Critical Review 

vol. 6, no, 4, pp. 471-492 

Roger W. Garrison

Underlying the analytical framework of Keynes's General Theory is a comparison of capitalism and socialism in terms of the risks and consequent rates of interest, rates of investment and capital accumulation, and levels of employment and output. Keynes's social philosophy and corresponding vision of macroeconomic reality biases his comparison in favor of socialism, or, more precisely, in favor of "a comprehensive socialization of investment." Recognizing the significant influence of Keynes's early social philosophy on his subsequent macroeconomics—which is firmly established by Allan Melzer's "different" interpretation of Keynes—refocuses criticism of Keynes's analytics, provides a basis for assessing other interpretations of the General Theory, and helps account for the absence of reconciliation among the modern recastings of Keynesian macroeconomics.

Keynes in the Hands of His Interpreters
The General Theory is filled with engaging but cryptic prose. While its lack of clarity was seen by some early critics as a clear symptom of error and confusion, it was seen by others as a hallmark of genius.⁽⁴⁾ It was that special combination of "engaging but cryptic"—coupled with Keynes's long established status as a man of letters and of political affairs—that gave birth to the enterprise of interpreting Keynes. What did he actually say? What could he possibly mean? Interpreters soon discovered that plausible answers to one of these questions were difficult to square with answers to the other. The gap between actual statements made and (alleged, supposed, or divined) meaning intended was substantial—and remained so until Meltzer's melding of Keynes's macroeconomics and social philosophy.
        Most of Keynes's interpreters start on the "meaning" side of the interpretation gap and try to bridge toward actual statements in the General Theory. Anatol Murad's 1962 book is immodestly entitled What Keynes Means.⁽⁵⁾ Other interpreters dwell on what Keynes must have had in the back of his mind or hint about how he would have changed his mind had he lived a few more years—long enough to see the inflationary bias in his policy prescriptions.⁽⁶⁾ The range of possible meanings that characterizes this approach has been effectively constrained by the implicit assumption that Keynes's intended message is internally consistent, insightful, and relevant. Whether or not such an assumption is warranted, most modern readings of the General Theory take the form of a conjectured vision of the macroeconomy, largely if not wholly of the recaster's own making, followed by a search through Keynes's writings for passages that provide hints about the vision. Judged by this standard of exegetical research, Meltzer's is truly a different interpretation.
        Differences among interpretations are attributable in large part to different judgments of the interpreters about which chapter(s) of the General Theory or which assumption(s) are key to getting Keynes's central message (pp. 282 and passim). For instance, so-called Keynesian Hydraulics draws inspiration from Chapter 3, "The Principle of Effective Demand" and Chapter 10 "The Marginal Propensity to Consume and the Multiplier." These chapters, which emphasize the determinacy—given the level of investment—of the other macroeconomic magnitudes, underlie the conventional textbook Keynesianism of the 1960s. Keynesian Kaleidics, which features the radical subjectivism of G. L. S. Shackle and Ludwig M. Lachmann, draws heavily on Chapter 12, "The State of Long-Term Expectations." This chapter, along with the 1937 summing-up article⁽⁷⁾ in which Keynes emphasizes the uncertainties inherent in a market economy, establish the fundamental indeterminacy of investment and hence of the other macroeconomic magnitudes. The same uncertainty that discourages investment encourages the hoarding of money, which accounts for the emphasis by Paul Davidson and other Post Keynesians on Chapter 17, "Essential Properties of Interest and Money" (p. 285). Meltzer deals with Shackle and Davidson under the headings "Irrational Expectations" (pp. 280-85) and "Gross Substitution of Finance" (pp. 285-91).
        The New Keynesians of recent years find their General Theory roots not in some specific chapter but in the assumption of fixed or sticky prices and wage rates, an assumption widely believed (though not by Meltzer) to underlie the first eighteen chapters of the book. New Keynesians reject New Classical theories that assume perfect price and wage flexibility, thereby reversing the free-market conclusions and policy implications that would otherwise flow from New Classical models, A major concern of the New Keynesians is the status of the claim that prices and wage rates are fixed or sticky downward. Prior to their own theorizing, the notion of fixity or stickiness, on which so much of Keynesianism is thought to rest, had been brought into macroeconomics by Keynes's interpreters (if not by Keynes himself) as an ad hoc assumption. What is new about New Keynesianism is its supply of "sophisticated reasons" for stickiness, which save the theory from ad hocery. Theories about pricing behavior have important implications about the pattern of price and wage adjustments that might follow, say, an economywide increase in the demand for output. And the adjustment pattern determines, in turn, how the impact of the increased demand is divided between increases in prices and wages and increases in output and employment.⁽⁸⁾
        Recognizing that unemployment follows trivially from the assumption that the wage rate is stuck above its market-clearing level, Don Patinkin imputes great significance to Chapter 19, "Changes in Money-Wages," where Keynes explicitly relaxed the assumption of price and wage-rate stickiness but went on to argue that the general thrust of his theory was unaffected: So long as downward adjustments in the wage rate are accompanied by downward adjustments in prices, unemployment would persist. Although inspired in part by the perceived Swedish flavor of that same Chapter 19, Axel Leijonhufvud interpolates between Keynes's earlier book, A Treatise on Money (1930), and the General Theory, producing a smorgasboard of meanings. Z-theory, so named by Leijonhufvud, gives play to quantity adjustments in the spirit of the General Theory but rejects the liquidity-preference theory of interest, which Keynes saw as a critical innovation, setting his second look at macroeconomic relationships apart from his first.⁽⁹⁾ Leijonhufvud's interpretation gets the highest marks for internal consistency, insightfulness, and relevance, but he has difficulty in convincingly bridging from this interpretation to actual passages in either of the two books. Meltzer deals with Patinkin and Leijonhufvud under the headings of "Elasticity pessimism" (pp. 270-286) and "Coordination failures" (pp. 266-270).
        Chapters 3, 10, 12, and 19 of the General Theory all have some claim on our attention. These and most of the other chapters sandwiched between Keynes's throat-clearing remarks in Chapter 1 and his excursions into social philosophy in Chapter 24, contain important clues about macroeconomic relationships as envisioned by Keynes. Significantly, the one chapter most heavily discounted if not entirely overlooked by modern macroeconomists is the final one, Chapter 24, "Concluding Notes on the Social Philosophy toward which the General Theory might lead." This common oversight is attributable, one suspects, partly to its status as "Notes," partly to the shift in focus from macroeconomics to social philosophy, and partly to the change in tone. If Chapters 2 through 23 read like papers presented in a series of seminars, Chapter 24 reads more like a transcription of lively conversation at the cocktail party marking the end of the series.
        Standing at the open bar, Keynes lets down his guard and tells the reader what he has in mind for our future. He looks forward to a more equitable and less arbitrary world, achievable, in his judgment, within one or two generations. This imagined world is one in which capital yields no return apart from compensation for supervising it and bearing the associated risks. Interest, which "rewards no genuine sacrifice," would be nil. Its elimination would mean "the euthanasia of the rentier, and consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital." Once the "high stakes" of the capitalist system are eliminated, "the State will have to exercise a guiding influence." In Keynes's reflective judgment, "a somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employment."⁽¹⁰⁾
        The unbuttoned Keynes of Chapter 24 makes no appearance at all in modern textbooks and is largely ignored by Keynes's interpreters. Alvin Hansen, in his influential Guide to Keynes, suggests that Keynes was just "flying his kite" in the final chapter (quoted by Meltzer, p. 182). Dismissing Chapter 24 in such a cavalier fashion might be justified if it weren't for the fact that the views expressed there, as Meltzer shows, serve to reaffirm fundamental beliefs long held by Keynes. His views on social philosophy remained largely unchanged from the early years, when he wrote "Am I a Liberal?" (1925), "The End of Laissez Faire" (1926), and "The economic Possibilities of Our Grandchildren" (1930). The kite that Keynes flew at the end of the General Theory, together with his subsequent article on "My Early Beliefs" (1938), signals a reaffirmation of those beliefs.⁽¹¹⁾ His macroeconomics of the mid-1930s in not to be interpreted as something at odds with his long-embraced social philosophy. Here Meltzer is simply heeding Joseph Schumpeter's insight that vision precedes theory.
        Meltzer's rendition of Keynes is not drawn from Chapter 24 in the same way that Keynesian Hydraulics is drawn from Chapter 3 and 10 and Keynesian Kaleidics from Chapter 12. Rather, in reading the first 23 chapters, Meltzer couples Keynes's final chapter with his "early beliefs" to fashion a kind of social-philosophy sieve. This sieve allows much to fall through—the imposing and relaxing of heuristic assumptions about price and wage-rate fixity, the interplay of demand elasticities that characterize the real and monetary sectors of the economy, and the hint about short-run countercyclical policy—while trapping only the nuggets of wisdom about the root nature of capitalism and the implied directions for reform.
        This technique pays off for Meltzer in a way that belies his book's modest title. His interpretation is in one sense less and in another sense more than the others. It is less than the others because once the sieve has sorted things out, Meltzer simply takes Keynes at his word. He begins on the What-did-Keynes-actually-say? side of the interpretation gap, And the sieve itself, he discovers, has reduced if not eliminated the gap. Getting to the What-could-he-possibly-mean? side requires little or no input from the interpreter. Meltzer, operating under the assumption that Keynes meant what he said, refrains from imposing the constraint that what he meant must be internally consistent, insightful, and relevant. However, Meltzer's Keynes amounts to more of an interpretation than the others (as argued in the subsequent section) because it actually encompasses important aspects of most of the chapter-specific renditions of Keynes.
        Meltzer shares with the Keynesian fundamentalists a certain insistence that we take Keynes literally but differs from them by having a workable technique for determining what is fundamental. That is, while the fundamentalist pore over the General Theory, Meltzer pours the General Theory through the social-philosophy sieve. For the student of Keynesian economics who is not well grounded in Keynes's social philosophy, a nearly equivalent operating procedure would be: The more Keynes sounds like he is venting his spleen, the more fundamental are his thoughts and the more literal his pronouncements are to be taken. Hence the title of the present essay, which attempts to capture substance and spirit of the central message that Meltzer draws from Keynes's book. 

Keynes as Comparative Systems Analyst
As chapter follows chapter, Keynes's focus shifts—usually without warning—from one level of abstraction to another, from pure theory to empirical observation, and from concern about workaday policy to prospects for fundamental reform. But underlying it all in a lopsided exercise in comparative economic systems. Keynes is continually comparing capitalism-as-it-is against the standard of socialism-as-it-has-never-been. Judging the current system to be both unstable and unjust, he holds out hopes—and is even optimistic about the prospects—for making the transition to something better.
        Meltzer's Keynes argues from his belief that in a society with ideal economic institutions the rate of interest would be zero to the conclusion that in our society, with its less-than-ideal economic institutions, the rate of employment is too low (pp. 123-135). A chain of arguments involving risk, interest, investment, capital, output, and labor is tailored to fit each of the two sets of economic institutions and to demonstrate the superiority of the imagined society over the actual one.
        In the imagined system of socialism-as-it-has-never-been, risks would be minimized, the rate of interest would be nil, and all investment opportunities would be fully exploited. Capital (whose rental price in equilibrium is the rate of interest) would cease to be scarce, output would be at its maximum, and the labor force would be fully employed. In our current system of capitalism-as-it-is, risks are unnecessarily high, the rate of interest is correspondingly high (read: not zero), and investment is limited to those undertakings whose expected yield exceeds the interest rate. Capital, then, is kept artificially scarce, output is less than its maximum, and the level of employment is below its potential. Meltzer demonstrates, in effect, that Keynes's ultimate verdict on capitalism, as well as his proposals for reform, are based squarely on this comparative-systems exercise. (In correspondence, Meltzer has indicated that, for him, the comparison is between actual and ideal conditions rather than between capitalist and socialist systems. I do not believe, however, that my preference for the terms capitalist and socialist does injustice either to Meltzer or to Keynes.)
        The theory offered up by Keynes traces the perceived chain of causation from greater-than-zero interest to less-that-full employment. If this is the essence of the General Theory (and I believe that it is), then the decades of difficulties in so identifying it become understandable. First, exercises in comparative economic systems can have relevance only if the systems being compared are in fact comparable. Actual or possible systems can be compared with one another; ideal or imagined systems can be compared with one another. But a hybrid comparison—between one actual and one ideal system—is so biased from the outset in favor of the ideal as to hardly be recognizable by modern scholars. Second, the one-way causal connections (from interest to employment), so important to Keynes's comparative-systems story, often get lost in the telling. His use of the conventional analytics of supply and demand—in which the interaction of the market for labor and the market for loanable funds implies two-way causality—belies his central theme. This particular obstacle to getting Keynes straight was compounded by Keynes himself when he endorsed John R. Hicks's early interpretation of the General Theory, for Hicks's set of simultaneous equations explicitly show the interaction of the market forces that determine both labor income and the interest rate.⁽¹²⁾ And third, the arguments are presented backwards. The logical and causal chain runs from the rate of interest to the rate of employment, yet Keynes deals with the market for labor first (in Chapter 2) and only much later (starting with Chapter 13) with the rate of interest. Here Meltzer's interpretation is actually bolstered by one aspect of the General Theory's obscurity. In his early chapter on the problem of less-than-full employment, Keynes attempts to downplay the significance of market forces operating within the labor market itself. In so doing he finds it necessary to anticipate a later argument (involving the rate of interest) by referring cryptically to "certain other forces," or "a different set of forces."⁽¹³⁾
        To enumerate these difficulties is not to cast doubts on Meltzer's interpretation. After all, Meltzer's Keynes firmly believed that the ideal system he had in mind was in fact a possible system. His failure to explain in any detail just how this ideal system would work is consistent with socialist thought in general, which has always focused on the perceived failings of the actual system rather than on the allegedly superior workings of the imagined one. Keynesian economics as an exercise in comparative systems, then is not to be dismissed out of hand. In carrying out the exercise, Keynes often resorted to the framework of mutual determination because that was British economics of the period. And he addressed the issue of employment first because that was his and his readers' most pressing concern.
        Now that Meltzer has overcome the difficulties of interpretation and identified Keynes's underlying chain of argument, we are in a position to ask some critical questions. How well does this chain hold up? How strong is each of its links? And how essential is each link to the Keynesian vision and to the various interpretations of Keynes? Meltzer provides good clues and a summary judgment but stops short of a full critical analysis. 

Keynes as Socialist
Unique to Meltzer's interpretation is the particular significance he attaches to Keynes's treatment of risk (pp. 128-130 and passim). The focus here is on the riskiness of lending over and above the riskiness, if any, of the projects undertaken by borrowers. In a market economy, saving must wend its way to investment through financial markets. And while the saver-lender and the borrower-entrepreneur share their investment's yield, there is a compounding of risk. Equivalently, the so-called lender's risk rides piggy-back on the project risk born by the borrower. The borrower forms a risky expectation about the net yield of his or her investment project; the lender forms a risky expectation about the borrower's ability to form relevant expectations. Inherent in private financial and capital markets, then, is a component of risk that would be completely absent if the borrower and the lender were the same agent—completely absent, that is, if there were a comprehensive socialization of investment. Keynes seemed to believe that this component of risk was large and unstable. In the Keynesian vision, this socially unnecessary lender's risk accounts for most if not all of the market rate of interest. And worse, it is subject to unanticipated change as lenders, overcome by the "fetish of liquidity," hoard rather than lend their money in order to avoid the risk. Accordingly, the elimination of lender's risk through the social direction of investment would effectively minimize if not eliminate altogether the necessity of paying—and the privilege of receiving—interest income.
        The first two links in Keynes's chain of argument, establishing the comparative risks and the corresponding interest rates that characterize capitalism and socialism, are the most crucial and the least plausible. Keynes seems to believe that risks can be eliminated through social reform with no effect on the quality of investment decisions. He sometimes argues as if his ideal government can somehow control the total volume of investment, minimizing risk, while private enterprise continues to control the direction of investment, maximizing allocational efficiency. On the page immediately following his call for a comprehensive socialization of investment, Keynes sees "no reason to suppose that the existing system seriously misemploys the factors of production which are in use .... It is in determining the volume, not the direction, of actual employment that the existing system has broken down."⁽¹⁴⁾ Just what specific social reforms would eliminate risk so as to correct for volume but would leave direction unaffected are never spelled out in enough detail to permit a critical evaluation.
        Further, to argue that the elimination of lenders' risk—or of all risks, for that matter—translates into the elimination of the interest rate is to totally misunderstand the nature and significance of interest. Whatever complications there may be in the form of a risk premium, an inflation premium, and a liquidity premium, the rate of interest reflects some underlying intertemporal terms of trade. Goods or purchasing power available only at some future date trade at a discount relative to goods available now. The general notion that sooner is preferred to later is as fundamental to economic reasoning as the notion that more is preferred to less. The systematic discounting of the future and the corresponding positive rate of interest was understood by some classical economists, as particularly evidenced in Nassau senior's abstinence theory of interest; by the Swedish economists, as exposited at length in Gustav Cassel's Nature and Necessity of Interest; and by the Austrian economists, some of whom attributed interest solely to the time preferences of market participants. Even in Marshall's Principles, the notion of "waiting" figures importantly in the discussion of interest. Independent of monetary considerations, the value of time implies a positive rate of interest. Keynes gained little ground in his attempt to denigrate this broadly shared understanding of the economics of interest. His question-begging perplexity about Marshall's views was based on the failure of Marshall (as perceived by Keynes) to recognize that interest is largely a monetary phenomenon particularly characteristic of a decentralized financial sector.⁽¹⁵⁾
        Once Keynes has established—at least to his own satisfaction—that in an economy with a private investment sector, there are substantial risks which are subject to change and that the sole effect of socializing that investment sector is to eliminate those risks and with them the interest rate, his propositions about the level of investment, the size of the capital stock, and the rates of output and employment follow almost trivially. Investment, capital, output, and employment are necessarily greater in Keynes's imagined world than the corresponding magnitudes in the world-as-we-know-it, where lenders take risks and borrowers pay interest. Indeed, in Keynes's utopia investment is exhaustive, capital in not scarce, output is maximal, and employment is full.
        Less important to Keynes was the fact that the macroeconomic magnitudes in the world-as-we-know-it are collectively subject to variation. The performance of capitalism is not always as bad as it is sometimes. The prospects for ironing out the ups and downs have long been the primary focus of Keynesian Hydraulics. The key issues here are the relative strengths of the government-spending multiplier as compared to the tax-cut multiplier, and the relative merits of fiscal policy in general as compared to monetary policy as a means of nudging capitalism-as-it-is in the direction of full employment. Though not Keynes's fundamental concern, he recognized that intervention, in the form of monetary and fiscal policy, by making for marginal improvements in economic performance, may hasten the day that society can afford the more fundamental transition to something better. Some makeshift patching up of the current system may even be necessary to prevent serious backsliding and to keep hope alive.
        Keynes's exercises in comparative economic systems can serve as the basis for the claim that he offered a theory of employment (as suggested by the title of his book) rather than a theory of unemployment. That is, he theorized that the equilibrium level of employment in the world as we know it is less on average and involves a greater variability than in his imagined world. So-called involuntary unemployment—a term that has engendered much controversy—is simply the difference between the two equilibrium levels of employment. It is a comparative-systems employment differential made up of two components. The secular component derives from the "less on average" aspect of the comparison: the cyclical component derives from the "greater variability" aspect of the comparison. Meltzer (p. 126) argues that the secular component is Keynes's major concern. The General Theory is not predominantly about business cycles.
        Although Meltzer seems unperplexed to find little in Keynes's book about business cycles and counter-cyclical policy, he is perplexed to find so little about foreign trade and trade policy. The neglect of the foreign sector in the General Theory, Meltzer claims, is "inexplicable" (p. 311). But his general approach to explaining Keynes seems uniquely capable of putting the issues of foreign trade and trade policy in their proper perspective. Taking a comparative-systems point of view, we can say that throughout has academic career Keynes was in matters of trade consistent. That is, he was consistently against intervention, or consistently in favor of it, depending upon what alternative mechanisms there were for macroeconomic manipulation. He applauded the Mercantilists for manipulating trade flows, recognizing that there was nothing else for them to manipulate. For later periods when fiscal and monetary policy institutions had become sufficiently developed, he recommended these as the more appropriate tools of intervention. Policies affecting trade flows pit country against country, but fiscal and monetary policies can lift all countries together toward higher levels of prosperity. However, if most countries are lacking in enlightened leadership, the fiscal and monetary policies of enlightened countries—and certainly their reforms aimed at eliminating the interest rate—will have to be accompanied by protectionist policies to prevent trade flows from thwarting the uplifting effects of such policies and reforms.⁽¹⁶⁾
        The lessons of the General Theory, whether in terms of policy in the narrow sense or of fundamental reform, apply either (1) to all countries collectively and without protectionist measures or (2) to each country separately but with protectionist measures. This implicit all-and-without and each-but-with rule for application allowed Keynes to unbundle the issues and compare existing with imagined societies without addressing at each turn the issues of foreign trade. 

Keynes and the Keynesians
Keynesian Splenetics stands or falls with the validity of Keynes's comparative-systems analysis and hence the relevance of the employment differential. By discounting Chapter 24 and related material scattered over earlier chapters, virtually all prior interpretations of Keynes have implicitly rendered the judgment of "invalid and irrelevant." Keynes's lamentable use of the term "involuntary unemployment," however, has allowed interpreters to conceive of the comparative-systems employment differential as unemployment in the more conventional sense. Unemployment means that workers are off their supply curve—either temporarily or permanently. The quantity of labor demanded falls short of the quantity supplied. Accordingly, full employment means that level of employment that puts workers on their supply curve. Full-employment output and full-employment income are defined, in this recasting of Keynes, as the levels of output and income consistent with a fully employed labor force working with a given stock of capital.
        Keynes's comparison of capitalism and socialism is thus replaced with an analysis of capitalism that allows for the possibility of an unemployment equilibrium. The problem of unemployment, whether conceived in equilibrium or disequilibrium terms, must stem from sluggishness or from perversities of one sort or another in the market process where labor supply is played off against labor demand. The notions of non-scarce capital, exhaustive investment, and zero interest play no part at all in either the dynamics of disequilibrium or the possibility of unemployment equilibrium.
        Here, the gulf between Keynes and the Keynesians, the interpretation gap, is virtually unbridgeable. Keynes compared capitalism and socialism in terms of a perceived unidirectional causation—from risk to interest to investment to capital to output and employment. His unemployment-equilibrium interpreters depict the capitalist system with simultaneous equations, which imply multidirectional causality. Typically, this fundamental difference between Keynes and his interpreters is not explicit acknowledged, but hints of it are unavoidable as the interpreters try to make sense out of Keynes's theory of interest and his notion of involuntary unemployment as an equilibrium phenomenon. Keynes's arguments reflecting the belief that zero interest and non-scarce capital are the relevant standards for judging the actual performance of a labor market in a capitalist system have to be transformed into arguments offered by interpreters that, under capitalism, an excess supply of labor is consistent with macroeconomic disequilibrium.
        The unidirectional argument from interest to employment is most easily seen in Keynes's view—not held consistently throughout the General Theory—that the rate of interest is determined by monetary factors alone.⁽¹⁷⁾ Hoarding money as a way of avoiding the adverse changes in the rate of interest that are characteristic of a capitalist system accounts for both the existence of the interest rate and its unduly high level. Keynes seeks to keep the interest rate free of any significant non-monetary influences, such as underlying time preferences and resource constraints, in order to keep his analytics consistent with his imagined world, in which the elimination of risk—and hence the elimination of the desire to hold money as a means of avoiding risks—leads directly to a zero rate of interest. Here Meltzer fails to make full use of his social-philosophy sieve: Hicks-style simultaneous determination of interest and income falls through the sieve; the purely monetary theory of interest remains. But Meltzer (p. 149) simply remarks that Keynes "may have been confused on this point."
        The second symptom of an unbridgeable gap between Keynes and his followers is their treatment of the notion of unemployment. Divorced from Keynes's comparative-systems analysis, the "equilibrium level of involuntary unemployment" is a phrase at war with itself. Under a wide variety of assumptions, the root notion that the labor market fails to clear is either clearly false for trivially true. So long as an excess supply of labor puts some downward pressure on the wage rate, the notion is clearly false. The market process through which labor supply and labor demand are brought into balance is still working; equilibrium is yet to be attained. If it is specified that the wage rate is above its market-clearing level and cannot adjust downward, then the labor market's failure to clear and the corresponding unemployment follow trivially. It is unobjectionable, of course, to argue that labor markets—as well as most other markets—do not clear instantly and that the market process through which they eventually do clear may involve a substantial amount of unemployment. But striking a balance in this way between a clear falsehood and a trivial truth produces a commonplace, as Meltzer (pp. 255-56) notes, that predates Keynes's earliest contributions to macroeconomic theory.
        Too many interpreters follow Keynes in his obscurity rather than in his comparative-systems analysis and leave as an unsolved mystery why reductions in expenditures on output and hence reductions in labor demand should result in involuntary unemployment rather than in a reduced wage rate. Why doesn't the wage rate adjust to existing supply and demand conditions? (I remember Milton Friedman raising this question repeatedly at the 1986 conference.) Keynes's Chapter 19, to which some interpreters attach so much importance, suggests that a reduced demand for labor does cause the wage rate to adjust downward, but that it causes prices to adjust downward as well, such that the real wage rate remains unchanged. Real-wage stickiness follows from wages and prices that are either separately sticky or jointly variable. Nominal stickiness may not be crucial to the argument, but then real stickiness is. So why doesn't the real wage rate adjust to existing supply and demand conditions" For most interpretations of Keynes, the answer to this question and hence the cause of so-called involuntary unemployment remains obscure. The mystery was identifies early on by Frank Knight: "To explain unemployment, Mr. Keynes first assumes (a) unemployment, and (b) such a price situation, and (c) such a mode of operation of the price mechanism, that growth in employment is blocked. This blocking is the fundamental mystery."⁽¹⁸⁾
        To prevent this enduring mystery from blocking the development of Keynesian economics, most modern interpreters have adopted the pre-Keynesian commonplace notion of unemployment. Changes in market conditions may involve a substantial excess of labor supply over labor demand during the process of adjusting to a new equilibrium. Though not itself true to the General Theory, this reconstruction serves two purposes. First, it saves Keynes from himself: It saves him from his belief that a society with zero interest and non-scarce capital is an achievable goal and a relevant standard for judging the performance of capitalist economies. Second, it serves as a basis for dealing with those of Keynes's insights that are believed to be worth developing—insights about the precarious circumstances in which business firms form long-term expectations and about the interconnectedness of the loanable-funds market and the labor market. These issues will be discussed below in connection with the separate views of Shackle and Leijonhufvud.
        Reconstructions of the General Theory that treat unemployment as a disequilibrium phenomenon necessarily involve a shift of emphasis from the secular component of unemployment to the cyclical component. In fact, cyclical unemployment and involuntary unemployment have come to mean the same thing. Since the secular component of involuntary unemployment, which Meltzer argues is the more important of the two, is squarely based on Keynes's comparative-systems analysis, its appearance in modern reconstructions would require that the supply of and demand for labor reflect current market conditions, but at the same time a wage rate that somehow reflects the market conditions in Keynes's imagined world. Unemployment, then would persist until the wage rate is brought down from its other-worldly level or until our actual society is transformed into Keynes's imagined one. To my knowledge, such a hybrid construction involving a mysterious mix of comparative-systems and market-process analysis has not yet occurred to Keynes's interpreters. Instead, the focus has shifted to the cyclical unemployment, where, in a capitalist system, downward shifts in the demand for labor can produce unemployment so long as the wage rate continues to reflect the pre-existing market conditions.
        The significance of the difference between the comparative-systems Keynes and the dynamics-of-disequilibrium Keynesians is becoming increasingly evident with the development of New Keynesianism, which differs from New Classicism only in its rejection of the assumption of instantaneous market clearing. New Keynesian John Taylor put the matter straight in his treatment of the concept of involuntary unemployment: "In retrospect, Keynes would have added clarity to his discussion by unbundling his theory [of deficient aggregate demand] and his definition of involuntary unemployment."⁽¹⁹⁾ In other words, (1) why aggregate demand and hence the demand for labor are lower than they might otherwise be, and (2) why that relatively low demand manifests itself as unemployment rather than as a correspondingly low wage rate, are separable questions. Meltzer focuses on the first issue, about which Keynes had a unique perspective; the New Keynesians focus on the second issue, about which Keynes had no special insights to contribute. We—and Meltzer—can easily accept Taylor's retrospective judgment here, but not without wondering if clarity on this point wouldn't have cost Keynes much of his influence.

Shackle's and Leijonhufvud's Keynes Reconsidered
Two particular modern interpreters are worthy of a reconsideration: Shackle, whose Keynesian Kaleidics focuses on the uncertain business environment in which long-term expectations are formed, and Leijonhufvud, who tries to make Keynes out as a developer of macroeconomic disequilibrium theory in the tradition of the Swedish school.⁽²⁰⁾ Although Meltzer is critical of these two interpreters—overly so in my judgment—they actually come as close to Meltzer's own interpretation as their market-process, disequilibrium theorizing permits.
        Shackle has a kinship to Meltzer in seeing uncertainty as the root cause of macroeconomic problems. Shackle's Keynes argues from the pervasive uncertainty in a market economy to the unemployment that may accompany unexpected changes in market conditions. Shackle grounds this interpretation in Keynes's belief that long-run expectations have little basis in objective reality. But the expectations held by the business community are not so much irrational as arational. Further, and still following Keynes, a given state of expectations can for a time be upheld as a matter of convention. Expectations are contagious and thus self-reinforcing. According to this construction, the economy can prosper so long as the collectively held expectations hold up—even though the expectations themselves have long ceased to have, if ever they had, any solid grounding.
        But doubts can creep in. Some businesspeople in a reflective mood may perceive the precarious nature of things. And doubts are contagious, too. One state of expectations can be suddenly superseded by another, more pessimistic state. Asset markets as well as labor markets would then be in turmoil until the pattern of prices and wage rates is brought into line with the new state of expectations. Shackle's kaleidoscope, whose changing patterns of cut glass reflect the changing patterns of prices and wage rates, captures Keynes's view of a market economy No one pattern can be designated as the correct one or as representing underlying realities more accurately than any of the others. And if shaken by doubts that have overcome the business community, the new pattern of prices and wage rates is not predictable in its particulars from even the fullest knowledge of the old.
        Investors in the pre-capitalist era, when markets for the means of production were thin or nonexistent, can be compared to investors in the modern capitalist era, which is characterized by well-organized capital markets. Staying in business or continuing with an investment project was a matter of long-term commitment in the earlier era and of short-term confidence in the modern era. In the spirit of Shackle's Keynes, we can say that businesspeople, once wedded to their businesses by custom, are able to break loose from them as capital markets develop. Then in the absence of any commitment or direction, they follow one another over the nearest cliff—losing their grounding altogether. But like the coyote in the Saturday morning cartoons, they can walk on air so long as nobody looks down. When one looks down, though, they all look down, and down they go. With a comprehensive socialization of investment, the businesspeople, if effect, are individually rewedded to their respective businesses and hence collectively rewedded to the underlying economic realities. This vision of the market economy by Shackle's Keynes is wholly consistent with Keynesian Splenetics.⁽²¹⁾
        Leijonhufvud's kinship to Meltzer lies in his portrayal of the connection between the loanable-funds market and the labor market. Meltzer, interpreting Keynes in a comparative-systems framework, would say that the failure of the loan market to clear at a zero rate of interest causes the labor market to clear at a low level of employment; Leijonhufvud, interpreting Keynes in a disequilibrium framework, would say that the failure of the loan market to clear at an interest rate that reflects the underlying economic realities can cause the labor market not to clear at all. The loan market and the labor market are "cross-wired," to use Leijonhufvud's own imagery, such that a change in the conditions in one market has its greatest impact on the other.⁽²²⁾
        For illustration, suppose the economy is functioning at its full-employment level, meaning that the wage rate clears the labor market and that labor supply and labor demand accurately reflect underlying economic realities. Now suppose that the rate of interest rises because of speculation not grounded in the fundamentals. A higher interest rate means a lower level of investment, which means a reduction in labor demand. The old wage rate is now too high. According to Leijonhufved's Keynes, however, it is the interest rate and the corresponding demand for labor—and not the wage rate—that are inconsistent with underlying economic realities. Keynes's assumption that the wage rate will not fall becomes a recommendation that it not be allowed to fall.⁽²³⁾ It is the interest rate—and more fundamentally, the uncertainties that gave rise the destabilizing speculation—that needs attention.
        Identifying the interest rate as the source of the problem does not silence criticism in the spirit of Friedman. Wouldn't a fall in the wage rate be a solution to the problem even if an excessive wage rate is not—in some ultimate or general-equilibrium sense—the source of the problem? A reduced wage rate would alleviate the immediate problem of unemployment and may well constitute the first phase of a market process that moves both labor and asset markets toward equilibrium more broadly conceived. Meltzer's Keynes might respond that the prospect of falling wages and falling prices, which would eventually bring the real wage rate in line with labor-market conditions that had been distorted by speculation in asset markets, simply adds to the uncertainties that give rise to destabilizing speculation in the first place.
        The interpretations of Shackle and Leijonhufvud, allowing for the differences in analytical frameworks, are largely consistent with Meltzer's treatment of the cyclical component of involuntary unemployment. But rather than acknowledge the similarities and draw strength from them Meltzer simply criticizes Shackle for reading irrational expectations into Keynes and criticizes Leijohhufvud for misreading Keynes as a Swedish-style disequilibrium theorist. 

Keynes, Meltzer, and Meltzer's Keynes in Perspective
It is probably fair to say that if Meltzer undersells his own interpretation of the General Theory, he oversells Keynes. In his introductory chapter Meltzer (12) claims to share in many of Keynes's social views but to reject Keynes's perception of government. In his concluding chapter Meltzer offers the summary assessment that "Keynes was an economist, one of the greatest" (p. 302). He then briefly discusses seven problems in the General Theory, which he categorizes—somewhat artificially—as flaws in Keynes's analytical framework (1 through 3) and flaws in Keynes's vision of the world (4 through 7). Thus, Keynes (1) fails to explain unemployment, (2) is cavalier in his treatment of expectations (positing elastic or inelastic expectations as suits his immediate purpose), and (3) neglects the effect of inflation on money demand. He (4) omits considerations of international trade, (5) seems unconcerned generally about the consequences of inflation, (6) makes the questionable judgment that the state can reduce interest to zero, and (7) is too willing to sacrifice freedom (p. 311).
        At this point, let me simply note the incongruity in claiming that Keynes was a great economist and then listing as one of his analytical flaws a failure to explain unemployment. In accordance with most any interpretation except Meltzer's, the failure of the General Theory to explain unemployment would be catastrophic. Only in the comparative-systems context of Keynesian Splenetics, which most Keynesians have overlooked and the rest have rejected, is the failure to explain unemployment—in the sense of an excess supply of labor—inconsequential to the general thrust of the theory. But the general thrust of Keynesian Splenetics hinges critically on the ideas of zero interest and non-scarce capital, which involve such a serious flaw of vision as to be rejected out of had under most all interpretations.
        Meltzer claims in his early article, again in his response to critics, and still again in his book, not to be offering anything more than a "different" interpretation of Keynes—to be added, presumably, to the many existing ones. He emphasizes that no single one is the correct interpretation. Yet by demonstrating the importance of what I have dubbed Keynesian Splenetics, Meltzer penetrates to the core of Keynes's most firmly held beliefs, puts other interpretations of Keynes in clear perspective, and accounts for the decades of difficulties in getting Keynes straight. In the judgment of this reviewer, Allan Meltzer's insights and scholarship will contribute importantly to the writing of the final chapter of the Keynesian episode. 

Notes

1. Allan H. Meltzer, "Keynes's General Theory: A Different Perspective," Journal of Economic Literature, vol. 19, no. 1 (March), 1981, pp. 34-64 and idem, "Interpreting Keynes," Journal of Economic Literature, vol. 21, no. 1 (March), 1983, pp. 66-78.

2. See, for examples, Lorie Tarshis, Review of Keynes's Monetary Theory: A Different Interpretation, Journal of Economic Literature, vol. 28, no. 3 (September), 1990, pp. 1203-04, and Marcello de Cecco, "Keynes Revived, a Review Essay," Journal of Monetary Economics, vol. 26, 1990, pp. 179-90. In contrast, see Joseph T. Salerno, "The Development of Keynes's Economics: From Marshall to Millennialism," Review of Austrian Economics, vol. 6, no. 1, 1992, pp. 3-64, in which Salerno credits Schumpeter and Meltzer for seeing Keynes's analytics as a reflection of his early vision and then offers his own account of both the continuity and the discontinuity in the development of Keynes's thinking.

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

4. The sharpest contrast in this respect is that between Frank Knight, "Unemployment: And Mr. Keynes's Revolution in Economic Theory," The Canadian Journal of Economics and Political Science, vol. 3 (February), 1937, pp. 102-123, and Paul A. Samuelson, "The General Theory," in Robert Lekachman, ed., Keynes' General Theory: Report of Three Decades (New York: St. Martin's Press, 1964), pp. 315-331.

5. Anatol Murad, What Keynes Means: A Critical Clarification of the Economic Theories of John Maynard Keynes (New York: Bookman Associates, 1962).

6. After presenting his own rendition of Keynesian macroeconomics, Robert Clower makes the unqualified claim that "Keynes either had [Clower's rendition] in the back of his mind, or most of the General Theory is theoretical nonsense." Clower, "The Keynesian Counter-Revolution: A Theoretical Appraisal" in idem, ed., Monetary Theory (Middlesex: Penguin Books, 1969), p. 284.

7. John Maynard Keynes, "The General Theory of Employment," Quarterly Journal of Economics, vol. 51 (February), 1937, pp. 209-223.

8. Meltzer (pp. 255-266) deals with the rigid-wage angle on the General Theory, but New Keynesianism per se is too new to have been included. This strand of thought is sometimes dated to a paper published the same year as Meltzer's book: Laurence Ball, N. Gregory Mankiw, and David Romer, "The New Keynesian Economics and the Output-Inflation Trade-off," Brookings Papers on Economic Activity I (1988), pp. 1-65. With arguments anchored in the pre-Keynesian equation of exchange (MV=PQ), the New Keynesians concern themselves with the question of the effect of changes in spending (Money multiplied by its Velocity of circulation) on inflation and output (as measured by the Prices of goods and the Quantities of goods bought and sold). Because of its attention to changes in MV and the consequent changes in P and Q, new Keynesianism might be better described as New Monetarism. (That this new and important school of macroeconomic thought is seriously mislabeled was pointed out to me by Leland Yeager.)

9. Z-theory is spelled out in Axel Leijonhufvud, "The Wicksell Connection: Variations on a Theme," in idem, Information and Coordination: Essays in Macroeconomic Theory (Oxford: Oxford University Press, 1981), pp. 131-202.

10. Keynes, General Theory, pp. 374-78.

11. The three pre-General Theory articles are included in Keynes, Essays in Persuasion (New York: W. W. Norton, 1963), pp. 323-338, 312-322, and 358-373; the post-General Theory article in included in Keynes, The Collected Writings of John Maynard Keynes, vol. 10, ed. Donald Moggridge (London: Macmillan, 1972), pp. 433-450.

12. John R. Hicks, "Mr. Keynes and the 'Classics': A Suggested Interpretation," Econometrica, vol. 5 (April), 1937, pp. 147-19. Meltzer (pp. 129-123) argues, in effect, that Keynes's reservations about Hicks's interpretation are more significant than generally recognized.

13. Keynes, General Theory, pp. 13, 14, and passim.

14. Ibid., p. 379.

15. Ibid., p. 189. In correspondence, however, Meltzer has reminded me that the zero rate of interest is a common feature of classical economics. According to David Ricardo and J. S. Mill, the economic forces that pit labor against capital will eventually eliminate all interest income.

16. This role for protectionist policies is most explicit in Keynes, "National Self-Sufficiency," Yale Review, vol. 22 (June), 1933, pp. 755-769.

17. "The current rate of interest depends ... not on the strength of the desire to hold wealth but on the strengths of the desires to hold it in liquid and in illiquid forms respectively, coupled with the amount of the supply of wealth in one form relative to the supply of it in the other." Keynes, General Theory, p. 213. Meltzer's interpretation of this passage is what caused one reviewer to part company with him. See Tarshis, 1203-4.

18. Knight, "Unemployment," p. 102.

19. John B. Taylor, "Involuntary Unemployment," in John Eatwell, Murray Milgate, and Peter Newman, eds., The New Palgrave Dictionary of Economics, vol. 2 (London: Macmillan, 1987), p. 1000.

20. G. L. S. Shackle, Keynesian Kaleidics (Edinburgh: Edinburgh Press, 1974); Axel Leijonhufvud, On Keynesian Economics and the Economics of Keynes (Oxford: Oxford University Press, 1968); and especially idem, "The Wicksell Connection," in his Information and Coordination (n. 9 above).

21. Keynes himself argued in terms of the institution of marriage: "The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble like marriage, except by reason of death or other grave cause, might be a useful remedy for our contemporary evils." Keynes, General Theory, p. 160.

22. Leijonhufvud, "The Wicksell Connection," pp. 177-187.

23. "It is more expedient to aim at a rigid money-wage policy than at a flexible policy responding in easy stages to changes in the amount of unemployment." Keynes, General Theory, p. 266.