HARLAN LINNEUS MCCRACKEN
It was at this very moment, sometime early in 1933 and purely by chance, that Keynes received an unsolicited copy of a newly published book, Value Theory and Business Cycles, written by an American economist at the University of Minnesota by name of Harlan Linneus McCracken. That Keynes read at least a portion of this book while writing the General Theory has been evident since the publication of volume xxix of Keynes’ Collected Writings in 1979. In «a draft of chapter 2 from the last 1933 table of contents» (Moggridge in cw, xxix, 76), there is an extended footnote which begins:
Cf. H.L. McCracken, Value Theory and Business Cycles, [New York, 1933], 46, where this part of Marx’s theory is cited in relation to modern theory.
(cw, xxix, 81, fn.; square brackets in the original)
Most scholars have attached little significance to this citation since neither McCracken nor Marx had appeared to have had much to contribute to our understanding of how the General Theorycame to be written as it was. This is in spite of the fact that Value Theory and Business Cycles is about the conflicting approaches to the business cycle one would be prone to take were an economist to follow Ricardo rather than Malthus. Indeed, the book is largely about the impossibility of utilising Ricardian analysis in explaining the business cycle in contrast to the need to employ the kind of analysis pioneered by Malthus. All this is set out in the preface. Firstly McCracken discusses Ricardo:
The analysis appears to show that no embodied value theorist can logically explain a business cycle. He either involves himself in a dual theory of value, a logical inconsistency, or explains nothing but a secular trend. The presentation is quite critical, since it deals, as we believe, with the ‘false trails,’ based upon an erroneous theory of value, formulated by Ricardo.
(McCracken 1933, v)
Keynes, in arguing that because his contemporaries were following in the steps of Ricardo the notion of involuntary unemployment is a «possibility of which the classical theory does not admit» (cw, vii, 15), or that there is a «vitally important chapter of economic theory which remains to be written without which all discussions concerning the volume of aggregate employment are futile» (ibidem, 26) appears to be making a claim almost identical to the characterisation made by McCracken: an inability to generate a cyclical downturn appeared to be a consequence of adopting a Ricardian approach to the business cycle. In turning to Malthus, however, McCracken presents an argument that would be mirrored in the General Theory:
Malthus serves as a logical starting point for the consideration of business cycles, first, because he stressed the importance of ‘short run’ factors, and second, because his value approach was from the demand side. Consistent with his theory of value, he held that business might be depressed, either by a voluntary failure of demand on the part of those who had the power but not the will, or by an involuntary failure of demand by those who had the will but not the power.
(McCracken 1933, v-vi)
This is the same Malthus and the same contrast with Ricardo that would later on be found in the General Theory itself.
KEYNES’S LETTER TO MCCRACKEN
Until now, however, the question whether Keynes had actually read McCracken’s writings on Ricardo and Malthus was unanswerable. That he had read the sections on Marx was unarguable but whether he had read any of the rest of Value Theory and Business Cycles could only be left to conjecture.
Moreover, the question of Malthus’s writings having been a significant influence on Keynes’s thinking is far from accepted. It is for these reasons that a 1933 letter from Keynes to Harlan McCracken uncovered in June 2007 is of such significance (see Kates 2008). The letter makes clear the answers to both of these issues: firstly, whether Keynes read more of McCracken than just the section on Marx, and secondly, whether Malthus had been a major influence on Keynes’s thought. The following letter, dated 31st August 1933, was found in the McCracken archive at Lsu where it had lain since being deposited in 1961.
Dear Dr. McCracken,
Having now read your book, I must again thank you for having sent it to me. For I have found it of much interest, particularly perhaps the passages relating to Karl Marx, with which I have never been so familiar as I ought to have been.
In the matter of Malthus, you will perhaps have seen from my account of him in my lately published “Essays in Biography”, which appeared before your book was out, but after I think you had written it, that I wholly agree with you in regarding him as a much under-estimated pioneer in the line of thought which to-day seems to me by far the most likely to lead to progress in the analysis of the business cycle. Your contrast between Ricardo and Malthus contains, I am convinced, the essence of the matter.
Yours very truly,
J. M. Keynes
The answer to whether Keynes read McCracken is quite clearly stated at the very start of the letter. Keynes wrote «having now read your book», a statement which should settle any doubts about whether Keynes had read the other parts of the book dealing with matters aside from Marx.
But what is far more significant is Keynes’s statement on the relevance of Malthus to how economic theory must develop. Keynes is unequivocal: it is Malthus’s «line of thought» that is «by far the most likely to lead to progress in the analysis of the business cycle» (italics added). Keynes does not endorse any of the specifics of Malthus’s analysis but its overall approach. It is a restatement of the sentiment found in his biographical essay where Keynes lamented, «if only Malthus, instead of Ricardo, had been the parent stem from which nineteenth-century economics proceeded» (cw, x, 100-101). Malthus does not provide the final answers, but it is from his analysis, according to Keynes, that economic theory ought to have initially developed, and even though it had not done so then, it should nevertheless do so now. It is Malthus’s «line of thought» that Keynes would now himself adopt.
SUPPLY CREATED ITS OWN DEMAND
One could, of course, decide Keynes had found someone else who had come to the same conclusion as he had on Ricardo and Malthus. Coincidence possibly or parallel development of ideas. One could thus say there is nothing in their mutual agreement on these questions that suggests McCracken had influenced Keynes except for this: it is from McCracken that Keynes takes the phrase “supply creates its own demand” as a definition of Say’s Law.
It has been generally assumed those words have their origins in the early nineteenth century, most probably because when Keynes first uses the phrase himself, he states «from the time of Say and Ricardo the classical economists have taught that supply creates its own demand» (cw, vii, 18). The implication is that this was a standard form of words that had been the common property of early writers on economic matters in describing the law of markets. In actuality, neither this form of words nor any close variant has ever been found in any of the classical writers. These words are, however, with only one minor variation, found in McCracken and with specific reference to Say’s Law. The following is from McCracken’s discussion of involuntary failure of demand:
The Automatic Production-Consumption Economists [ie those economists who accept Say’s Law] who insisted that supply created its own demand, that goods exchanged against goods and that a money economy was only refined and convenient indirect barter missed the significance of the money economy entirely.
(McCracken 1933, 159; italics added)
Thus, the one phrase virtually every economist can be expected to know was first written by Harlan McCracken. None of this is to suggest plagiarism since Keynes himself assumed an antique origin for these words from amongst the early classical writers. But whether consciously or not, here we have a book known to have been read by Keynes while writing the General Theory in which are found words that are found no earlier anywhere else as a definition of Say’s Law. The evidence is, of course, circumstantial but is irresistible for all that: McCracken had profoundly shaped Keynes’s thought. It was McCracken’s understanding that it was Say’s Law which divided Ricardo from Malthus, and it was McCracken’s interpretation of Say’s Law and the major role Say’s Law had played in shaping the subsequent development of economic theory, that were adopted by Keynes. These became the standard framework for understanding this classical principle and its significance.
MCCRACKEN AND THE MPC
One other area of overlap should be noted, the highly suggestive parallel between McCracken’s discussion of demand failure in Malthus and Keynes’s subsequent analysis in relation to the marginal propensity to consume. Chapter 8 of the General Theory presents what Keynes regarded as the basic relationship between the level of income and the level of consumer demand. This relationship is presented as a «fundamental psychological law >> (cw, VII, 96).
Compare this with the following passage in McCracken found in a chapter titled «The Malthusian System of Economic Thought>. There McCracken wrote that diminishing marginal utility of goods in aggregate might lead to a fall in the level of demand relative to supply. The consequence is a fall in the proportion of one’s income spent as incomes rise, and here too psychology has a part to play:
It is readily discernible that Malthus was introducing a psychological element into value and price, and the law of demand and supply… By a rigorous application of the principle of diminishing utility, Aftalion showed how the intensity of desire for any given good declines as additional units are acquired or consumed, and in like manner intensity of desire for all goods declines as we climb down the scale of needs from the more necessitous goods to the less necessitous.
(McCracken 1933, 214-215)
In Malthus’s time, it would have been impossible to imagine an entire society having run out of demands in general. Malthus therefore attributed the insufficiency of demand to extreme inequalities of wealth where those with high incomes did not spend all they had received. A century later, Aftalion (1913) in an attack on the law of markets, can conceive of a situation in which diminishing marginal utility for goods in general might lead to a decline in consumption expenditure. This too is discussed by McCracken in a section of his book that one is directed to in the passage on Malthus just quoted. There McCracken wrote:
Psychological observation reveals the existence of a long scale of desires, but desires of diminishing intensity… The intensity of desire diminishes as we increase our power to satisfy the lesser needs.
This is the same concept used by Keynes and here too it is presented as a psychological principle. Moreover, McCracken adds to the allure for Keynes of finally embodying this concept into mainstream economics with the suggestion that this would be a theoretical breakthrough of the highest order of significance:
If Aftalion has succeeded in establishing the possibility of a voluntary failure of demand by those who have purchasing power but insufficient keenness of desire, when facing expanded production under the influence of the principle of diminishing utility, then it constitutes one of the greatest contributions to economic theory in a generation. Say’s Law of Markets, according to which production financed consumption and supply generated adequate demand is in serious need of modification.
(Ibidem, 149, fn.; italics in the original)
This passage is also noteworthy in that it gives a name to the relevant principle: «Say’s Law of Markets».
COMPLETING THE TASK
The fortuitous arrival of McCracken’s Value Theory and Business Cycles in early 1933 was a prime example in the parallel development of thought. Keynes immediately recognised the strong similarity of view. How much Keynes already understood of the context of the Malthus-Ricardo correspondence or the General Glut debates is difficult to know. But McCracken, being as he was a specialist in the history of thought, would have added to Keynes’s understanding of the issues at stake, and provided an appreciation of what was needed to refute Say’s Law.
However, in showing that savings might grow as a proportion of income as income increased, it would have been clear to Keynes that less than half the task in demonstrating the possibility of demand deficiency was complete. What was still needed was a theory to explain why the additional savings made available because of a proportionate drop in consumption would not be channelled into investment through adjustments in the rate of interest. The elements that went into this part of the story were, in essence, the theory of liquidity preference, the marginal efficiency of capital and the related notions of expectations and economic uncertainty. These were, however, concepts that in early 1933 Keynes had not yet appreciated the significance of. As he noted in an oft-quoted passage in his letter to Harrod (cw, xiv, 85), these concepts would be assembled one by one.
Each of these concepts had already been discussed in depth in the contemporary economic literature by leading economists but in each case with a different purpose in mind. Moreover, each of these economists had had a book published during the early 1930s while Keynes was preparing the General Theory. Two of these works were published in 1933 and two in 1934, the years of greatest intensity in the development of Keynes’s core ideas.
JOHN R. COMMONS
The first of these economists was John R. Commons. In 1961, McCracken published his Keynesian Economics in the Stream of Economic Thought, a work that had developed out of his graduate seminar at LSu on Keynesian theory. In it he devoted an entire chapter to the work of Commons. This chapter is, moreover, no mere diversion but 34 pages in length and titled simply «John R. Commons». In his explanatory footnote, McCracken’s first sentence stated that «perhaps the reader is entitled to a brief explanation as to why a rather extended treatment of Commons is included in a study of Keynesian economics» (McCracken 1961, 61, fn.). It is a question that might well be asked.
Although not mentioned in his book, McCracken had in fact undertaken his doctorate under Commons at the University of Wisconsin, completing his thesis in 1922 and receiving his Ph.D. in 1923. According to university records, the thesis was embodied in an article that was published in the Review of Economic Statistics in 1922 and titled, «Secular Trends and Business Cycles: a Classification of Theories». Its joint authors were listed as J. R. Commons, H. L. McCracken and W. E. Zeuch.
And although the article is about classifications of the theory of the cycle, its very first paragraph deals with the differences between Malthus and Ricardo. The differences outlined would be entirely familiar to anyone who had read the General Theory. Then well into the article the following discussion occurs which expands on their contrasting theories of the cycle in which it is noted that «Malthus differed from Ricardo at almost every point» (Commons, McCracken and Zeuch 1922, 258). Note the difference in policy that follows from Malthus’s approach relative to Ricardo’s. It is clear why Keynes preferred Malthus’s theories to Ricardo’s:
According to Ricardo, there could be no universal or general overproduction of goods….
“But Malthus contended that the great mass of commodities is exchanged directly or indirectly for labor, either productively or unproductively. Hence, compared with labour, all of the goods may fall in value at the same time. And this general fall in value proceeds from a ‘glut,’ just as any one commodity falls in value from an excess of supply, compared with labor or money.
It followed that Ricardo’s remedy for overproduction of some goods was more production of other goods. It followed that Malthus’ remedy for overproduction was an increase in unproductive consumption, such as taxes, public employment, highways, improvement of landed estates and more employment of menial servants instead of ‘productive’ laborers.
Then in a footnote reference to a discussion on Sismondi, and where it is noted that in the theory being discussed «the market becomes glutted because effective demand was lacking» (ibidem, 251), the authors state:
This question [Sismondi] argued heatedly with J. B. Say and Ricardo. The two latter consistently held that ‘goods exchange against goods’ and therefore supply could never exceed demand.
(Ibidem, 251, fn.)
Thus, going beyond McCracken one encounters arguments found within the institutionalist school in looking at the nature of the business cycle. None of this is presented as an example of parallel discovery but as part of a process in which the ideas that had been developed by Commons and his students were filtered through to Keynes via McCracken. These were mature ideas that had been debated extensively and were part of a literature on the cycle that was available to scholars across the world.
COMMONS AND EXPECTATIONS
But what makes it even more likely that Keynes would have sought out and read this article was that he was a long-time admirer of Commons and needed no introduction through McCracken. Skidelsky, in his biography of Keynes, noted the high regard Keynes had had for Commons since the 1920s. He stresses that Commons had been an «unacknowledged» although «important» influence on Keynes:
Commons, an institutional economist who taught at Wisconsin University, is an important, if unacknowledged, influence on Keynes. Indeed, Keynes wrote to him in 1927 that ‘there seems to me to be no other economist with whose general way of thinking I feel myself in such general accord’.
(Skidelsky 1992, 229)
Once Keynes had turned to Commons, the book that would almost certainly have come to his attention was Commons’ then most recent publication, Institutional Economics, published in 1934 while Keynes was in the midst of his background research on the General Theory. And it turns out that the central issue raised by Commons was the issue that became the minor theme of the General Theory, the role of expectations in decisions to invest. One might be thought to be drawing a long bow to relate Commons and Keynes in regard to expectations, yet it was McCracken who made this connection without suggesting that Keynes might have taken the idea from Commons. Explicitly McCracken, who understood both Commons and Keynes with extraordinary clarity, having been taught by one and directly influenced the other, recognised how close their thinking on this issue was. McCracken, in looking back on the Keynesian Revolution, makes this observation:
A final feature of Institutional Economics centers around the word ‘futurity.’ Commons definitely anticipated Keynes by approximately twenty years.
(McCracken 1961, 69)
Futurity was Commons’ depiction of value as an estimate of the future flow of income expected to accrue as the result of an investment. This is how McCracken describes the parallel notions in Commons and Keynes:
In class notes of 1921 the author found this statement: ‘Value is a mental appraisal in the present of future uses of incomes.’ The same idea was later included in Institutional Economics: ‘It is evident, indeed, that the entire concept of value is volitional instead of mechanistic, since value is a present estimate of something expected in the future.’
The meaning given to this formal definition was almost precisely the idea later expressed by Keynes in his General Theory (1936), in which Chapter 5 is devoted to expectations….
It is the judgment of the writer that Commons and Keynes have here given us the greatest single contribution to economic theory in this century.
(Ibidem, 70-71; italics in the original but the bolding has been added)
McCracken sums up the comparison by stating that «we learn both from Commons and from Keynes that the value of all goods, commodities, or services is the discounted present worth of future expectations» (ibidem, 73). This was, as McCracken explains, a long-held and long-developed theory of Commons’, outlined at length in a book published in 1934. With Keynes, on the other hand, the marginal efficiency of capital, his name for this form of valuation, is a novel concept not previously presented in any of his prior works. Keynes, in his famous letter to Harrod on the development of the underlying concepts of the General Theory lists the MEc as having occurred last of all in the development of his own thinking and describes its gestation as difficult, writing:
After an immense lot of muddling and many drafts, the proper definition of the marginal efficiency of capital linked up one thing with another.
(cw, xiv, 85)
Moreover, Whalen notes that in a speech given in 1925, Keynes directly excerpts passages from a book written by Commons in that same year. The book, Reasonable Value, is a mimeographed typescript but one which had been published in that form and had been personally distributed by Commons to selected recipients (Whalen 2008, 229). Given the extensive quotes that Keynes took from this book in the speech he gave in 1925, it is clear that Keynes read this book.
And what is of great significance is that section five of Reasonable Value deals with and is titled «Futurity», the issue dealt with by Keynes in the General Theory, which McCracken argued was «the greatest single contribution to economic theory in this century» and which McCracken had further argued that Commons had preceded Keynes by twenty years. Whalen (and others) have examined the connection between Keynes and Commons during the 1920s. More fruitful and of far greater potential importance would be an examination of the role Commons played in shaping Keynes’s ideas in the early 1930s as the General Theory was being written.
That Irving Fisher had developed the concepts embodied in Keynes’s Marginal Efficiency of Capital before Keynes had done so himself seems almost entirely beyond argument. In the General Theory we find the following acknowledgement of Fisher’s work:
Although he does not call it the ‘marginal efficiency of capital,’ Professor Irving Fisher has given in his Theory of Interest (1930) a definition of what he calls ‘the rate of return over costs’ which is identical with my definition… Professor Fisher uses his ‘rate of return over cost’ in the same sense and for precisely the same purpose as I employ ‘the marginal efficiency of capital’.
(cw, vii, 140-141)
Although a fulsome and apparently straightforward recognition of precedence, Patinkin explains how Keynes’s acknowledgement of the fact of this prior development came about:
Now, in the General Theory (p. 141) Keynes himself had attributed priority for the notion of the marginal efficiency of capital to Fisher; and only recently have we (with the help of Paul Samuelson) learned the fascinating story of how this priority was brought to Keynes’ attention by Redvers Opie, at almost the last minute before publication.
(Patinkin 1982, 9)
The details of how Keynes was alerted to the fact that others had recognised in a late draft of the General Theory the identical concept within Fisher’s writing is dealt with at length as a footnote to a transcribed discussion that took place at the University of Western Ontario in October 1975. It was Samuelson who had suggested that Opie had been the one to mention to Keynes that Fisher had priority in the development of this concept. The footnote to the discussion between Patinkin and Samuelson then spells out how this issue was sorted out some forty years after the events described:
Since the Conference, Samuelson has discussed this question with Redvers Opie himself, who in reply provided him with a copy of a handwritten note (dated August 5, 1935) which R.F. Kahn sent to Opie at Oxford, and which in its entirety reads:
Guillebaud tells me that you maintain that Fisher, in his Theory of Interest (1930), has a definition identical with Keynes’ definition of the ‘marginal efficiency of capital.’ I wonder if you could let me have the reference.
A scribble at the bottom of this note indicates that Opie then referred to ‘Fisher pp. 155, 168.’
This note together with the fact that the first record of Keynes’ recognition of Fisher’s priority in this matter is in a letter which Keynes wrote to Roy Harrod three weeks later, on August 27, 1935 (jMk xiii, p. 549; Patinkin 1976 (a). 80-1) constitute fairly conclusive confirmation of Samuelson’s suggestion. Samuelson thinks that he himself may have learned of this incident from Schumpeter.
(Patinkin and Leath 1977, 89, fn.)
Keynes’s own reaction to being told others had discovered that Fisher had priority in outlining what Keynes had called the «marginal efficiency of capital» is quite interesting in its own way. In the passage below, which is from the letter to Harrod referred to by Patinkin and Leith in the above quotation, Keynes wrote:
My definition of the marginal efficiency of capital is quite different from anything to be found in [Marshall’s] work or in that of any other classical economist (except for a passage which he makes little subsequent use of in Irving Fisher’s latest book).
(cw, xiii, 549)
Thus, whether Fisher had made subsequent use of this concept or not, Keynes accepts that the concept that in the General Theory is known as the marginal efficiency of capital is exactly the same as Fisher’s «rate of return over cost». In this case, however, and unlike with McCracken, others recognised Fisher had already discussed the same concepts before they had been discussed by Keynes. Keynes therefore acknowledged Fisher’s priority which would not in all probability have occurred had Opie not drawn this parallel to the attention of others.
ケインズ全集・J.M.K Vol.XXIX,p. 81~2参照
（参照：ケインズ全集・J.M.K Vol.XXIX,p. 81~2）
に或る種の「千年の岩(Rock of Ages)」(訳注:賛美歌)と霊感の内包を見出していることも知っています。しかもなおそれに目
J・M・ K‘But whatever the sociological value of [Das Kapital] I am sure that its contemporary economic value (apart from occasional but inconstructive [sic] and discontinuous flashes of insight) is nil’ (1934, JMK to George Bernard Shaw, 2 December, quoted in Robert Skidelsky, John Maynard Keynes, vol. 2 (1992), p. 520).
‘To understand my state of mind … you have to know that I believe myself to be writing a book on economic theory, which will largely revolutionise … the way the world thinks about economic problems. When my new theory has been duly assimilated and mixed with politics and feelings and passions, I can’t predict what the upshot will be in its effects on actions and affairs. But there will be a great change, and, in particular, the Ricardian foundations of Marxism will be knocked away’ (1935, JMK to George Bernard Shaw, 1 January, quoted in Skidelsky, John Maynard Keynes, vol. 2, pp. 520–21).
George Bernard Shaw (left) and John Maynard Keynes (right),
at the Fitzwilliam Museum, Cambridge, U.K., 1936