Keynes 1930 (chs 9–11): Was he right?

Look at this text (chs 9–11). Is this theory true?

(The prompt contained chapters 9–11 from JM Keynes’s 1930 “A Treatise on Money”.)

Not in the strong sense. These chapters are important, but they are not an accepted general theory today.

Keynes is doing two different things here.

First, he builds a set of identities from special definitions. In chapter 9 he defines income as factor payments excluding windfall profits, and defines saving as income minus consumption. Once he does that, results like

\[ Q=I-S \]

and

\[ P=\frac{E}{O}+\frac{I'-S}{R} \]

follow largely by construction from his symbols and definitions in chapters 9–10. Keynes even says as much: these equations are “purely formal” and “mere identities” unless you add a causal story (Treatise on Money, 1930, ch. 10).

Second, he adds a causal claim: if investment runs ahead of saving, firms get windfall profits, expand, and prices rise; if saving runs ahead of investment, firms get losses, contract, and prices fall; equilibrium requires zero aggregate windfall profits (Treatise, ch. 11). That is the part that is only partly right.

What still looks right:

The Wicksellian intuition survives. Monetary conditions can push spending above or below the economy’s “natural” balance, and that affects profits, output, and inflation. Modern monetary theory still uses a descendant of this idea in the gap between the policy rate and the natural rate of interest (Wicksell, Interest and Prices, 1898/1936; Woodford, Interest and Prices, 2003).

Also, Keynes’s separation of ordinary remuneration from unexpected gains/losses is not crazy. His “profits” here are really windfall disequilibrium profits, not normal business income. On that definition, saying equilibrium implies zero profits means zero unexpected aggregate windfalls, not that firms earn literally nothing.

What is not accepted now:

The big problem is his treatment of saving and investment. In modern macro and national accounting, aggregate saving and aggregate investment are equal ex post in a closed economy once terms are defined consistently. Keynes later adopted exactly that position in The General Theory, chapters 6–7 (Keynes, 1936). The real issue is not a lasting accounting wedge \(S-I\), but a gap between planned/designed saving and planned/designed investment, which is resolved by changes in income, output, inventories, and expectations.

So in modern terms, the Treatise result \(Q=I-S\) is mostly a consequence of his special choice to exclude windfall profits from income. If you put profits back into income, the gap disappears as an accounting matter.

Also, modern macro does not accept that the price level is determined mainly by this one wedge between saving and investment. Inflation is usually modeled as depending on monetary policy, expectations, slack/output gaps, wage setting, markups, and financial conditions, not just on \(I-S\) in Keynes’s 1930 sense (Woodford, 2003; Clarida, Galí, and Gertler, 1999).

So the clean verdict is:

The algebra is “true” inside Keynes’s own definitions. The economic mechanism contains an important insight. But the theory, as a general description of how saving, investment, profits, and the price level work, was later revised by Keynes himself and is not accepted in that exact form today.

The shortest fair summary is: historically important, partly insightful, but not literally true as stated.

If you want, I can turn this into a line-by-line commentary on the exact claims in chapters 9, 10, and 11.