and markets were mostly restricted to commodity surpluses and luxuries. In contrast, Keynes implicitly assumes highly developed labour and capital markets in his General Theory. Presumably these are ‘restrictive axioms’ that would have to be removed from the General Theory to make it applicable to feudalism, along with the addition of other assumptions such as serf labour, and so on. Davidson’s argument that the General Theory can be applied to feudalism and other non-capitalist societies by the addition, but not the removal, of restrictive assumptions is undemonstrated and unconvincing.

Overall, I find Davidson’s argument in defence of Keynes’s arguments for generality to be unclear and unpersuasive. The case for pluralism is made, especially once it is admitted that Keynes could possibly have been wrong in at least on respect.




Davidson, Paul (1996) ‘What Revolution? The Legacy of Keynes’, Journal of Post Keynesian Economics, 19(1), Fall, pp. 47-60. Reprinted in Davidson, Louise (ed.) (1999) Uncertainty, International Money, Employment and Theory: The Collected Writings of Paul Davidson, Volume 3 (London: Macmillan).

Davidson, Paul (2004) ‘A Response to King’s Argument For Pluralism’, post-autistic economics review, issue no. 24, 15 March 2004, article 1, 25/Hodgson25.htm

Hahn, Frank H. (1980) ‘General Equilibrium Theory’, The Public Interest, Special Issue, pp. 123-138.

Hodgson, Geoffrey M. (2001) How Economics Forgot History: The Problem of Historical Specificity in Social Science (London and New York: Routledge).

Keynes, John Maynard (1936) The General Theory of Employment, Interest and Money (London: Macmillan).

King, John E. (2004) ‘Three Arguments for Pluralism in Economics’, post-autistic economics review, issue no. 23, 5 January 2004, article 2,

Schumpeter, Joseph A. (1946) ‘John Maynard Keynes 1883-1946’, American Economic Review, 36(4), September, pp. 495-518.

Geoffrey M. Hodgson, “Is it All in Keynes’s General Theory?”, post-autistic economics review, issue no. 25, 18 May 2004, pp. 21-24 ,